POST-EFFECTIVE AMENDMENT NO. 3 TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF
SECURITIES OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934, as amended
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EDnet, INC.
(Name of Small Business Issuer in its charter)
Colorado 84-1273795
- ----------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Union Street, San Francisco, California 94111
- -------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (415) 274-8800
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be registered: each class is to be registered:
NONE NOT APPLICABLE
Securities to be registered under Section 12(g) of the Act:
Common Stock ($.001 par value per share)
---------------------------------------------
(Title of Class)
<PAGE>
This Form 10-SB includes forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from management expectations
as discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, the following: risks associated with
fundraising and the Company's ability to secure resources necessary to remain
viable as a going concern; business conditions in the telecommunications,
entertainment and advertising industries, and the general economy; competitive
factors such as rival networking technology, competing products and competitive
pricing; risks associated with the development, introduction and acceptance of
new products; the Company's ability to manage its rapid growth and attract and
retain key employees; and other risk factors. See "Part I - Item 6.
Description of Business - Plan of Operation" below).
PART I
ALTERNATIVE 2
ITEM 6 (OF MODEL B OF FORM 1-A). DESCRIPTION OF BUSINESS
Summary of Business
EDnet, Inc., a Colorado corporation (the "Company"), develops and
markets integrated systems for the delivery, storage and management of
professional-quality digital communications for media-based applications,
including audio and video production for the U.S. advertising and entertainment
industry. The Company has established a private wide-area network through
strategic alliances with long distance carriers, regional telephone companies,
satellite operators and independent fiber optic telecommunications providers,
which enables the exchange of high quality audio, compressed video and
multimedia data communications. The Company provides engineering services,
application-specific technical advice, audio, video and networking hardware and
software as part of its business. Additionally, the Company provides Internet
web site development, hosting services and proprietary software to businesses
conducting Internet commerce.
Industry Overview
The digital communications industry originated in the 1970's based on
the ability of digital technology to support new and advanced communication
capabilities. Digital data can be compressed, enabling data-dense applications
such as the instantaneous exchange of large amounts of data and high-quality
concurrent (or "real-time") interactive communication over any distance. The
Company's primary expertise is in systems integration using digital networking
technology.
Business of the Company
Principal Markets. The Company sells its services to the advertising
and entertainment industry, including production and post-production companies,
advertisers, producers, directors
2.
<PAGE>
and actors. The Company's networking technology makes it possible for producers,
directors and actors to interact in real time, with less interruption of their
schedules, despite being in separate locations. The Company's management
("Management") believes that this is of growing importance in the entertainment
industry because while the production of audio and video entertainment is
inherently a creative process requiring the collaboration of many parties,
increasingly, the participants in this process are in separate locations.
Traditionally, this fact has accounted for frequent travel and delay being a
necessary element of the audio and video production process. The Company's
technology is designed to address this situation by allowing the collaborative
process to go forward despite physical separation.
The Company has established a "network" of recording studios; to join
this network a studio generally enters into an agreement with the Company to
become part of the network for a term of three years. Being part of the
Company's network allows a studio (which the Company refers to as an "affiliate
studio") to establish a link with, and therefore transmit audio and video
information to, any other affiliate studio. An affiliate studio may also
participate in joint promotional and advertising activities describing the
Company's network of affiliate studios, has access to certain technical support
described below and a software directory of affiliate studios. Affiliate Studios
also are charged lower "link-up" rates than those charged to non-affiliate
studios to connect to studios with incompatible equipment. Currently, the
network is composed of over 360 studios across North America, with major
concentrations in California, Seattle, St. Louis, Chicago, Minneapolis, Atlanta
and on the East Coast from Washington, D.C. to New York and Boston. By granting
access to its network, the Company earns one-time fees from customers for the
sale and installation of its equipment and ongoing fees for the use of the
network.
Audio and Video Network System Development Process. The Company has
standardized its process for developing audio and video network communications
systems for its customers. At the time that the Company contracts with a new
audio or video network customer, the Company's personnel obtain and determine
technical information and specifications regarding the customer's existing
facility, equipment and communications requirements. Based on those
specifications, the Company determines the configuration of the new system,
selects the appropriate equipment components, makes necessary modifications to
the software and/or hardware and performs final quality control procedures. The
Company then packages and ships the system to the customer. Installation of the
system can usually be performed by affiliated technicians with telephonic
support from Company engineers. Upon installation of the system, the Company's
technical personnel typically perform a routine series of system checks and
diagnostics from its headquarters facilities via the remote network connection
to ensure that the newly-installed equipment functions properly.
Technical Support. As part of a customer's monthly network connection
fee, the Company maintains a staff of technical support personnel to respond to
customer inquiries during business hours. For emergency support during
non-business hours, domestic customers can contact Company personnel through a
toll-free 800 number, while a special direct-dial telephone number is available
for international customers. The Company generally can resolve the vast majority
of technical support issues directly through its network connection, which
enables
3.
<PAGE>
Company personnel to perform remote diagnostics directly on a customer's
equipment. In the event that the Company is unable to diagnose and service a
hardware or software problem via the remote network connection, a customer can
ship equipment to the Company for on-site, or "bench," diagnostics and service.
Key Suppliers and Alliances. The Company functions as a systems
integrator by acquiring other companies' technologies and combining them into an
effective communications solution. The Company does not manufacture any of the
components used in its network, but rather purchases digital communications
equipment components directly from their manufacturers, including Dolby Labs,
Telos and APT, Inc. The Company performs installation services and further
equipment integration. Because the individual components used in the Company's
systems are available from more than one reliable source or manufacturer,
Management believes the risk of an adverse impact to the Company's business from
an interruption in supply from any single supplier is minimal. The Company also
maintains an ongoing inventory of all of the components of its various
communications products. Most of the Company's suppliers have offices and/or
distribution points near the Company's San Francisco headquarters. In the event
that the Company does not have sufficient inventory onhand to fulfill a system
hardware order, the Company can usually order and receive additional inventory
with turnaround times of as little as twenty-four hours and generally no more
than four weeks.
Marketing. The Company markets its services through a combination of
employing a direct sales staff of four full-time employees and by appearing at
industry trade shows.
Description of Current and Developing Products
Audio Media Networking Services. The Company develops integrated system
solutions (its "Audio Media Communications Service") which provide compression
and transmission of studio quality audio signals over fiber optic lines (i.e.,
telephone digital data lines) between separate studios. The audio data can also
be accompanied by time codes so that operators at the different studios can
synchronize the audio to film projectors or VCR machines in order to allow the
"real time" editing of movies and video. Upon installation of an audio media
communications system and the requisite sound equipment, a studio becomes an
affiliate studio,"equipped with a device to compress, send, receive and
decompress analog audio media (known as a "codec"). In addition, the studio
becomes a part of the Company's network of media production and post production
studios. Outside customers (non-affiliates) seeking to access media production
facilities or otherwise review or edit an audio clip with the assistance of a
person in a different location can do so through these affiliate studios. By
using the Company's Electronic Directory Software, someone in an affiliate
studio can determine whether that studio, or another affiliate studio, operates
equipment that is compatible with the needs of the customer. Once the
appropriate affiliate studio is chosen, the customer can schedule an appointment
to use the network. If nearby studios do not have compatible equipment, the
Company's personnel in San Francisco can digitally "bridge" the studios
together. The customer then pays a network access fee to the Company. The
purchase price of these audio media communications systems ranges from $5,250 to
$18,000. The Company pays local telephone
4.
<PAGE>
service providers telephone connection installation charges (depending upon
bandwidth requirements, from $250 to $1,000) and monthly recurring connection
charges (from $50 to $1,200), most of which is reimbursed to the Company by its
customers. The primary market for the Audio Media Communications Service are
radio and television advertisers, motion picture and television program
production companies and music recording companies.
The Company recently announced a network application which is designed
especially for the music recording industry. The Company's "ZeroC" (for zero
compression) technology provides fiber-optic transmission of real-time,
uncompressed digital audio, using the true CD standard of 44.1 Khz sampling at
16 bits. The system relays, in real playback time, the audio bits of an AES/EBU
digital audio datastream with no re-sampling or rate adaption.
Video Media Networking Services. The Company is currently developing a
video communications service (its "Fast Forward Delivery System") which is
similar to its Audio Media Communications Service. Through the use of similar
equipment located at affiliate studios, the Company manages the transmission of
approval-quality video segments between studios. The Fast Forward Delivery
System transmits information on a 128 kilobit ("ISDN") data line, which has
dial-up capability, and operates on the same principle as the Audio Media
Communications Service except that the transmission does not happen in "real
time." However, using this technology, video media producers and their customers
can efficiently and effectively transmit edits, approvals, or modifications to
video and other types of media, including special effects media and graphic
media (including prints and logos). Management believes its system is similar to
e.mail for video and, compared to conventional methods of transmitting video,
i.e., mail or physical travel, can significantly increase the speed and
efficiency of the video editing process, and anticipates spending approximately
$200,000 in the current year in developing the Fast Forward Delivery System and
installing the necessary equipment in affiliate studios.
As with the Company's Audio Networking Services, outside customers
(non-affiliates) seeking to access media production facilities or otherwise
review or edit video with the assistance of a person in a different location can
do so by paying a fee to use an affiliate studio. The customer also pays a
network access fee to the Company. The purchase price of the Fast Forward
Delivery System ranges from $15,000 to $50,000. The Company pays local telephone
service providers telephone connection installation charges (depending upon
bandwidth requirements, from $250 to $1,000) and monthly recurring connection
charges (from $50 to $1,200), most of which is reimbursed to the Company by its
customers. The primary market for the Fast Forward Delivery System are
television advertisers, motion picture and television series production
companies and other corporate video users.
Currently, six Fast Forward Delivery Systems are in use by several
television series projects in Australia, Canada and Hollywood, California.
Internet WebSite Development and Hosting Services. The Company is also
in the Internet services marketplace. In June 1996, in order to increase its
potential to deliver high-quality audio and other media over the Internet, the
Company consummated a transaction whereby Internet Worldwide Business Solutions,
a California corporation, dba Internet Business
5.
<PAGE>
Solutions ("IBS"), an Internet services provider specializing in the development
and hosting of web sites for companies doing business on the Internet, merged
with and into a subsidiary of the Company. The Company thus improved its ability
to integrate numerous technologies to yield cost-effective media communications
solutions. IBS provides interactive web site development services, specializing
in complex database access and professional graphic appearance for its corporate
customers. Web site development services are sought by businesses that wish to
pursue on-line commerce on the Internet. Management believes that a key feature
of the Company's web site service is the Company's ability to provide
interactive, graphically appealing web pages, while many of the web sites
developed by competitors are static and plain. In addition to web site
development, the Company offers the following Internet related services:
catalog-based search engines for custom or existing databases; electronic forms
for customer and query information capture; specialized on-line ordering
systems; and comprehensive Internet networking, integration and consulting.
Internet services for web site development range from $5,000 to $75,000
depending on the content and complexity of the web site. Web site host fees
collected by the Company this year average approximately $249 per month. The
primary market for these services are large and small corporate businesses.
Description of Possible Products
The Company is also exploring the development of additional products
which are not yet in the production phase to enable the Company to participate
in the Internet services marketplace, which products could provide enhancements
to the Company's Audio Media Communications Service and Fast Forward Delivery
System. Management believes that there is a market for the products listed
below, but there is no assurance that the Company will be able to raise funds
sufficient to develop these products, that such products will be successfully
developed and produced, or if developed and produced, that they will be
profitable for the Company.
Media Asset Management Systems. The Company anticipates providing a new
service (its "Media Asset Management System") for the collection, indexing and
storage of media assets for corporate customers. Media assets include any audio,
video, special effects or print media that have been developed by, and are
considered the property of, the developing company. Examples include radio and
TV commercials and product or background still photography. Management believes
that the Media Asset Management System would enable customers to access their
media assets by fiber optic lines, which would allow them to easily save,
archive and retrieve previously produced media assets for reuse (or
"re-purposing") at a later time for a different application. For example, an
advertising agency may be able to retrieve a previously used photograph of the
Golden Gate Bridge or a product package and make minor changes to the image for
use in a new advertisement, saving both time and money. The Company anticipates
that the pricing for this service would include one-time and ongoing charges and
be based on the specific operational needs of each customer. The primary market
for the Media Asset Management System could be corporate advertisers and
advertising agencies. The details of the Media Asset Management System have not
yet been finalized, nor have marketing plans for the Media Asset Management
System been developed.
6.
<PAGE>
Internet WebSite Development and Hosting Services. The Company is
exploring the expansion of its host/server site service for maintaining its
customers' web sites to develop an "Intranet" or closed access network for the
entertainment industry while using the Internet as the main "backbone" or
communications path.
Competition
Audio and Video Networking. Competition in the audio and video
networking business is based on the ability to provide systems compatibility and
proprietary off-the-shelf codecs. Due to the difficulty and expense of
developing and maintaining private digital networks, Management believes that
the number of competitors is, and will remain, small.
The Company's principal competitor in audio networking is the 3D2
("3D2") division of Keystone Communications, Inc. Until March 31, 1995, 3D2 was
the exclusive North American distributor of apt-X codecs manufactured by Audio
Processing Technology ("APT"), which were in demand in the radio voice-over
market. In April 1995, the Company became one of APT's few distributors and
through aggressive marketing, within six months became APT's largest worldwide
distributor. Management believes that the Company was able to use its position
as a distributor of apt-X codecs to attract studios to its network because
studios grew increasingly confident in the Company's ability as a network
service provider as a result of its position as an apt-X codecs distributor.
Management estimates that, between July 1995 and June 1996, as a result of
distributing apt-X codecs, approximately 120 studios joined the network.
The Company's primary video networking competitors are VYVX, a division
of Williams Co., and Sprint through its DRUMS products. These companies offer
their video networking services utilizing higher-bandwidth fiber connections,
which, because they do not have dial-up capability, require scheduling and are
considerably more expensive. Because the Fast Forward Delivery System is
primarily ISDN-based, and has dial-up capability, it is generally less expensive
than sending video materials between studios by courier.
Patents & Trademarks
The Company does not own any patents and relies instead on a
combination of statutory and common law copyright, trademark and trade secret
laws to protect its rights in its proprietary technologies. The Company has
registered "EDnet" and "Entertainment Digital Network" as trademarks with the
U.S. Patent and Trademark Office and has applied to register "ZeroC" as a
trademark with the U.S. Patent and Trademark Office.
Research and Development.
During the last two fiscal years, the Company spent a total of
approximately $42,000 on research and development. During each of the last two
fiscal years, the Company did not spend any funds on material customer-sponsored
research and development. During the current fiscal year, assuming the Company
is able to raise sufficient capital, Management anticipates that the Company
will spend a total of approximately $900,000 on research and development.
7.
<PAGE>
Governmental Approvals and Regulation
The Company's networking services are currently not subject to
regulation by any government agency or regulatory body.
History and Organization
Background. Prior to founding the Company, most of Management was
employed by Skywalker Sound ("Skywalker"), the post production division of
LucasArts/Lucasfilm Ltd. ("LucasArts"). In 1991, while at Skywalker, they made a
breakthrough in the application of digital communications technology. They were
able to send four channels of compressed, professional-quality digital audio
over T-1 fiber-optic telephone lines (individual DSOs or channels over a single
line) from a Skywalker studio in Northern California to a Skywalker studio in
Southern California. The group thereafter sent the audio mix for the movie
Backdraft, then under production, between the two studios on a daily basis. The
result was that Backdraft was the first film in which the director reviewed
movie audio from a remote studio on the same day it was produced.
Based upon this success (and with the acknowledgement of LucasArts),
the Company's management organized Entertainment Digital Network ("EDN")) as a
Nevada corporation on June 26, 1992, and set up a trial network of seven studios
and developed other proprietary technology to market T-1 digital communications
to the music, movie and television industries. On January 25, 1993, EDN was
re-incorporated in the State of California.
Effective August 27, 1993, EDN acquired the assets of Digital Patch
Systems ("Digital Patch"), an unrelated networking service provider, for 235,000
shares of EDN common stock and 140,000 shares of EDN preferred stock. At that
time, Digital used MPEG-based, audiocompression, switched 56 and ISDN data
lines, which the Company has since adopted as its primary technology. Management
believed that ISDN, which had become the standard in the telecommunications
industry in Europe, Japan and many parts of the Pacific Rim, would likewise
become the standard in the U.S. Currently, ISDN is common in most areas of the
world. EDN also obtained non-competition agreements from the two shareholders of
Digital Patch which prohibited these individuals from competing with EDN for a
period of five years in areas where Digital Patch had operated before the
transaction. Following this transaction, Bert Berdis, who owned 50% of the
outstanding shares of Digital Patch, became a Director of the Company (see "Part
I - Item 8. Directors, Executive Officers and Significant Employees" below).
Merger With AP Office Equipment. On or about September 20, 1995, EDN's
management determined that it was in EDN's best interests to effect a business
combination with a company whose shares were publicly-traded in order to access
the public capital markets. Toward this end, EDN, its seven largest shareholders
and AP Office Equipment, Inc. ("AP"), an unrelated company, entered into a Stock
Purchase Agreement pursuant to which such shareholders exchanged their EDN
common and preferred stock for 1,275,818 shares of AP common stock, par value
$.001 per share (the "Common Stock"). In addition, (a) outstanding non-qualified
options to purchase an aggregate of 263,420 shares of EDN common stock at an
8.
<PAGE>
exercise price of $.10 per share were converted into options to purchase an
aggregate of 230,479 shares of Common Stock at an exercise price of $.11 per
share, and (b) outstanding warrants to purchase an aggregate of 347,343 shares
of EDN common stock at $2.625 per share, which terminated as of October 31,
1996, were converted into warrants to purchase an aggregate of 303,908 shares of
Common Stock at an exercise price of $3.00 per share. The closing of these
transactions was contingent upon the successful completion by AP of a sale of
1,500,000 shares of Common Stock at a price of $0.665 per share.
By means of an Amendment of Articles of Incorporation which was filed
with the Colorado Secretary of State on September 29, 1995, AP changed its name
to "EDnet, Inc."
Finally, pursuant to a Stock Purchase Agreement executed by the Company
(formerly AP) and the remaining shareholders of EDN, dated as of October 18,
1995, such shareholders sold their EDN common stock to the Company in exchange
for 243,720 shares of Common Stock. The result was that EDN became, and remains,
a wholly-owned subsidiary of the Company.
IBS Transaction. Pursuant to an Agreement and Plan of Reorganization
dated as of June 24, 1996 (the "IBS Agreement"), the Company acquired all of the
outstanding shares of common stock of IBS, an unrelated internet services
provider, through a merger of IBS into a subsidiary of the Company. As
consideration for such merger, the Company delivered the following to the two
shareholders of IBS, Trevor Stout and Randall Schmitz: (i) two promissory notes
in the aggregate amount of $250,000 (the "First IBS Notes"); (ii) two promissory
notes in the aggregate amount of $250,000 (the "Second IBS Notes"); and (iii)
311,284 shares of Common Stock. The First IBS Notes were due sixty (60) days
after the closing of the IBS Agreement and were repaid by the Company in August
1996. The Second IBS Notes originally provided for interest of eight percent
(8%) and maturity on the earlier of one year from the closing under the IBS
Agreement or fifteen (15) days after the closing of a public offering by the
Company of its Common Stock. In addition, pursuant to an earn-out plan, Messrs.
Stout and Schmitz were originally entitled to receive up to an aggregate of
500,000 shares of Common Stock if IBS was to meet certain specified performance
goals during a period commencing on the effective date of the IBS Agreement and
ending 120 days after June 30, 1999 (the "Earnout"), and Messrs. Stout and
Schmitz entered into three-year employment agreements with the Company and IBS
(collectively, the "IBS Employment Agreements"). Finally, the Company granted to
three employees of IBS options to purchase an aggregate of 50,000 shares of
Common Stock under the NSO Plan (as defined below), at $1.25 per share, which
options vest over a three year period. The merger was accounted for as a
purchase. Upon the closing of the IBS Agreement, Mr. Stout was appointed a
director of the Company and presently serves in such capacity.
Subsequently, the Company determined that the cost of supporting IBS in
researching, developing and marketing certain software related to the
development, operation and maintenance of world-wide web sites (the "IBS Website
Software") was, in Management's view, prohibitively expensive. Accordingly,
pursuant to an Amendment to the Agreement and Plan of Reorganization dated as of
January 31, 1997 and certain collateral documents: (i) IBS licensed
9.
<PAGE>
the IBS Website Software to a new entity, Breakthrough Software, Inc., a
California corporation ("Breakthrough"); (ii) the Company agreed to lend up to
$250,000 to Breakthrough to be used for specified purposes, as represented by an
unsecured promissory note made by Breakthrough in favor of the Company, payable
30 days after demand after July 1, 1997 or upon the date that Breakthrough
closes a financing of not less than $1,000,000; (iii) Breakthrough issued to the
Company 2,000,000 shares of convertible Series A Preferred Stock (the
"Breakthrough Series A Preferred Shares") representing (after conversion into
Breakthrough common stock) 40% of Breakthrough's outstanding common stock; (iv)
Breakthrough issued to Messrs. Stout and Schmitz common stock representing 60%
of Breakthrough's outstanding common stock; (v) the Company canceled the Second
Notes; (vi) the Company reduced the number of shares of Common Stock subject to
the Earnout from 500,000 to 125,000; (vii) the IBS Employment Agreements
terminated as of December 31, 1996; and (viii) Messrs. Stout and Schmitz entered
into consulting agreements with the Company to provide transition services to
IBS for a period of three months.
The Breakthrough Series A Preferred Shares have a liquidation
preference worth $605,000, which represents Management's estimate of the value
to date of the Company's capital investment in the IBS Website Software. So long
as 1,500,000 shares of Breakthrough Series A Preferred Shares remain
outstanding, the holder of the Breakthrough Series A Preferred Shares is
entitled to elect one director to the Breakthrough board of directors and the
affirmative approval of the Company is required to approve certain events,
including but not limited to, any increase or decrease in the authorized number
of shares of Breakthrough common or preferred stock, any amendment of
Breakthrough's articles of incorporation or bylaws which adversely affects the
rights of the holders of Breakthrough Series A Preferred Shares, any issuance of
securities on a parity with or senior to the Breakthrough Series A Preferred
Shares and any issuance of any additional securities to either Messrs. Stout and
Schmitz or any trust or other entity controlled by either of them. The rights,
privileges and preferences of the Breakthrough Series A Preferred Shares are
contained in the Amended and Restated Articles of Incorporation of Breakthrough,
which were filed with the California Secretary of State on January 31, 1997.
Employees
As of March 31, 1997, the Company employs 17 persons, and IBS employs
11 persons.
Policy Regarding Related Party Transactions
The Company's policy with regard to transactions between the Company
and related parties is to comply with all state and federal laws governing such
transactions, to make efforts to assure that such transactions are on reasonable
terms and in the best interests of the Company and its shareholders and are on
the same terms as could be received from unaffiliated parties and, where
appropriate, to seek the advice of counsel with respect to such transactions.
Plan of Operation
10.
<PAGE>
As noted in the Report of Independent Accountants contained in this
Form 10-SB, the Company's auditors, Coopers & Lybrand L.L.P., have noted that
the Company has suffered recurring losses from operations and has a net working
capital deficiency that raises substantial doubt about the Company's ability to
continue as a going concern. Management believes that the following plan of
operation will enable the Company to satisfy its cash requirements during the
twelve month period commencing November 1, 1996:
First, as discussed more fully in "Part II - Item 4. Recent Sales of
Unregistered Securities - Private Placement of EDnet Series A Preferred Shares"
below, the Company has retained a broker to assist the Company in raising up to
$5,000,000 in a private placement to non-United States persons of EDnet Series A
Preferred Shares (as defined below). The first phase of this offering is for the
sale of $1,750,000 of Ednet Series A Preferred Stock which commenced February 3,
1997. The proceeds from this first phase will be used to finance continuing
operations and service the Senior Secured Notes and other liabilities of the
Company. Management anticipates that the second phase of this offering will
commence on or about May, 1997.
Second, Management believes that the Breakthrough transactions
discussed in IBS Transaction above will relieve the Company of making any
substantial additional funding for the research and development costs and
marketing expenses of the IBS Website Software (except for the Breakthrough
unsecured promissory note discussed above), enabling the Company to concentrate
its resources on the growth of its core networking services business during the
next twelve months.
Third, as discussed more fully in "Part II - Item 4. Recent Sales of
Unregistered Securities - Private Placement of Note Participations" below, the
Senior Secured Notes (as defined below), which originally matured on November
15, 1996, were extended to January 31, 1997. At that time, the Senior Secured
Notes converted into a term note with monthly principal payments beginning
February 15, 1997. Management believes that paying monthly payments required
under the term loan is preferable to paying off the entire balance of the Senior
Secured Notes and will enable the Company to use its capital for operations. On
February 15, 1997, the Company made a $100,000 principal payment on the Senior
Secured Notes to Morgan Fuller (as defined below). On March 11, 1997, Morgan
Fuller verbally agreed to defer for a two-week period the $100,000 principal
payment due on March 15, 1997. Subsequently, the Company received a demand
notice from Morgan Fuller placing the Company in default and is currently
negotiating with Morgan Fuller and holders of Participations (as defined below)
regarding the payment terms of the Senior Secured Notes.
Fourth, as discussed more fully in "Part II - Item 4. Recent Sales of
Unregistered Securities - Private Placement of Common Stock" below, on December
31, 1996, the Company initiated a private placement of up to $5,000,000 of
Common Stock. As of March 31, 1997, the Company had raised $265,000 in this
private placement, which is being used to finance continuing operations and
service the Senior Secured Notes and other liabilities.
11.
<PAGE>
Management believes that if the full amount of such offerings are
timely raised, further financings will not be necessary during the twelve-month
period of the plan of operation. No assurance can be given that the full amounts
(or substantially all of the full amounts) of such offerings can be raised. To
the extent that the full amounts of such offerings are not raised, Management
may act to reduce the amount of the Company's spending devoted to research and
development, reduce the size of the Company, or sell a portion of the Company's
assets. Management is continually monitoring the Company's cash position and the
status of these offerings.
ITEM 7 (OF MODEL B OF FORM 1-A). DESCRIPTION OF PROPERTY
The Company operates from two offices located in San Francisco and Los
Angeles, California. The San Francisco office, located at One Union Street, San
Francisco, California, is a 5,000 square foot facility that operates as
administrative headquarters and provides the centralized network hub for
electronically bridging affiliate studios, as well as overall network
management. The Company leases this facility pursuant to a Sublease dated
November 1, 1993 with Varitel Video, Inc. ("Varitel"), an unaffiliated entity.
This sublease provides for a term of five years commencing November 15, 1993
(with an option to extend for an additional five year term), with monthly lease
payments of zero during the first three months of the term, $5,653.39 during
months four through 24 of the term and $5,992.59 during months 25 through 60 of
the term (plus the Company's proportionate share of rent adjustments under the
master lease). In lieu of a security deposit, the Company has granted Varitel a
security interest in certain of the Company's equipment with an aggregate
purchase price of approximately $75,000. Varitel may terminate this sublease
upon 90 days prior written notice upon a change in the "principal ownership" of
the Company or in the event that the Company engages in a "competing type of
film or video service business like or similar to Varitel" excluding, however,
any "networking service application" which the Company engages in in connection
with its audio, video and other multimedia networking services. The Los Angeles
office, located at 3000 Olympic Blvd., Suite 2121, Santa Monica, California, is
a 4,000 square foot facility that serves as a sales and demonstration facility
and provides access to many users of the Company's services from the
entertainment industry located in Southern California. The Company leases this
facility pursuant to an Office Lease dated June 16, 1993 with Lantana Center, a
California limited partnership ("Lantana"), an unaffiliated entity. This lease
provides for a term of ten years commencing July 1, 1993, with monthly lease
payments of $7,749.50 (subject to a cost-of-living adjustment) and reimbursement
to the Company of up to $61,015 incurred for the installation of permanent
tenant improvements. As discussed in "Part I - Item 11. Interest of Management
and Others in Certain Transactions - Short-Term Loans from Officers, Directors
and Shareholders; Guaranty of Lease" below, the Company's obligations under this
lease have been guaranteed by Mr. Kobayashi, the Chairman of the Company.
The IBS subsidiary operates from an office located in Mountain View,
California. The Mountain View office, located at 2083 Landings Drive, Mountain
View, California, is a 2,000 square foot facility that operates as its
administrative and operations headquarters. IBS leases this facility pursuant to
a Building Lease dated August 28, 1995, as amended by a Modification No. 1 dated
February 13, 1996, with Landmark Investments, Limited, an entity unaffiliated
with
12.
<PAGE>
either IBS or the Company. This lease, as amended, provides for a term
commencing September 15, 1995 and ending March 3, 1997, with monthly lease
payments from September 15, 1995 through September 30, 1995 of $707.19, from
October 1, 1995 through March 3, 1996 of $1,580.80 and from March 4, 1996
through March 3, 1997 of $4,348 (subject to a cost-of-living adjustment).
ITEM 8 (OF MODEL B OF FORM 1-A). DIRECTORS, EXECUTIVE OFFICERS AND SIGNIFICANT
EMPLOYEES
The following sets forth the names, ages and current positions with the
Company held by Directors, Executive Officers and Significant Employees,
together with the year such positions were assumed. Tom Kobayashi, the Chairman,
and David Gustafson, the Executive Vice President of Sales and Marketing, are
brothers-in law. Other than as described in the preceding sentence, there is no
immediate family relationship between or among any of the Directors, Executive
Officers or Significant Employees and the Company is not aware of any
arrangement or understanding between any Director or Executive Officer and any
other person pursuant to which he was elected to his current position.
Charles E. Erickson, age 59, has served as a consultant to the Company
as its President Chief Executive Officer since April 7, 1997. From 1996 to April
1997, Mr. Erickson was the Chief Technical Officer of Assurenet Pathways, Inc.
(formerly Digital Pathways, Inc.), a supplier of secure remote access systems;
1991 to 1996, he was the President and Chief Executive Officer of Digital
Pathways, Inc.; from 1987 to 1990 he was the President of Olivetti Advanced
Technology Center and responsible for the development of a broad line of
personal computers; and from 1975 to 1987 he was the Director, Research and
Development, of Olivetti Research and Development, where he was responsible for
the development of video typewriters and peripheral printer systems.
Tom Kobayashi, age 68, has served as the Chairman of the Board of
Directors and a Director of the Company since 1992 and as Chief Executive
Officer from 1992 to March 1997. From 1986 to 1993, he was Vice President and
General Manager of Skywalker. During his tenure at Skywalker, the sending of
digital audio over fiber optic telephone lines was developed and the idea for an
entertainment digital network was formulated. In 1992, with George Lucas's
approval, Mr. Kobayashi utilized the technology first developed at Skywalker to
found EDN. Previously, he was with Glen Glenn Sound, a major sound recording
studio in Hollywood. He began with Glen Glenn in 1964 as Vice President of
Finance, later served as Vice President of Business Affairs and Executive Vice
President and in 1983 was appointed President and Chief Operating Officer. Mr.
Kobayashi is a member of the American Engineering Society, the Society of Motion
Picture and Television Engineers, the Society of Professional Audio Recording
Studios (of which he has been a member of the Board of Governors for over seven
years), the Academy of Motion Picture Arts and Sciences and the Academy of
Television Arts and Sciences. Mr. Kobayashi earned a Bachelor of Science degree
at the University of Southern California.
13.
<PAGE>
David Gustafson, age 50, has served as the Executive Vice President of
Sales and Marketing since March 1997 and served as the President and Chief
Operating Officer of the Company from March 1996 to March 1997, and as Vice
President, Marketing and Sales, from July 1992 to March 1996. He has served as a
Director of the Company since 1992. Previously, he was President and Chief
Operating Officer of SLT, Inc., a private New York-based apparel manufacturer;
Corporate Vice President and Director of Wacoal America, Inc., a $35 million
division of the $1 billion Wacoal Corp., a multi-national consumer products
company based in Kyoto, Japan, where his responsibilities included Merchandising
and Design, Sales, Marketing and Advertising; Vice President of Marketing and
Merchandising for the Olga Company; Management Information Systems Consultant
with Deloitte, Haskins & Sells in Los Angeles; and a computer Systems Engineer
and Manager at EDS Corp., working in New York, Miami and Dallas. Mr. Gustafson
received his Bachelor's degree from Westmont College in Santa Barbara,
California and further training in Marketing and Executive Management from the
graduate business schools at both the University of California, Los Angeles and
the University of Southern California.
Thomas Scott, age 53, has served as the Vice President-Chief Technology
Officer of the Company since 1992. From 1985 to 1992, he was Chief Engineer for
Skywalker Sound, the post production division of LucasArts/Lucasfilm Ltd.
Previously, he was Chief Engineer of The Record Plant and eventually worked in
film sound on the picture Apocalypse Now. Mr. Scott has been involved with
motion pictures since then, being employed at American Zoetrope, Dolby
Laboratories and LucasArts as Director of Engineering. During this period Mr.
Scott received two Oscar Academy Awards for Best Sound on the films The Right
Stuff and Amadeus. His last LucasArts project was the supervision of the
EditDroid and SoundDroid -- revolutionary computer-based picture and sound
editing equipment. Previously, he was Chief Engineer and Director of Remote
Operations at Wally Heider Recording, one of the first independent recording
studios, and an engineer with the Peace Corps in Venezuela. Mr. Scott is active
in numerous professional organizations and standards committees, including the
American Engineering Society, Society of Motion Picture and Television
Engineers, the Society of Professional Audio Recording Studios, the National
Academy of Recording Arts and Sciences and the Academy of Motion Picture Arts
and Sciences. Mr. Scott earned his Bachelor of Science degree from the
Massachusetts Institute of Technology.
Alan Geddes, age 47, has served as the Vice President and Chief
Financial Officer of the Company since July, 1996. From 1986 to 1996, he was the
Chief Financial Officer of IMAR Corporation and Oncogenetics, Inc., both
emerging companies in medical technology, in addition to founding his own
company, California Pacific Leasing, Inc. Previously, he served in corporate
management at Bio-Rad Laboratories, as Corporate Controller at Fiberplastics,
Inc., was a Financial Analyst with Litton Industries and a Plant Controller with
Abbott Laboratories. Mr. Geddes has a Masters in Business Administration in
Finance from Utah State University.
Mark L. Wallin, age 27, has served as the President of IBS since
February 1, 1997. Previously, he served as the Technical Director of Web
Services from June 1996 to February 1, 1997. From 1992 to 1996, he was a Project
Manager, Technical Team Leader and Application
14.
<PAGE>
Integrator for IBM. He graduated from Stanford University in 1993 with a degree
in Computer Systems Engineering.
Trevor Stout, age 26, has served as a Director of the Company since
August 1996. He is currently the Chief Executive Officer for Breakthrough.
Previously, he served as the President and Chief Technical Officer of IBS from
1995 to December 31, 1996. Prior to co- founding IBS, from 1989 to 1995, he was
a project manager at IBM. He pioneered the development of IBM's website and was
the manager and lead architect of IBMLink, IBM's web system for customer support
and sales information. Mr. Stout graduated magna cum laude from the University
of California, Los Angeles, in Computer Engineering.
Robert J. Wussler, age 59, has served as a Director of the Company
since 1995. From 1994 to the present, he has been the President and Chief
Executive Officer of Affiliate Enterprises, Inc., the company formed by ABC
Television affiliates to pursue new business opportunities, including emerging
technology applications. From 1990 to 1993, he was President and Chief Executive
Officer of COMSAT Video Enterprises, where he managed the acquisition of the NBA
Denver Nuggets. Previously, from 1980 to 1990, he was Senior Vice President of
Turner Broadcasting, where he oversaw the launch of CNN, Headline News and TNT,
in addition to serving as President of SuperStation TBS, and from 1974 to 1978,
he was the President of the CBS Television Network and CBS Sports.
Avi A. Fogel, age 42, has served as a Director of the Company since
1995. From 1995 to the present, he has been the Vice President of Global
Marketing for Digital Equipment Corporation in the Network Division. Mr. Fogel
recently initiated a $330 million acquisition of Lannet Data Communications by
Madge Networks. From 1987 to 1995, he served in various roles at Lannet Data
Communications, first as Sales and Marketing Manager, then as President and
Chief Executive Officer of Lannet North America and finally as Executive Vice
President - Global Marketing and Business Development, where he guided the
development of international and North American sales and marketing
organizations, and established customer and partnership relationships with
Wellfleet Communications, AT&T, Mitel, Data General, Fore Systems, Swiss Bank
Corp., Sprint and General Motors.
Jack Kraft, age 54, has served as a Director of the Company since 1996.
He is a director of Ballas Engineering, Gameplan, Inc. and Argus Plastics, Inc.
and is currently retained as a consultant to several advertising and technology
firms. From 1993 to 1995, he was a senior executive with Young and Rubicam, Inc.
Prior to taking early retirement in 1993, he was the Chief Operating Officer and
Vice Chairman of Chicago-based Leo Burnett USA, one of the world's largest and
best known advertising agencies. During Mr. Kraft's tenure, he made significant
contributions to that agency's strategic direction and deployment as revenues
increased from $325 million to $4.3 billion.
Phil Ramone, age 56, has served as a Director of the Company since
1995. Mr. Ramone is acknowledged as one of the top producers in the recording
industry. Mr. Ramone's career has embraced virtually every aspect of the music
industry. By 1961, he had acquired his own independent studio, A & R Recording,
in New York. He has produced award-winning
15.
<PAGE>
albums for such legends as Barbra Streisand and Frank Sinatra, as well as for
Liza Minelli, Elton John and Paul McCartney. The recording he made with Billy
Joel, The Stranger, was the first Compact Disc ever cut. He is also the moving
force behind a group of relative newcomers, such stars as Gloria Estefan, Jon
Secada and Sinead O'Connor. On the technical side, Phil Ramone is responsible
for innovations that have changed the very face of the recording industry. It
was Ramone, for example, who was responsible for the first use of the
solid-state console for recording and mastering for Solid State Records; of
Dolby four-track discrete sound, with the 1976 motion picture A Star is Born, of
Dolby optical surround sound for the motion picture One Trick Pony; and of
digital remote recording for Songs in the Attic, paving the way for the
technology that led to the Compact Disc. Mr. Ramone has received eight Grammy
Awards, fifteen Grammy Nominations, one Emmy Award, has served as President of
the New York Chapter of the National Academy of Recording Arts and Sciences
(NARAS), was elected to the TBC Hall of Fame in 1992 and Hollywood's Rock Walk
and is the recipient of the Platinum Music Award, the 3M Visionary Award and the
Eyes On New York Award.
The directors named above have been elected for one-year terms at the
most recent annual shareholders' meeting. On January 29, 1997, the Board of
Directors removed Christopher Desmond for failure to attend to his duties as a
director. In addition, Bert Berdis resigned as a Director on March 18, 1997.
ITEM 9 (OF MODEL B OF FORM 1-A). REMUNERATION OF DIRECTORS AND OFFICERS
The following table sets forth information concerning all annual
compensation paid to each of the three highest paid persons who were officers or
directors of the Company for the fiscal year ended June 30, 1996:
Capacities in
Name of individual which remunera- Aggregate
or identity of group tion was received remuneration
Tom Kobayashi Chairman and Chief $131,000(1)
Executive Officer and
Director (2)
David Gustafson President and Chief $131,000(4)
Operating Officer and
Director (3)
Tom Scott Vice President and $ 90,000
Chief Technical Officer
Total of above $352,000
- -----------
16.
<PAGE>
(1) Mr. Kobayashi has an Employment Agreement with the Company which
provides for a five-year term expiring December 31, 2000, with a base
salary of $10,416 per month from September 1, 1995 to February 28,
1996, with an increase to "market rate" at March 1, 1996 and every year
thereafter.
(2) Currently the Chairman of the Board of Directors of the Company.
(3) Currently the Executive Vice President of Sales and Marketing and a
Director of the Company.
(4) Mr. Gustafson has an Employment Agreement with the Company which
provides for a five-year term expiring December 31, 2000, with a base
salary of $10,416 per month from September 1, 1995 to February 28,
1996, with an increase to "market rate" at March 1, 1996 and every year
thereafter.
Directors of the Company do not receive any compensation for their
services as directors other than reimbursement by the Company of reasonable
out-of-pocket travel expenses incurred in connection with attending director
meetings in person.
As more fully disclosed in "Part I - Item 10 - Security Ownership of
Management and Certain Securityholders" below, the Company maintains the
1995-1996 Nonstatutory Stock Option Plan (the "NSO Plan"). The NSO Plan is
administered by a committee appointed by the board of directors, consisting of
two members. The NSO Plan reserves a total of 565,000 shares of Common Stock for
option grants to key employees and consultants (including directors) of the
Company and its subsidiaries and provides that the option price may be equal to
or less than the fair market value of the Common Stock on the grant date,
provided, however, in the event that the option price is less than 85% of the
then current market value of the Common Stock, the Board of Directors must
approve such option grant. In addition, the NSO Plan provides that no option be
granted after December 31, 1996 and requires that no option period exceed five
(5) years after the grant date. As of December 31, 1996, options to purchase
372,000 shares of Common Stock had been issued under the NSO Plan. The NSO Plan
was approved by the Board of Directors on November 10, 1995. In addition, in
connection with the merger with AP, non-qualified options to purchase an
aggregate of 263,420 shares of EDN common stock at an exercise price of $.10 per
share issued under EDN's 1993 Flexible Stock Incentive Plan (the "EDN Option
Plan") were converted into options to purchase an aggregate of 230,479 shares of
Common Stock at an exercise price of $.11 per share, which options are fully
vested. Other than as discussed herein, the Company does not have any pension,
profit-sharing, stock bonus, or other benefit plans. In addition, the Company
makes available certain non-monetary benefits to its executive officers with a
view to acquiring and retaining qualified personnel and facilitating job
performance. The Company considers such benefits to be ordinary and incidental
business costs and expenses.
Mr. Kobayashi and Mr. Gustafson have employment agreements with the
Company, each dated September 1, 1995, which contain identical non-competition
provisions. Each provision provides for a period of three (3) years following
the date of the employment agreement, the employee will not, directly or
indirectly, within any county, city or part thereof and other areas in the
United States of America (collectively, the "Locations"), so long as the Company
continues to be engaged in the same or similar business or activity (the
"Business") in such Location: (i) own, manage, operate, control, or be connected
in any manner with the ownership, management, operation or control of any person
or entity that engages in the same
17.
<PAGE>
or similar type of Business as the Business or engages in a business competitive
with the Business (a "Competitive Business"), which includes but is not limited
to, acting as a director, officer, agent, employee, consultant, partner or
stockholder of a Competitive Business; (ii) engage in any activity which is the
same as, similar to or in competition with the Business; (iii) interfere with,
disrupt or attempt to disrupt the business relationship, contractual, employment
or otherwise, between the Company and any customer or prospective customer,
supplier, lessee or employee of the Company, including without limitation the
customers and suppliers of the Business prior to the date of the employment
agreement; (iv) solicit employment for or of employees of the Company or induce
any employee to leave the employ of the Company; (v) lend or allow his name or
reputation to be used by or in connection with any Competitive Business; or (vi)
otherwise allow his skill, knowledge or experience to be used in or by any
Competitive Business. Each employment agreement provides that the employee may
invest in up to 5% of the shares of any public corporation without violating the
non-competition provisions, and that such non-competition provisions will
survive the termination of the employment agreement, other than where (a) the
employee exercises his right to terminate the employment agreement upon a sale
or transfer of substantially all of the assets of the Company, or a change in
control of the Company, (b) when the Company exercises its right to terminate
the employment agreement upon 30 days written notice, or (c) the Company
breaches the employment agreement and fails to cure such breach within thirty
(30) days of receipt of written notice thereof. A court applying California law
may decline to enforce (or may partially enforce) these non-competition
provisions.
ITEM 10 (OF MODEL B OF FORM 1-A). SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN
SECURITYHOLDERS
The following table sets forth information, as of March 31, 1997,
regarding shares of Common Stock held of record by: (i) each of the three
highest paid persons who are officers or directors of the Company; (ii) all
officers and directors as a group; and (iii) each shareholder who owns more than
10% of any class of the Company's securities, including those shares subject to
outstanding options and warrants. Unless expressly indicated otherwise, each
shareholder exercises sole voting and investment power with respect to the
shares owned.
Title Name and Address Percent
of Class of Owner Amount Owned of Class (1)
Common Tom Kobayashi 425,048 7.67%
One Union Street
San Francisco, CA 94111
Common David Gustafson 135,761 3.62%
One Union Street
San Francisco, CA 94111
Common Tom Scott 164,885 3.04%
One Union Street
San Francisco, CA 94111
Common Liviakis Financial 1,005,000 17.74%
18.
<PAGE>
Communications, Inc.
2118 "P" Street, Suite C
Sacramento, CA 95816
Common All officers and
directors as a group (2) 943,836 17.97%
- -----------
(1) Assumes the exercise by the holder of his outstanding options and
warrants; based upon 5,665,465 shares of Common Stock issued and
outstanding on March 31, 1997.
(2) Includes the Common Stock owned by Kobayashi, Gustafson and Scott and
218,142 shares owned by Mr. Stout.
<TABLE>
The following table sets forth information, as of March 31, 1997,
concerning outstanding options and warrants to purchase shares of Common Stock
held by: (i) each of the three highest paid persons who are officers or
directors of the Company; (ii) all officers and directors as a group; and (iii)
each shareholder who owns more than 10% of any class of the Company's
securities, including those shares subject to outstanding options and warrants.
Unless expressly indicated otherwise, each shareholder exercises sole voting and
investment power with respect to the shares beneficially owned.
<CAPTION>
Title and Amount of securities called
Name of Holder for by options, warrants or rights Exercise Price Date of Exercise
<S> <C> <C> <C>
Tom Kobayashi Options for 11,483 Shares of Common Stock $0.11 Fully Vested (1)
David Gustafson Options for 72,005 Shares of Common Stock $0.11 Fully Vested (2)
Tom Scott Options for 7,316 Shares of Common Stock $0.11 Fully Vested (3)
All officers and Options for 17,500 Shares of Common Stock $0.11 Fully Vested (4)
directors as a group Options for 150,000 Shares of Common Stock $1.25 (5)
Options for 50,000 Shares of Common Stock $1.25 (6)
Options for 90,804 Shares of Common Stock $0.11 (7)
- -----------
<FN>
(1) Mr. Kobayashi holds options issued under the EDN Option Plan to
purchase an aggregate of 11,483 shares of Common Stock at an exercise
price of $.11 per share, which are fully vested (see History and
Organization - Merger With AP Office Equipment).
(2) Mr. Gustafson holds options issued under the EDN Option Plan to
purchase an aggregate of 72,005 shares of Common Stock at an exercise
price of $.11 per share, which are fully vested (see History and
Organization - Merger With AP Office Equipment).
(3) Mr. Scott holds options issued under the EDN Option Plan to purchase an
aggregate of 7,316 shares of Common Stock at an exercise price of $.11
per share, which are fully vested. (see History and Organization -
Merger With AP Office Equipment).
(4) Granted to Phil Ramone, a Director of the Company, and issued under the
EDN Option Plan.
(5) Granted to Messrs. Wussler, Fogel and Kraft, Directors of the Company
(for 50,000 shares each), and issued under the NSO Plan. 75,000
currently vested and 75,000 will vest December 31, 1997.
19.
<PAGE>
(6) Granted to Mr. Geddes, the Chief Financial Officer of the Company and
issued under the NSO Plan. One-third vested December 31, 1996,
one-third will vest December 31, 1997 and one-third will vest December
31, 1998.
(7) Granted to Messrs. Kobayashi, Gustafson and Scott (see footnotes 1, 2
and 3 above).
</FN>
</TABLE>
ITEM 11 (OF MODEL B OF FORM 1-A). INTEREST OF MANAGEMENT AND OTHERS IN CERTAIN
TRANSACTIONS
Investment Banking and Brokerage Services
All of the agreements described below were negotiated with unrelated third
parties on an arms-length basis.
Century Financial Partners, Inc. Pursuant to a Consulting Agreement, dated
July 31, 1995, between EDN and Century Financial Partners, Inc. ("Century"), EDN
hired Century to advise EDN with respect to a merger of EDN with an entity whose
securities were publicly traded. Such consulting agreement granted Century the
exclusive right to represent EDN, on a best efforts basis, to prospective
investors for financing and general corporate advisory services for a period of
three years, and a right of first refusal to provide investment banking services
for a period of three years. Century advised the Company with respect to the
transaction with AP (see "Part II - Item 6. Description of Business - History
and Organization - Merger with AP Office Equipment"). Century has verbally
consented to the Company's agreements with Morgan Fuller (described below). As
payment for Century's services, the Century consulting agreement provided that
EDN would grant to Mr. Irawan Onggara ("Mr. Onggara"), an investor in Century,
and a shareholder of the Company holding an aggregate of 100,000 shares of
Common Stock, an option to purchase 1,000,000 shares of the common stock of any
publicly traded entity into which EDN would merge, at $1.25 per share, which
option shares would be registered "immediately" by EDN with the SEC on Form S-8.
Management does not believe that such a registration is legally possible due to
the fact that Mr. Onggara is not an employee of the Company and plans to address
this issue more completely in the near future. The Company has had verbal
discussions with Mr. Onggara with respect to reducing the number of shares of
Common Stock subject to such option to 805,000 shares. When Mr. Onggara is
granted options and assuming the exercise of those options, he may become a
shareholder holding more than ten percent of the outstanding Common Stock.
Liviakis Financial Communications, Inc. Pursuant to a Consulting
Agreement, dated as of January 12, 1996, between the Company and Liviakis
Financial Communications, Inc., a California corporation ("Liviakis"), Liviakis
agreed to provide public relations consulting services to the Company for a term
of one year ending on January 11, 1997. As payment for its services, Liviakis
received 390,000 unregistered shares of Common Stock from the Company. At the
end of the term of the consulting agreement, Liviakis may demand that the
Company use its best efforts to register such shares with the Securities and
Exchange Commission (the "SEC"). Pursuant to an additional Consulting Agreement
effective as of January 12, 1997, between the Company and Liviakis, Liviakis
agreed to provide consulting services to the Company for a term of one year
ending on January 2, 1998. As payment for its services, Liviakis received
490,000 unregistered shares of Common Stock from the Company. At the end
20.
<PAGE>
of the term of the consulting agreement, Liviakis shall have the same demand
registration rights to register such shares with the SEC as given to investors
in the December 1996 Private Placement (as defined in "Part II - Item 4. Recent
Sales of Unregistered Securities - Private Placement of Common Stock" below.
Morgan Fuller Capital Group L.L.C. Pursuant to engagement letters dated
May 20, June 25, June 28, June 28, November 19 and November 21, 1996, the
Company retained Morgan Fuller Capital Group L.L.C. ("Morgan Fuller") to provide
investment banking services to, and raise capital for, the Company. As discussed
more fully in "Part II - Item 4. Recent Sales of Unregistered Securities" below,
as of March 31, 1997, the Company had: (i) granted Morgan Fuller 250,000
Warrants at an exercise price of $6.37 per share for general investment advisory
services; (ii) delivered the Senior Secured Notes (as defined below) payable to
Morgan Fuller in the aggregate principal amount of $1,000,000; (iii) paid Morgan
Fuller a loan fee of five percent (5%) of the amount of the Senior Secured
Notes; and (iv) granted Morgan Fuller 39,255 warrants to purchase Common Stock
("Warrants") at an exercise price of $4.25 and 45,205 Warrants at an exercise
price of $3.69 in connection with the sale of Participations (as defined below).
The June 28, 1996 engagement letter provides that in the event that the Company
fails to proceed with a subsequent Regulation S financing, the Company is
obligated to pay to Morgan Fuller a cash fee of $140,000 and $200,000 in
aggregate amount of Warrants at an exercise price equal to the lesser of: (i)
$3.00; or (ii) sixty percent (60%) of the average closing bid price of the
Common Stock during a consecutive ten (10) day period immediately preceding the
issuance date of the Warrants. Because the Company has engaged another broker in
connection with such an offering (see "Net Financial International, Ltd."
below), the Company has had oral discussions with Morgan Fuller regarding Morgan
Fuller's waiver of this provision. In connection with the extension of the
Participations, the Company agreed to pay to Morgan Fuller a cash fee of one and
one-half percent (1.5%) of the amount of the Senior Secured Notes and granted
Morgan Fuller 55,970 three-year Warrants with an exercise price of $2.68.
LBC Capital Resources, Inc. Pursuant to an engagement letter dated October
17, 1996 (the "LBC Letter Agreement") between the Company and LBC Capital
Resources, Inc. ("LBC"), the Company retained LBC to solicit a broad range of
transactions on behalf of the Company, including equity and debt financings and
to provide advice with respect to potential merger and acquisition transactions.
LBC would be paid fees only upon the successful closing of any such transaction.
Such fees would be comprised of (i) a cash fee in the amount of six percent (6%)
of the gross amount of such transaction (to be paid as such proceeds are
received by the Company) and (ii) warrants as described in the next sentence.
Upon the completion of one or more transactions, for each $1,000,000 of such
transaction amount, after transactions aggregating at least $1,000,000 have been
closed, LBC would be entitled to purchase from the Company for $2,500 a seven
year warrant to purchase one hundred twenty thousand (120,000) shares of Common
Stock, at an exercise price per share equal to one hundred twenty-five percent
(125%) of the average closing price for the five (5) trading days preceding the
execution of the LBC Letter Agreement. The term of the LBC Letter Agreement is
sixty (60) days and thereafter, will remain in effect until terminated by either
party upon ten (10) days written
21.
<PAGE>
notice. Upon execution of the LBC Letter Agreement, the Company also paid to LBC
a $2,500 non-accountable expense allowance.
NET Financial International, Ltd. On January 31, 1997, the Company entered
into a Consulting Agreement with NET Financial International, Ltd. ("NET
Financial"), pursuant to which NET Financial agreed to act as placement agent
for the sale of up to $5,000,000 of EDnet Series A Convertible Preferred Stock
(the "EDnet Series A Preferred Shares") to non-United States persons in one or
more offerings exempt from the registration requirements of the Securities Act
pursuant to Regulation S promulgated under the Securities Act in two phases,
with the first phase commenced on February 3, 1997. For a description of this
offering, see "Part II - Item 4. Recent Sales of Unregistered Securities" below.
The Company has agreed to pay NET Financial fees equal to 10% of the total
capital raised in the financing as well as issuing to it a warrant (with
registration rights) exercisable for two years allowing the purchase of shares
of Common Stock with a value on the date of the closing equal to 6% of the
capital raised in the financing, at an exercise price equal to the closing bid
price of the Common Stock on the date of the closing of the financing. The NET
Financial consulting agreement has a term of three months and thereafter is
terminable by either party upon ten days prior written notice. In addition, in
the event that the Company seeks additional financing during the twelve month
period after the execution of the NET Financial consulting agreement, the
Company must give NET Financial the right of first refusal to obtain such
additional financing, upon the compensation terms described above.
Short-Term Loans from Officers, Directors and Shareholders; Guaranty of Lease
Several of the officers and directors of the Company have made short term
loans to the Company pursuant to promissory notes each providing for maturity
ninety days after the date thereof and simple interest of 6% on unpaid
principal. Such promissory notes are overdue. Mr. Kobayashi made loans in the
aggregate amount of $36,000, as evidenced by promissory notes dated from June
11, 1993 to February 10, 1994. As of March 31, 1997, unpaid principal (excluding
interest) of $24,000 was due on Mr. Kobayashi's notes. Mr. Scott, the Vice
President and Chief Technical Officer of the Company, made loans in the
aggregate amount of $43,050, as evidenced by promissory notes dated from August
6, 1993 to June 12, 1995. As of March 31, 1997, unpaid principal (excluding
interest) of $16,550 was due on Mr. Scott's notes. Each of these individuals has
agreed not to declare a default under these notes for an indefinite period and
to accept repayment by the Company at a future date.
Mr. Onggara has made three loans to the Company in the aggregate amount of
$425,000, pursuant to: (a) a promissory note in the principal amount of $250,000
dated February 8, 1996 with a maturity date of August 8, 1996; (b) a promissory
note in the principal amount of $100,000 dated April 18, 1996 with a maturity
date of October 18, 1996; and (c) a promissory note in the principal amount of
$75,000 dated May 20, 1996 with a maturity date of November 20, 1996. All such
promissory notes provide for interest of 7% on unpaid principal and are secured
by a subordinate security interest in the accounts receivable, chattel paper,
accounts and certain other assets of the Company. In August 1996, the Company
made aggregate principal payments of $120,000 to Mr. Onggara on the first note.
Mr. Onggara has
22.
<PAGE>
verbally agreed to extend the maturity date of such notes for an indefinite
period and to accept repayment by the Company at a future date, and readvanced
$35,000 to the Company under the first note. As of March 31, 1997, unpaid
principal (excluding interest) of $340,000 was due on Mr. Onggara's loans.
Mr. Kobayashi executed a Guaranty of Lease in favor of Lantana pursuant
to which Mr. Kobayashi personally guaranteed EDN's obligations under its lease
for the Company's Los Angeles office premises. Mr. Kobayashi's guaranty is
limited to $48,225 for so long as he remains the chief executive officer, and
maintains voting control, of the Company. Because Mr. Kobayashi does not
currently have voting control of the Company, his guarantee is therefore
unlimited. Mr. Kobayashi has had verbal discussions with Lantana regarding
amending the Guaranty of Lease to eliminate the voting control condition.
ITEM 12 (OF MODEL B OF FORM 1-A). SECURITIES BEING OFFERED
Pursuant to this Form 10-SB, the Company is registering its class of
Common Stock under Section 12(b) of the Act but no Common Stock is being offered
for sale. The Company's Articles of Incorporation authorize the issuance of
50,000,000 shares of Common Stock, $.001 par value per share, and 5,000,000
shares of non-voting preferred stock, $.001 par value per share. Dividends in
cash, property or shares may be paid, as and when declared by the Board of
Directors, out of funds legally available therefor. Each outstanding share of
Common Stock is entitled to one vote, and each fractional share of Common Stock
is entitled to a corresponding fractional vote, on each matter submitted to a
vote of shareholders. Each share of Common Stock is entitled to participate in
distributions upon liquidation, dissolution or winding up of the Company, when,
as and if declared by the Board of Directors from funds legally available
therefor, subject to preferences, if any, granted to holders of preferred
shares. Holders of Common Stock have no preemptive rights to purchase, subscribe
for or otherwise acquire shares of the Company's stock, rights, warrants or
options to purchase stock or securities of any kind convertible into stock of
the Company. There are no conversion rights, redemption provisions or sinking
fund provisions relating to the Common Stock. All outstanding shares of Common
Stock are fully paid and nonassessable.
Section 7-106-203(2) of the Colorado Corporation Business Act (the
"Colorado Act") provides that unless provided otherwise in a corporation's
articles of incorporation, a shareholder is not personally liable for the acts
or debts of the corporation, except that such person may become personally
liable by reason of such person's own acts or conduct. The Company's Articles of
Incorporation do not provide otherwise. See also the description of the Warrants
contained in "Part II - Item 4. Recent Sales of Unregistered Securities" below.
Other than the fact that the Company's shareholders are entitled to
dissenters' rights under the Colorado Act and Section 2(d) of the Company's
Bylaws, which provides that the shareholders may amend the Bylaws to provide
that the director be divided into not more than four classes whose terms of
office would expire at different times, there are no provisions in the
23.
<PAGE>
Company's Articles of Incorporation or Bylaws which would delay, defer or
prevent a change in control of the Company.
Commencing on February 3, 1997, the Company offered up to $1,750,000 of
EDnet Series A Preferred Shares at $1,000 per share to non-United States persons
in an offering exempt from the registration requirements of the Securities Act
pursuant to Regulation S promulgated under the Securities Act. For a detailed
description of the EDnet Series A Preferred Shares, see "Part II - Item 4.
Recent Sales of Unregistered Securities - Private Placement of EDnet Series A
Preferred Shares."
24.
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
(a) Market Information
Since November 1995, the Common Stock has been trading on the National
Association of Securities Dealers Automated Quotation Bulletin Board (the
"Nasdaq Bulletin Board") under the symbol "DNET." Prior to November 1995, AP's
common stock was not traded on the Nasdaq Bulletin Board. The following table
shows the high and low bid and ask prices of the stock during the periods
indicated (which information has been obtained from the Trading and Market
Services at The Nasdaq Stock Market, Inc.):
Bid Prices (1) Ask Prices
High Low High Low
Quarter ended March 31, 1997 $2.19 $1.06 $2.31 $1.25
Quarter ended December 31, 1996 $3.44 $1.00 $3.75 $1.06
Quarter ended September 30, 1996 $3.75 $3.00 $4.25 $3.25
Quarter ended June 30, 1996 $7.1 $4.63 $7.63 $5.00
Quarter ended March 31, 1996 $5.88 $2.00 $6.25 $2.56
Quarter ended December 31, 1995 $3.69 $2.00 $4.12 $2.88
- -----------
(1) The bid prices reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions.
(b) Holders
As of March 31, 1997 there were 526 holders of record of the Common
Stock.
(c) Dividends
The Company has never paid cash dividends on the Common Stock and
intends to utilize current resources to expand its operations. Moreover, the
Warrants restrict the ability of the
25.
<PAGE>
Company to pay dividends. Therefore, the Company anticipates that cash dividends
will not be paid on the Common Stock in the foreseeable future.
ITEM 2. LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings
other than ordinary litigation which, in the opinion of the Management, is
incidental to the business of the Company.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Private Placement of Units. Commencing on or about June 26, 1996, the
Company commenced a private placement of up to $3,000,000 of Units (each Unit
consisting of one share of Common Stock and one Warrant), for a price per Unit
equal to the lesser of: (i) $3.00; or (ii) the average closing bid price of the
Common Stock during a consecutive thirty (30) day period immediately preceding
the termination of the offering minus thirty percent (30%) (the "Stock Purchase
Price"). The purchase price for each Warrant is one-tenth of one cent ($0.001)
per Warrant. Each Warrant is exercisable until July 31, 1999, provided, however,
that in the event that the average closing bid price of the Common Stock exceeds
one hundred sixty percent (160%) of the Stock Purchase Price for thirty (30)
consecutive trading days, then the Company may, within three business days
following the end of such thirty (30) day period, give notice of its intent to
repurchase the Warrants at a purchase price of one-tenth of one cent ($0.001)
per Warrant, in which case Holders will have (30) days following the date of the
Company's notice to exercise the Warrants. Each Warrant entitles the holder to
purchase one share of Common Stock at an exercise price equal to the lesser of:
(i) $4.75; or (ii) the average closing bid price of the Common Stock during a
consecutive thirty (30) day period immediately preceding the termination of the
offering (subject to adjustment in certain circumstances). Holders of Common
Stock and Warrants have been granted piggyback and Form S-3 registration rights
for the Common Stock (and the Common Stock underlying the Warrants).
The Common Stock, the Warrants and the shares purchasable pursuant to
the Warrants were offered and sold only to "accredited investors" as defined in
Regulation D promulgated under the Securities Act of 1933, as amended (the
"Securities Act") in a private placement exempt from the registration
requirements of the Securities Act under Rule 506 promulgated under the
Securities Act. The Company has agreed to pay the following fees in connection
with sales of Units: (i) to Morgan Fuller (or any other broker selling Units) a
brokerage fee of eight percent (8%) of the value of Units sold; (ii) to Morgan
Fuller a fee of five percent (5%) of the value of Units sold by any other
broker; and (iii) to Morgan Fuller that number of Warrants
26.
<PAGE>
equal to twenty percent (20%) of the value of Units sold by Morgan Fuller
divided by the market bid price of the Common Stock on the day the Units are
sold, at such price. This offering was terminated on November 30, 1996 and as of
such date the Company had itself sold an aggregate of $555,000 of Units directly
and had not paid any brokerage fees or issued any Warrants to Morgan Fuller.
Private Placement of Note Participations. On or about July 3, 1996, the
Company delivered to Morgan Fuller $1,000,000 of Senior Secured Promissory Notes
(the "Senior Secured Notes"), made by the Company, as debtor, in favor of Morgan
Fuller, as lender. The Senior Secured Notes are secured by a broad lien on the
Company's assets and provide for interest at the rate of fourteen percent (14%)
per annum and were originally due on November 15, 1996, provided, however, that
if the principal and accrued interest was not repaid on such date, the loan
represented by the Senior Secured Notes would be converted into a term loan with
monthly principal payments of $100,000 commencing December 1, 1996 and interest
at eighteen percent (18%) per annum. Morgan Fuller offered participations
("Participations") in the Senior Secured Notes. Investors purchasing
Participations have also received that number of Warrants equal to one-sixth
(1/6) of the aggregate dollar amount of Participations purchased divided by the
exercise price (as discussed below), at exercise prices of $4.25 and $3.69. Each
Warrant is exercisable until July 31, 1999, provided, however, that in the event
that the average closing bid price of the Common Stock exceeds one hundred sixty
percent (160%) of the exercise price for thirty (30) consecutive trading days,
then the Company may, within three business days following the end of such
thirty (30) day period, give notice of its intent to repurchase the Warrants at
a purchase price of one-tenth of one cent ($0.001) per Warrant, in which case
Holders will have (30) days following the date of the Company's notice to
exercise the Warrants. Each Warrant entitles the holder to purchase one share of
Common Stock at an exercise price equal to the closing bid price of the Common
Stock on the date of the Note(s) in which the investor has purchased
Participations (subject to adjustment in certain circumstances). The purchase
price for each Warrant is one-tenth of one cent ($0.001) per Warrant. As of
March 31, 1997, Morgan Fuller has sold an aggregate of $1,000,000 of
Participations.
The Participations, the Warrants and the shares purchasable pursuant to
the Warrants have been offered and sold only to "accredited investors" as
defined in Regulation D promulgated under the Securities Act and the original
execution and delivery of the Senior Secured Notes and the offering of
Participations was a private placement of securities exempt from the
registration requirements of the Securities Act under Rule 506 promulgated under
the Securities Act. For Morgan Fuller's services in connection with the Senior
Secured Notes and selling the Participations, the Company has: (i) paid Morgan
Fuller a loan fee of five percent (5%) of the amount of the Senior Secured
Notes; and (ii) granted Morgan Fuller 39,255 Warrants to purchase Common Stock
at an exercise price of $4.25, and 45,205 Warrants at an exercise price of
$3.69. Holders of Warrants have been granted piggyback and Form S-3 registration
rights for the Common Stock underlying the Warrants. This offering has been
terminated.
Pursuant to that Amendment No. 1 to Senior Secured Promissory Notes
dated as of November 15, 1996, the Company and Morgan Fuller extended the term
of the Senior Secured
27.
<PAGE>
Notes to January 31, 1997. Pursuant to an engagement letter dated November 19,
1996, in which Morgan Fuller agreed to use its best efforts to obtain a 75 day
extension of the Participations, the Participations were extended to January 31,
1997. On January 31, 1997, the indebtedness represented by the Senior Secured
Notes converted into a term loan with monthly principal payments beginning
February 15, 1997. In connection with the extension of the Participations, the
Company has agreed to pay to Morgan Fuller a cash fee of one and one-half
percent (1.5%) of the amount of the Senior Secured Notes and granted Morgan
Fuller or its nominees 55,970 three-year Warrants with an exercise price of
$2.68.
Pursuant to engagement letters dated May 20, June 25, June 28, June 28,
November 19 and November 21, 1996, and as of March 31, 1997, the Company had:
(i) granted Morgan Fuller 250,000 Warrants at an exercise price of $6.37 per
share for general investment advisory services; and (ii) granted Morgan Fuller
39,255 Warrants at an exercise price of $4.25 and 45,205 Warrants at an exercise
price of $3.69 in connection with the sale of Participations. In connection with
the extension of the Participations, the Company granted Morgan Fuller 55,970
three-year Warrants with an exercise price of $2.68.
On February 15, 1997, the Company made a $100,000 principal payment on
the Senior Secured Notes to Morgan Fuller. On March 11, 1997, Morgan Fuller
verbally agreed to defer for a two-week period the $100,000 principal payment
due on March 15, 1997. Subsequently, the Company received a demand notice from
Morgan Fuller placing the Company in default and is currently negotiating with
Morgan Fuller and holders of Participations regarding the payment terms of the
Senior Secured Notes.
Private Placement of Common Stock. On December 31, 1996, the Company
initiated a private placement of up to $5,000,000 of Common Stock at $1.00 per
share (the "December 1996 Private Placement"). This Common Stock is being
offered and sold only to "accredited investors" as defined in Regulation D
promulgated under the Securities Act and the offering of such Common Stock was a
private placement of securities exempt from the registration requirements of the
Securities Act under Rule 506 promulgated under the Securities Act. Holders of
this Common Stock have been granted piggyback and Form S-3 registration rights.
The Company has agreed to pay to brokers selling Common Stock in this offering a
brokerage fee of eight percent (8%) of the Common Stock sold. As of March 31,
1997, the Company had raised $265,000 in this private placement. This offering
is ongoing.
Private Placement of EDnet Series A Preferred Shares. Commencing on
February 3, 1997, the Company commenced a private placement of up to $1,750,000
of EDnet Series A Preferred Shares at $1,000 per share to non-United States
persons in an offering exempt from the registration requirements of the
Securities Act pursuant to Regulation S promulgated under the Securities Act.
The terms of the EDnet Series A Preferred Shares are described below. The Series
A Preferred Shares are convertible into Common Stock at any time until the third
anniversary of their issuance at the lesser of 70% of: (i) the average of the
closing bid price of the Common Stock on the five trading days preceding
conversion (the "Market Price"); or (ii) the average of the closing bid prices
for the Common Stock on the five trading days preceding the closing (the
"Closing Price"), but if the Market Price or the Closing Price is less
28.
<PAGE>
than $1.43 per share it shall be deemed to be $1.43 per share (the "Floor"). The
Series A Preferred Shares are also subject to mandatory conversion on the third
anniversary of their issuance at the lesser of 70% of the Market Price or the
Closing Price, subject to the Floor. Upon conversion, the holders of Series A
Preferred Shares will be paid a 6% cumulative dividend measured from the
issuance date of the Series A Preferred Shares through the conversion date,
payable in Common Stock valued at the Market Price. The Series A Preferred
Shares have a liquidation preference of $1,000 per share and all other stock of
the Company are subordinate to such preference. Holders of Series A Preferred
Shares or the underlying conversion Common Stock will be granted piggyback and
Form S-3 registration rights for the underlying Common Stock. As of March 31,
1997, the Company had raised $150,000 in this private placement. This offering
is ongoing. Management anticipates that the second phase of this offering will
commence on or about May, 1997. The Company has also paid NET Financial
placement fees further described in "Part I - Item 11. Interest of Management
and Others in Certain Transactions - Investment Banking and Brokerage Services -
Net Financial International, Ltd.".
Onggara Option. As discussed further in "Part I - Item 11. Interest of
Management and Others in Certain Transactions," EDN entered into a Consulting
Agreement, dated July 31, 1995, with Century. As payment for Century's services,
such consulting agreement provided that EDN would grant to Mr. Onggara, an
investor in Century, and a shareholder of the Company holding an aggregate of
100,000 shares of Common Stock, an option to purchase 1,000,000 shares of the
common stock of any publicly traded entity into which EDN would merge, at $1.25
per share, which option shares would be registered "immediately" by EDN with the
SEC on Form S-8. Management does not believe that such a registration is legally
possible due to the fact that Mr. Onggara is not an employee of the Company and
plans to address this issue more completely in the near future. The Company has
had verbal discussions with Mr. Onggara with respect to reducing the number of
shares of Common Stock subject to such option to 805,000 shares. When Mr.
Onggara is granted options and assuming the exercise of those options, he may
become a shareholder holding more than ten percent of the outstanding Common
Stock.
Merger With AP Office Equipment. As discussed more fully in "Part I -
Item 6. Description of Business - History and Organization - Merger With AP
Office Equipment," on or about September 20, 1995, EDN's management determined
that it was in EDN's best interests to effect a business combination with a
company whose shares were publicly-traded in order to access the public capital
markets. Toward this end, EDN, its seven largest shareholders and AP, an
unrelated company, entered into a Stock Purchase Agreement pursuant to which
such shareholders exchanged their EDN common and preferred stock for 1,275,818
shares of AP Common Stock. In addition, (a) outstanding non-qualified options to
purchase an aggregate of 263,420 shares of EDN common stock at an exercise price
of $.10 per share were converted into options to purchase an aggregate of
230,479 shares of Common Stock at an exercise price of $.11 per share, and (b)
outstanding warrants to purchase an aggregate of 347,343 shares of EDN common
stock at $2.625 per share, which terminated as of October 31, 1996, were
converted into warrants to purchase an aggregate of 303,908 shares of Common
Stock at an exercise price of $3.00 per share. The closing of these transactions
was contingent upon the successful
29.
<PAGE>
completion by AP of a sale of 1,500,000 shares of Common Stock at a price of
$0.665 per share. By means of an Amendment of Articles of Incorporation which
was filed with the Colorado Secretary of State on September 29, 1995, AP changed
its name to "EDnet, Inc." Finally, pursuant to a Stock Purchase Agreement
executed by the Company (formerly AP) and the remaining shareholders of EDN,
dated as of October 18, 1995, such shareholders sold their EDN common stock to
the Company in exchange for 243,720 shares of Common Stock. The result was that
EDN became, and remains, a wholly-owned subsidiary of the Company.
IBS Transaction. As discussed more fully in "Part I - Item 6.
Description of Business - History and Organization - IBS Transaction;
Breakthrough," pursuant to the IBS Agreement, the Company acquired all of the
outstanding shares of common stock of IBS, an unrelated internet services
provider, through a merger of IBS into a subsidiary of the Company. As
consideration for such merger, the Company delivered to the two shareholders of
IBS, Trevor Stout and Randall Schmitz, among other things, 311,284 shares of
Common Stock. In addition, pursuant to an earn-out plan, Messrs. Stout and
Schmitz were granted the Earnout, pursuant to which they were entitled to
receive up to an aggregate of 500,000 shares of Common Stock if IBS was to meet
certain specified performance goals during a period commencing on the effective
date of the IBS Agreement and ending 120 days after June 30, 1999. The Company
also granted to three employees of IBS options to purchase an aggregate of
50,000 shares of Common Stock under the NSO Plan at $1.25 per share, which
options vest over a three year period. These sales of securities were a private
placement exempt from the registration requirements of the Securities Act under
Rule 506 promulgated under the Securities Act. Subsequently, the Company entered
into an Amendment to the Agreement and Plan of Reorganization dated as of
January 31, 1997 and certain collateral documents, pursuant to which, among
other things, the Company reduced the number of shares of Common Stock subject
to the Earnout from 500,000 to 125,000.
Liviakis Financial Communications, Inc. As discussed more fully in
"Part I Item 11. Interest of Management and Others in Certain Transactions -
Investment Banking and Brokerage Services," the Company is a party to a
Consulting Agreement, dated as of January 12, 1996, with Liviakis for public
relations consulting services. As payment for its services, Liviakis received
390,000 unregistered shares of Common Stock from the Company in a private
placement to an "accredited investor" as defined in Regulation D promulgated
under the Securities Act exempt from the registration requirements of the
Securities Act under Rule 506 promulgated under the Securities Act. At the end
of the term of the consulting agreement, Liviakis may demand that the Company
use its best efforts to register such shares with the SEC. Pursuant to an
additional Consulting Agreement effective as of January 12, 1997, between the
Company and Liviakis, Liviakis agreed to provide public relations consulting
services to the Company for a term of one year ending on January 2, 1998. As
payment for its services, Liviakis received 490,000 unregistered shares of
Common Stock from the Company in a private placement to an "accredited investor"
as defined in Regulation D promulgated under the Securities Act exempt from the
registration requirements of the Securities Act under Rule 506 promulgated under
the Securities Act. At the end of the term of the consulting agreement, Liviakis
shall have the same demand registration rights to register such shares with
30.
<PAGE>
the SEC as given to investors in the December 1996 Private Placement (as defined
in "Part II - Item 4. Recent Sales of Unregistered Securities - Private
Placement of Common Stock."
Issuances to Employees. During fiscal 1996, the Company issued 395,228
shares of Common Stock to certain of its officers and directors and employees in
lieu of payroll. Such shares were issued in a private placement exempt from the
registration requirements of the Securities Act under Rule 504 promulgated under
the Securities Act.
The Company has filed, or is in the process of filing, all required
filings on Form D with respect to the transactions discussed above.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 7-108-402(1) of the Colorado Corporation Business Act provides
that a corporation may, if it so provides in its articles of incorporation,
eliminate or limit the personal liability of a director to the corporation or
its shareholders for monetary damages for breach of fiduciary duty as a
director; except that any such provision shall not eliminate or limit the
liability of a director to the corporation or to its shareholders for monetary
damages for any breach of the director's duty of loyalty to the corporation or
its shareholders, acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, an unlawful distribution,
or any transaction from which the director directly or indirectly derived an
improper personal benefit. Article XIII of the Company's Articles of
Incorporation provides that the Board of Director of the Company shall have the
power to indemnify its directors and officers against expenses and liabilities
they incur to defend, settle or satisfy any civil or criminal action brought
against them on account of their being or having been company directors or
officers unless, in any such action, they are adjudged to have acted with
negligence or engaged in misconduct. Insofar as indemnification for liabilities
arising under the Securities Act and the Securities Exchange Act of 1934, as
amended, (collectively, the "Acts") may be permitted to directors, officers or
controlling persons pursuant to foregoing provisions, the Company has been
informed that, in the opinion of the SEC, such indemnification is against public
policy as expressed in the Acts and is, therefore, unenforceable.
31.
<PAGE>
PART F/S
FINANCIAL STATEMENTS
Attached are audited financial statements for EDnet, Inc. and Internet
Worldwide Business Solutions for the year ended June 30, 1996. The following
financial statements are attached to this report and filed as a part thereof.
See pages F-1 through F-32.
EDnet, Inc.
1. Table of Contents
2. Report of Independent Accountants
3. Consolidated Balance Sheet
4. Consolidated Statements of Operations
5. Consolidated Statements of Stockholders' Equity
6. Consolidated Statements of Cash Flows
7. Notes to Consolidated Financial Statements
Internet Worldwide Business Solutions
1. Table of Contents
2. Report of Independent Accountants
3. Balance Sheet
4. Statement of Operations
5. Statement of Changes in Stockholders' Equity
6. Statement of Cash Flows
7. Notes to Financial Statements
Also attached are the unaudited balance sheet of EDnet, Inc. and
Internet Worldwide Business Solutions as of the quarter ended March 31, 1997 and
income statements and statements of cash flows for the interim period up to such
date, and income statements for the most recent fiscal quarter, in the form of
the Company's Form 10-QSB, as filed with the Commission on May 15, 1997.
32.
<PAGE>
EDnet, INC.
-------------------
REPORTS ON AUDITS OF FINANCIAL STATEMENTS
as of June 30, 1996 and for the
years ended June 30, 1995 and 1996
<PAGE>
EDnet, Inc.
------------------
C O N T E N T S
Page
Report of Independent Accountants 1
Consolidated Balance Sheet 2
Consolidated Statements of Operations 3
Consolidated Statements of Stockholders' Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6-20
<PAGE>
Coopers & Lybrand LLP
Coopers
& Lybrand a professional services firm
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of EDnet, Inc.
We have audited the accompanying consolidated balance sheet of EDnet, Inc. and
subsidiaries as of June 30, 1996 and the related consolidated statements of
income, stockholders' equity, and cash flows for the years ended June 30, 1995
and 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 the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of EDnet, Inc. and
subsidiaries as of June 30, 1996 and the consolidated results of their
operations and their cash flows for the years ended June 30, 1995 and 1996, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net working capital deficiency that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
COOPERS & LYBRAND LLP
/S/ COOPERS & LYBRAND LLP
San Francisco, California
October 21, 1996
<PAGE>
<TABLE>
EDnet, Inc.
CONSOLIDATED BALANCE SHEET
June 30, 1996
-------------
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash $ 186,875
Restricted cash 35,000
Accounts receivable, net of allowance for doubtful accounts of $33,936 478,076
Inventories 147,409
Other current assets 14,298
-----------
Total current assets 861,658
Property and equipment, net 488,943
Goodwill, net 1,088,568
Other assets 79,342
-----------
$ 2,518,511
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 659,709
Accrued expenses 390,002
Deferred revenue 69,623
Line of credit 16,638
Notes payable 990,991
Current portion of capital lease obligations 24,493
-----------
Total current liabilities 2,151,456
Capital lease obligations 43,622
-----------
Total liabilities 2,195,078
-----------
Stockholders' equity:
Common stock; $0.001 par value; 50,000,000 shares authorized;
4,468,322 shares issued and outstanding 4,468
Additional paid-in capital 2,758,644
Accumulated deficit (2,439,679)
-----------
Total stockholders' equity 323,433
-----------
$ 2,518,511
===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
2
</TABLE>
<PAGE>
EDnet, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended June 30, 1995 and 1996
-------------
1995 1996
Revenues:
Equipment sales $ 351,210 $ 1,308,646
Installation and monthly fees 340,603 404,976
Usage fees 471,962 637,262
Other fees 89,561 185,374
----------- -----------
1,253,336 2,536,258
Cost of sales 1,026,867 2,126,741
----------- -----------
Gross profit 226,469 409,517
Sales and marketing 320,803 995,917
Operating expenses 302,377 532,081
----------- -----------
Loss from operations (396,711) (1,118,481)
Other income (expenses):
Interest income -- 238
Interest expense (28,898) (34,560)
Gain on sale of equipment 32,086 --
----------- -----------
Total other income (expense), net 3,188 (34,322)
Loss before provision for income taxes (393,523) (1,152,803)
Income taxes 800 1,600
----------- -----------
Net loss $ (394,323) $(1,154,403)
=========== ===========
Net loss per share $ (0.35) $ (0.36)
=========== ===========
The accompanying notes are an integral part of
these consolidated financial statements.
3
<PAGE>
<TABLE>
EDnet, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended June 30, 1995 and 1996
-----------------
<CAPTION>
Common Stock Additional
------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Beginning balance, restated for APO merger,
July 1, 1994 1,124,310 $ 1,124 $ 672,268 $ (890,953) $ (217,561)
Net loss -- -- -- (394,323) (394,323)
--------- ----------- ----------- ------------ -----------
Balance, June 30, 1995 1,124,310 1,124 672,268 (1,285,276) (611,884)
Shares issued in lieu of payroll 395,228 395 50,607 -- 51,002
Shares issued for APO merger 747,500 748 3,527 -- 4,275
Shares issued under Regulation D offering 1,500,000 1,500 996,000 -- 997,500
Shares issued pursuant to consulting agreement 390,000 390 413,985 -- 414,375
Shares issued for acquisition of IBS 311,284 311 622,257 -- 622,568
Net loss -- -- -- (1,154,403) (1,154,403)
--------- ----------- ----------- ------------ -----------
Ending balance, June 30, 1996 4,468,322 $ 4,468 $ 2,758,644 $(2,439,679) $ 323,433
========= =========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
EDnet, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended June 30, 1995 and 1996
----------------
<CAPTION>
1995 1996
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (394,323) $(1,154,403)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 107,385 136,823
Gain on sale of fixed assets (32,086) --
Provision for doubtful accounts 9,383 6,142
Noncash compensation expenses -- 465,377
(Increase) decrease in assets, net of effects of IBS acquisition:
Accounts receivable (121,648) (163,237)
Inventories -- (147,409)
Prepaid expenses (1,800) (10,301)
Other assets 5,128 (62,543)
Increase (decrease) in liabilities, net of effects of IBS acquisition:
Accounts payable 40,897 92,297
Accrued expenses 40,247 (14,504)
Deferred revenue 158,814 (161,078)
----------- -----------
Net cash used in operating activities (188,003) (1,012,836)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (32,640) (81,638)
Cash from the acquisition of IBS, net of cash paid -- 113,814
Proceeds from the sale of assets 72,908 --
----------- -----------
Net cash provided by investing activities 40,268 32,176
----------- -----------
Cash flows from financing activities:
Principal payments on long-term debt (104,743) (277,825)
Payments on capital leases (297) (8,577)
Issuance of shares under Regulation D -- 997,500
Proceeds from borrowings 253,305 400,001
Subscribed shares -- 35,000
Restricted cash -- (35,000)
----------- -----------
Net cash provided by financing activities 148,265 1,111,099
----------- -----------
Net increase in cash 530 130,439
Cash at beginning of year 55,906 56,436
----------- -----------
Cash at end of year $ 56,436 $ 186,875
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 24,050 $ 14,232
=========== ===========
Cash paid during the year for taxes 800 $ --
=========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
EDnet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------
1. The Company:
Summary of Business:
EDnet, Inc. (the Company), a Colorado corporation, and its subsidiaries
develop and market integrated systems for the delivery, storage, and
management of professional-quality digital communications for
media-based applications, including audio and video production for the
U. S. entertainment industry. The Company, through strategic alliances
with long-distance carriers, regional telephone companies, satellite
operators, and independent fiber optic telecommunications providers,
has established a worldwide network that enables the exchange of high
quality audio, video, multimedia, and data communications. The Company
provides engineering services and application-specific technical
advice, audio, video, and networking hardware and software as part of
its business. Additionally, through one of its wholly owned
subsidiaries, the Company provides Internet web site development and
hosting services, utilizing proprietary software, to businesses
conducting Internet commerce.
Organization:
The Company's principal subsidiary, Entertainment Digital Network
(EDN), was originally incorporated in the state of Nevada in June 1992.
In January 1993, EDN was reincorporated in the state of California.
During September and October of 1995, EDN's stockholders exchanged 100%
of their shares of common stock for 1,519,538 shares of common stock of
AP Office Equipment (APO), a public company with no operations and no
significant assets or liabilities. At the time of the exchange, APO, a
Colorado corporation that was incorporated in May 1994, had 747,500
shares of common stock outstanding. Concurrently, APO sold 1,500,000
shares of common stock to a group of investors for $.665 per share. APO
then changed its name to EDnet, Inc. EDN became a subsidiary of the
Company as a result of this transaction. For accounting purposes, this
transaction has been treated as a recapitalization of EDN, recognizing
the issuance of shares of common stock for the net assets of the
Company. The historical financial statements prior to this transaction
are those of EDN.
Continued
6
<PAGE>
EDnet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------
1. The Company, continued:
Acquisition of Internet Worldwide Business Solutions:
On June 24, 1996, the Company acquired all the outstanding shares of
common stock of Internet Worldwide Business Solutions (IBS) in a
business combination accounted for as a purchase. IBS is primarily an
Internet service provider specializing in the development and hosting
of web sites. The results of operations of IBS are included in the
accompanying financial statements since the date of acquisition. The
purchase price of $1,162,568 included 311,284 shares of the Company's
common stock, notes payable in the aggregate amount of $500,000 (Note
5) and $40,000 of acquisition related costs. The purchase price
exceeded the estimated fair value of the net tangible assets of IBS by
$1,088,568. The excess is reflected as goodwill on the balance sheet
and is being amortized using the straight-line method over a five-year
period.
The assets and liabilities purchased in connection with the acquisition
were as follows:
Current assets $ 219,683
Property, plant and equipment, net 90,136
Other assets 2,767
Current liabilities (150,949)
Note payable to EDnet (25,000)
Deferred revenues (62,637)
---------
Net assets acquired $ 74,000
=========
In addition, the Company entered into a stock bonus plan to issue up to
an aggregate of 500,000 shares of its common stock to the two former
owners of IBS, now employees of the Company. The plan sets certain
threshold levels for revenue and profit goals to be realized in order
for the stock to be issued. If a threshold for a given time period is
exceeded, the amount in excess shall not be added to the amount in the
next time period or used to determine whether that threshold has been
met or exceeded. This agreement represents an earn-out plan and the
fair market value of any additional shares issued will be added to
goodwill when and if the goals are met.
In conjunction with the acquisition, under the terms of its
nonstatutory stock option plan, options to purchase an aggregate of
50,000 shares of common stock of the Company were granted to certain
IBS employees at $1.25 per share (see Note 9).
Continued
7
<PAGE>
EDnet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------
1. The Company, continued:
Acquisition of Internet Worldwide Business Solutions, continued:
<TABLE>
Had the acquisition occurred on October 1, 1995 (the commencement of
operations for IBS), the pro forma statement of operations for the
Company for the year ended June 30, 1996 would have been as follows:
<CAPTION>
Pro Forma
As Stated Adjustments Pro Forma
--------- ----------- ---------
<S> <C> <C> <C>
Revenues $ 2,536,258 $ 480,030 $ 3,016,288
Cost of sales 2,126,741 258,716 2,385,457
----------- ----------- -----------
Gross profit 409,517 221,314 630,831
Sales and marketing 995,917 64,679 1,060,596
General and administrative 532,081 271,083 803,164
----------- ----------- -----------
(Loss) income from operations (1,118,481) (1,144,488) (1,232,929)
Other expenses, net 34,322 832 35,154
(Loss) income before income taxes (1,152,803) (1,152,800) (1,268,083)
Income taxes 1,600 10,335 11,935
----------- ----------- -----------
Net (loss) income $(1,154,403) $(1,256,155) $(1,280,018)
=========== =========== ===========
Net (loss) per share $ (0.36) $ (0.37)
=========== ===========
</TABLE>
Going Concern:
The Company and its subsidiaries have not been able to generate any
operating profit since inception. Through June 30, 1996, the Company
and its subsidiaries have aggregated losses of $2,439,679 and current
liabilities exceed current assets by $1,289,798. Subsequent to year
end, the Company obtained additional funding as described in Note 13.
The Company's management is attempting to raise additional funds to
fully develop its core business products. The Company's management is
attempting to raise additional funds to fully develop its core business
products and manage its cash outflows by engaging in various private
placement issuances, extending its Senior Secured Notes to delay
short-term cash requirements, and pursuing aggressive collection
efforts of its current accounts receivable balances. However, if the
Company cannot raise additional funds, it may not have the financial
resources to continue as a going concern. The financial statements do
not contain any adjustments that may be needed if the Company is unable
to continue as a going concern.
Continued
8
<PAGE>
EDnet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------
2. Summary of Significant Accounting Policies:
Consolidation:
The consolidated financial statements include the accounts of the
Company's wholly owned subsidiaries EDN and IBS. Material inter-company
transactions and balances have been eliminated.
Revenue Recognition:
A significant component of revenues relate to the sale of equipment
which is recognized when the equipment is installed. Installation fees
are recognized when the installation has been completed and usage fees
are recognized over the period the equipment is used based on the
relative usage level. Deferred revenues represent billings in excess of
revenue recognized.
Restricted Cash:
Restricted cash represents the funds received by the Company in
conjunction with its Regulation D offering (see Note 13) prior to
reaching the minimum level of investment for usage of funds.
Allowance for Doubtful Accounts:
Bad debts are provided on the allowance method based on historical
experience and management's evaluation of outstanding accounts
receivable.
Inventories:
Inventories are valued at the lower of cost or market with cost being
determined on the first-in, first-out basis.
Property and Equipment and Leasehold Improvements:
Property and equipment are carried at cost and are depreciated on the
straight-line basis over their estimated useful lives, which range from
five to seven years. The costs of leasehold improvements are amortized
over the lesser of the length of the related leases or the estimated
useful lives of the assets. Expenditures for improvement or expansion
of property and equipment are capitalized. Repairs and maintenance are
charged to expense as incurred. When the assets are sold or retired,
their cost and related accumulated depreciation are removed from the
accounts with the resulting gain or loss reflected in the statement of
operations.
Continued
9
<PAGE>
EDnet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------
2. Summary of Significant Accounting Policies, continued:
Goodwill:
Goodwill is being amortized using the straight-line method over the
estimated useful life of five years. The Company evaluates the recovery
of its goodwill by comparing the aggregate estimated cash flows
generated by those assets with their carrying value. If the carrying
value exceeds the aggregate cash flow amount, goodwill would be reduced
accordingly.
Income Taxes:
The Company accounts for income taxes using the liability method.
Deferred income tax assets and liabilities are computed annually for
differences between the financial reporting and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the
future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets
to the amount expected to be realized.
Loss Per Share:
Loss per share has been calculated using the weighted average number of
shares outstanding for the period, which were 1,124,310 for 1995 and
3,181,350 for 1996. Common stock equivalents (stock options and
warrants) have been excluded from the calculation because they are
anti-dilutive.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Recent Accounting Pronouncements:
During October 1995, the financial Accounting Standards Board issued
Statement No. 123 (SFAS No. 123), Accounting for Stock-Based
Compensation, which establishes a fair value based method of accounting
for stock-based compensation plans. The Company is currently following
the requirements of APB Opinion No. 25, Accounting for Stock Issued to
Employees. The Company plans to adopt SFAS No. 123 during fiscal year
1997 utilizing the disclosure alternative.
In March 1995, the Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived assets and for Long-Lived
Assets to Be Disposed Of, (SFAS 121) was issued and is effective for
the Company's 1997 fiscal year. SFAS 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used
for long-lived assets
Continued
10
<PAGE>
EDnet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------
and certain identifiable intangibles to be disposed. The Company has
adopted this standard during fiscal year 1996 with no impact on the
financial statements. The Company's policy related to evaluating
long-lived assets is included in the goodwill policy disclosures above.
3. Accounts Receivable and Allowance for Doubtful Accounts:
Accounts receivable at June 30, 1996 comprise the following:
Current trade $ 469,028
Employee 3,372
Rebillable charges 39,612
---------
512,012
Less allowance for doubtful accounts (33,936)
---------
Total $ 478,076
=========
Allowances are made as a percentage of sales adjusted annually based upon
review of the individual accounts receivable. Accounts are written off
when deemed to be worthless. Total bad debt expense was $16,603 and $6,461
for the years ended June 30, 1995 and 1996, respectively.
4. Property and Equipment:
Property and equipment are summarized by major category as follows as of
June 30, 1996:
Network and related equipment $ 831,635
Furniture and fixtures 15,421
Computer software 20,766
Leasehold improvements 15,108
---------
882,930
Depreciation and amortization (393,987)
---------
Net property and equipment $ 488,943
=========
Depreciation and amortization included in the statements of operations
amounted to $107,385 and $136,823 for the years ended June 30, 1995 and
1996, respectively.
The Company leases some equipment to customers under terms which are
accounted for as operating leases. Under the operating method, rental
revenue from leases are recognized ratably over the life of the lease and
the related equipment is depreciated over its estimated useful life.
Continued
11
<PAGE>
EDnet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------
<TABLE>
<CAPTION>
5. Notes Payable:
<S> <C>
Notes payable consist of the following as of June 30, 1996:
Notes payable to two stockholders of $125,000 each at 8% interest,
principal and interest due 60 days subsequent to the IBS purchase,
collateralized by IBS shares of common stock acquired by the Company
(see Note 1). The note and accrued interest was repaid in full in
August, 1996. $ 250,000
Notes payable to two stockholders of $125,000 each at 8% interest,
principal and accrued interest due the earlier of 12 months
subsequent to the IBS purchase or 15 days after close of a public
offering of common stock, uncollateralized (see Note 1). 250,000
Notes payable to Mr. Irawan Onggara, a shareholder and financial advisor,
with original amounts of $250,000, $100,000, and $75,000 at 7%
interest rate, collateralized by assets of the Company subordinated
to equipment covered by individual capital leases, due August 8,
1996, October 18, 1996, and November 20, 1996, respectively. The
Company has repaid $90,000 and has obtained verbal agreement to
extend the due dates of the notes currently due. 410,000
Note payable to Newjack, Inc., dba Waves Sound Recorders, Inc., interest
at 13.09%, monthly principal and interest payments of $1,475,
collateralized by equipment, final maturity May, 1997. 15,441
Notes payable to an officer, interest at 6% per annum, uncollateralized. 24,000
Notes payable to an officer, interest at 6% per annum, uncollateralized. 26,550
Note payable to a director, interest at 6% per annum, uncollateralized. 15,000
---------
$ 990,991
=========
</TABLE>
The notes payable to officers and director are overdue as of October 21,
1996. Each of these individuals has agreed not to declare a default under
these notes for an indefinite period and to accept repayment by the
Company at a future date.
The carrying value of these financial instruments approximates fair value
due to the relatively short maturity.
6. Line of Credit:
The Company's wholly owned subsidiary, IBS, has a $25,000 line of credit
with a financial institution, of which $16,638 was outstanding as of June
30, 1996. The line of credit bears interest at the institutions reference
rate plus 5.06% (12.31% as of June 30, 1996) and is payable monthly. The
line of credit expires on March 8, 1997.
Continued
12
<PAGE>
EDNET, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------
7. Income Taxes:
The provision for income taxes consists of federal income taxes and
California franchise taxes payable and includes the following:
Currently payable $1,600
Deferred --
------
Total provision for income taxes $1,600
======
A reconciliation of the expected and reported provision for income taxes
follows:
For the Years Ended
June 30,
-------------------
1995 1996
Benefit expected based on federal statutory rate 34.0% 34.0%
State taxes, net of federal benefit 6.1 6.1
Nondeductible expenses 0.1 0.2
Valuation allowance, net (40.2) (40.2)
----- -----
Net income tax provision 0.0% 0.1%
===== =====
The tax effects of significant temporary differences representing deferred
tax assets and liabilities are as follows:
Net operating loss carryforwards $ 879,000
Property and equipment 17,000
Other, net 3,000
Valuation allowance (899,000)
---------
Net deferred tax asset --
=========
Due to the uncertainty of realization, a valuation allowance has been
provided to eliminate the net deferred tax assets. The increase in the
valuation allowance was $420,000 in fiscal 1996.
The Company has Federal and California loss carryforwards totaling
approximately $2.4 million and $1.2 million expiring through 2011 and
2001, respectively, that may be offset against future income taxes. The
utilization of these net operating loss carryforwards are limited due to a
change of ownership as defined in the Internal Revenue Code (see Note 1)
in November 1995.
Continued
13
<PAGE>
EDnet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------
8. Lease Commitments:
As of June 30, 1996, the Company leases office space and certain equipment
under various noncancelable capital and operating leases. Future minimum
lease payments required under the noncancelable leases are as follows:
Operating Capital
Year Ending June 30, Leases Leases
-------------------- ------ ------
1997 $ 200,118 $ 32,498
1998 164,905 26,274
1999 119,961 13,824
2000 92,994 10,961
2001 92,994 -
Thereafter 185,988 -
----------- ----------
Total minimum lease payments $ 856,960 83,557
===========
Less amount representing interest 15,442
----------
Present value of net minimum lease payments 68,115
Less current portion 24,493
----------
Long-term portion $ 43,622
==========
As of June 30, 1996, the Company has equipment purchased under
noncancelable capital leases with a cost of $76,990 and accumulated
amortization of $5,238.
Total rental expense for all operating leases for the years ended June 30,
1996 and 1995 amounted to $121,584 and $124,700, respectively.
The Company's obligations under its lease for its Los Angeles office
premises are guaranteed by its Chairman and Chief Executive Officer.
9. Options and Warrants:
Options to Key Employees and Directors:
On September 19, 1995, EDN granted a total of 263,420 non-qualified
options to certain employees and directors to purchase shares in EDN at
$.10 per share. As a result of the recapitalization discussed in Note
1, the EDN options were converted into options to purchase the
Company's stock at a conversion of .87495 per share for each EDN share.
As a result, at June 30, 1996, there were 230,479 options outstanding
at a price of $.11 per share. These options expire on September 29,
2000. There were no options exercised during the period.
Continued
14
<PAGE>
EDnet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------
9. Options and Warrants, continued:
Incentive Stock Options:
On November 10, 1995, the Company adopted an Incentive Stock Option
Plan (the Plan) for certain officers and executive employees of the
Company. An aggregate of 500,000 shares may be issued under the terms
of the Plan. The option price shall be determined by the Board of
Directors and the Company's Compensation Committee and shall not be
less than 100% of the fair market value of the common stock on the date
of grant. The period of option may not exceed ten years.
During fiscal 1996, the Company entered into an employment agreement
with both its Chairman and President. Under the terms of the agreement,
each officer may purchase up to 250,000 shares at a price of $1.25
under the terms outlined below:
1) On January 1, 1997, the option shall become exercisable for a total
of 100,000 shares of the Company's common stock, exercisable for a
five-year period, if for any prior rolling 12-month period during
the period from September 1, 1995 through December 31, 1996, the
Company has sales of at least $5,000,000 or income before income
taxes of at least $500,000.
2) On January 1, 1998, the option shall become exercisable for a total
of 100,000 shares of the Company's common stock, exercisable for a
five-year period, if for any prior rolling 12-month period during
the period from September 1, 1995 through December 31, 1997, the
Company has sales of at least $8,500,000 or income before income
taxes of at least $1,500,000.
3) On January 1, 1999, the option shall become exercisable for a total
of 50,000 shares of the Company's common stock, exercisable for a
five-year period, if for any prior rolling 12-month period during
the period from September 1, 1995 through December 31, 1998, the
Company has sales of at least $15,000,000 or income before income
taxes of at least $3,000,000.
Each of the above installments may be exercised by the delivery by the
employee to the Company of a three-year promissory note payable to the
Company, with interest to be determined at date of issuance. No further
options may be issued under this Plan.
Continued
15
<PAGE>
EDnet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------
9. Options and Warrants, continued:
Nonstatutory Stock Option Plan:
On November 10, 1995, the Company adopted a nonstatutory stock option
plan whereby 565,000 shares of the Company's common stock was reserved
for issuance. Under the terms of the plan, the options must be granted
prior to December 31, 1996; the price shall be determined by the
Company's Compensation Committee (CC); the period of option shall not
exceed five years from the date of grant; and the option must be paid
in cash when exercised unless a payment plan is authorized by the CC.
As of June 30, 1996, 222,000 options had been granted with an exercise
price of $1.25 per share, of which 100,000 shares have to be exercised
by November 30, 1997 and 100,000 by November 30, 1998.
In addition, in connection with the IBS acquisition (see Note 1),
50,000 options were granted to IBS employees with an exercise price of
$1.25 and a three-year vesting term.
EDN Stockholders' Warrants:
As a result of the recapitalization discussed in Note 1, outstanding
warrants to purchase an aggregate of 347,343 shares of EDN common stock
at $2.625 per share were converted to 303,908 warrants to purchase
shares of the Company's common stock at a price of $3.00 per share.
These warrants became exercisable on May 1, 1996 and expire on October
31, 1996.
Investment Banking Warrants:
In May 1996, the Company entered into an investment banking
relationship with Morgan Fuller Capital Group (Morgan). Under the terms
of the agreement, Morgan will provide the Company with financial
advisor services as well as arranging for equity and debt funding. As
part of Morgan's compensation, they received 250,000 warrants to
purchase shares of the Company's common stock at a price of $6.37 per
share to be exercised prior to May 1999.
Continued
16
<PAGE>
EDnet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------
9. Options and Warrants, continued:
A recap of the options and warrants outstanding as of June 30, 1996 is as
follows:
Quantity
Price Reserved Outstanding
----- -------- -----------
Employee EDN options converted $0.11 230,479 230,479
Employee incentive options $1.25 500,000 500,000
Nonstatutory options $1.25 565,000 272,000
--------- ---------
Total options 1,295,479 1,002,479
========= =========
Employee warrants $3.00 303,908 303,908
Morgan warrants $6.37 250,000 250,000
--------- ---------
Total warrants 553,908 553,908
========= =========
Subsequent to June 30, 1996, additional warrants were issued as described
in Note 13. On August 26, 1996, the Board of Directors issued, pursuant to
the nonstatutory stock option plan, 100,000 options to purchase shares of
common stock at a price of $1.25 per share vesting over three years.
Pursuant to a Consulting Agreement dated July 31, 1995, between EDN and
Century Financial Partners, Inc. (CFP), the Company was obligated to grant
an option to purchase 1,000,000 shares of common stock at $1.25 per share.
The Company has had verbal discussions with CFP with respect to reducing
the number of shares of common stock subject to such option to 805,000
shares.
10. Employment Contracts:
The Company has entered into employment contracts with both its Chairman
and President whereby each will receive a minimum annual salary of
$125,000 until February 28, 1996 adjusted to market rates at March 1,
1996, and annually thereafter, and incentive stock options as described in
Note 9. These agreements cover the period through December 31, 2000.
IBS has entered into employment contracts with its President and Chief
Executive Officer that extend through June 30, 1999. The contracts provide
for a minimum annual salary, adjusted at the discretion of the
Compensation Committee of the Board of Directors. At June 30, 1996 the
commitment under each contract was $300,000.
Continued
17
<PAGE>
EDnet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------
11. Concentration of Credit Risk:
The Company and its subsidiaries maintain cash in bank deposit accounts at
accredited financial institutions. The balances in these accounts may, at
times, exceed federally insured limits.
12. Supplemental Disclosures of Noncash Investing and Financing Activities:
The following noncash activity occurred during the periods under audit as
follows:
o The Company entered into capital leases for office and computer
equipment in the amount of $12,901 and $66,408, for the years ended
June 30, 1995 and 1996, respectively.
o During fiscal year 1996, the Company issued 395,228 shares of its
common stock to officers and employees of the Company in lieu of
payroll.
o During the fiscal year 1996, the Company issued 295,228 shares of its
common stock to officers and employees of the Company in lieu of
payroll resulting in a noncash compensation charge of $51,002. The
shares were valued using an estimation of the fair value of the stock
by management and the Board of Directors.
o In connection with the merger with APO (Note 1) in 1995, the Company
issued 747,500 shares of common stock in exchange for the net assets of
APO totaling $4,275.
o In connection with the merger with APO (Note 1) in 1995, the Company
issued 747,500 shares of common stock in exchange for the net assets of
APO totaling $4,275. The transaction has been recorded as a
recapitalization with the issuance of stock for assets and no goodwill.
o The Company issued 390,000 of its shares of common stock in
consideration for consulting services performed during fiscal year
1996. At the time of issuance these shares were valued at $414,375.
o The Company issued 290,000 of its shares of common stock in
consideration for consulting services performed during fiscal year
1996. At the time of issuance these shares were valued at the closing
bid price on the date of issuance discounted due to certain
restrictions regarding the lack of liquidity in the near term. The
total amount of $414,375 was charged to compensation expense.
o In conjunction with the acquisition of IBS during fiscal year 1996
(Note 1), the Company issued notes payable totaling $500,000 (Note 5)
and 311,284 shares of common stock valued at $622,257.
Continued
18
<PAGE>
EDnet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------
o In conjunction with the acquisition of IBS during fiscal year 1996
(Note 1), the Company issued notes payable totaling $500,000 (Note 5)
and 311,284 shares of common stock valued at $622,257. The shares were
valued by comparing the closing price of common shares concurrently
being issued under a Regulation D offering which included one common
share and one warrant and subsequently discounted due to the fact that
the liquidity of the shares was restricted to a future date.
13. Subsequent Events:
Senior Secured Promissory Notes:
Subsequent to June 30, 1996, the Company has borrowed a total of
$1,000,000 under three senior collateralized promissory notes, arranged
by its financial advisor, Morgan, as follows:
Date Amount Rate Due Date
July 5, 1996 $ 500,000 14% November 15, 1996
August 9, 1996 200,000 14% November 15, 1996
September 11, 1996 300,000 14% November 15, 1996
-------------
$ 1,000,000
=============
Interest on these notes is payable on a quarterly basis starting
September 30, 1996.
13. Subsequent Events, continued:
Senior Secured Promissory Notes, continued:
Subsequent to November 15, 1996, the notes may be converted into term
notes with principal payments for each note of $100,000 per month
beginning December 1, 1996. In addition, the interest rate will be
increased from 14% to 18%. The notes are collateralized by the
Company's assets.
In connection with the senior secured notes and selling of the
participations, investors and Morgan received:
-- 58,824 warrants (39,216 warrants to Morgan) at a price of $4.25 per
share to be exercised prior to July 4, 1999.
-- 67,806 warrants (45,205 warrants to Morgan) at a price of $3.687 per
share to be exercised prior to August 8, 1999 and September 10,
1999, respectively, for debt placement services.
Continued
19
<PAGE>
EDnet, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------
If the Company elects not to complete additional financing with Morgan,
a cash fee of $140,000 and $200,000 in warrants at an exercise price
equal to the lesser of (i) $3.00; or (ii) sixty percent of the average
closing bid price of the common stock during a consecutive ten (10) day
period immediately preceding the issuance date of the warrants, will
become due and payable to Morgan.
Regulation D Equity Placement:
The Company has offered up to a maximum of $3,000,000 in units (each
unit consists of one share of its common stock and one warrant) at a
price per unit of the lesser of $3.00 or the average closing bid price
of its common stock during a consecutive 30-day period immediately
preceding the termination date less 30%. The original termination date
of the offering was in August, 1996 but it has been extended and is
currently ongoing as of October 21, 1996. Each share of stock comes
with a warrant to purchase common stock through July 31, 1999 at a
price of the lesser of $4.75 or the average closing bid price during a
consecutive- 30-day period immediately preceding the termination date
as explained above. As of October 21, 1996 the Company had sold 190,000
units at a price of $3.00, with attached warrants at a price of $4.75
per share. The unit purchase price and the related warrant price may be
adjusted at the time of the closing depending on the average trading
price in the period described above.
20
<PAGE>
INTERNET WORLDWIDE BUSINESS SOLUTIONS
-----------------
REPORT ON AUDIT OF FINANCIAL STATEMENTS
as of June 24, 1996 and for the
period from October 1, 1995 to June 24, 1996
<PAGE>
INTERNET WORLDWIDE BUSINESS SOLUTIONS
-----------------
C O N T E N T S
Page
Report of Independent Accountants 1
Balance Sheet 2
Statement of Operations 3
Statement of Changes in Stockholders' Equity 4
Statement of Cash Flows 5
Notes to Financial Statements 6-8
<PAGE>
Coopers & Lybrand LLP
Coopers
& Lybrand a professional services firm
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of EDnet, Inc.
We have audited the accompanying balance sheet of Internet Worldwide Business
Solutions as of June 24, 1996, and the related statements of income, changes in
stockholders' equity, and cash flows for the period from October 1, 1995 to June
24, 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 audit.
We conducted our audit 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 the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, on June 24, 1996, the
Company was acquired by EDnet, Inc.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Internet Worldwide Business
Solutions as of June 24, 1996, and the results of its operations and its cash
flows for the period from October 1, 1995 to June 24, 1996, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND LLP
/S/ COOPERS & LYBRAND LLP
San Francisco, California
October 21, 1996
<PAGE>
<TABLE>
INTERNET WORLDWIDE BUSINESS SOLUTIONS
BALANCE SHEET
June 24, 1996
-----------------
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash $153,814
Accounts receivable, net of allowance for doubtful accounts of $13,911 51,640
Other current assets 14,229
--------
Total current assets 219,683
Property and equipment, net 90,136
Other assets 2,767
--------
$312,856
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 47,777
Accrued expenses 86,534
Line of credit 16,638
Note payable to EDnet, Inc. 25,000
Deferred revenue 62,637
--------
Total liabilities 238,536
--------
Stockholders' equity:
Common stock; no par value; 100,000 shares authorized; 50,000 shares
issued and outstanding
36,330
Retained earnings 37,670
--------
Total stockholders' equity 74,000
--------
$312,586
========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
2
<PAGE>
INTERNET WORLDWIDE BUSINESS SOLUTIONS
STATEMENT OF OPERATIONS
for the period from October 1, 1995 through June 24, 1996
-----------------
Revenues $480,030
Cost of revenues 258,716
--------
Gross profit 221,314
--------
Sales and marketing 64,679
General and administrative 107,798
--------
Income from operations 48,837
Interest expense 832
--------
Income before provision for income taxes 48,005
Provision for income taxes 10,335
--------
Net income $ 37,670
========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
<TABLE>
INTERNET WORLDWIDE BUSINESS SOLUTIONS
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
for the period from October 1, 1995 through June 24, 1996
-----------------
<CAPTION>
Total
Stock-
Common Retained holders'
Stock Earnings Equity
------- ------- -------
<S> <C> <C> <C>
Balance, October 1, 1995 -- -- --
Issuance of common stock (50,000 shares) $36,330 -- $36,330
Net income for the period from October 1, 1995 through June 24, 1996
-- $37,670 37,670
------- ------- -------
Balance, June 24, 1996 $36,330 $37,670 $74,000
======= ======= =======
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
INTERNET WORLDWIDE BUSINESS SOLUTIONS
STATEMENT OF CASH FLOWS
for the period from October 1, 1995 through June 24, 1996
-----------------
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net income $ 37,670
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization 11,509
Bad debt expense 13,911
(Increase) decrease in assets:
Accounts receivable (55,205)
Other current assets (14,229)
Other assets (2,767)
Increase (decrease) in liabilities:
Accounts payable 47,777
Accrued expenses 80,296
Deferred revenue 62,637
---------
Net cash provided by operating activities 181,599
---------
Cash flows from investing activities - purchase of property and equipment (85,900)
---------
Cash flows from financing activities:
Borrowings under line of credit 16,638
Proceeds from note payable 25,000
Proceeds from issuance of common stock 16,477
---------
Net cash provided by financing activities 58,115
---------
Net increase in cash 153,814
Cash at beginning of period --
---------
Cash at end of period $ 153,814
=========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 832
=========
Cash paid during the period for taxes $ 23,047
=========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
5
<PAGE>
INTERNET WORLDWIDE BUSINESS SOLUTIONS
NOTES TO FINANCIAL STATEMENTS
-----------------
1. The Company:
Internet Worldwide Business Solutions (the Company), a California
corporation, is primarily an Internet service provider specializing in the
development and hosting of web sites.
The Company was incorporated on August 4, 1995 in California; however,
operations were not begun until October 1, 1995. On October 1, 1995,
certain assets and liabilities were transferred from a partnership to the
corporation in exchange for 50,000 shares of common stock as follows:
Cash $ 16,477
Accounts receivable 10,346
Fixed assets 15,745
Accrued liabilities (6,238)
On June 24, 1996, the Company was acquired by EDnet, Inc. (EDnet) in a
business combination accounted for as a purchase.
2. Summary of Significant Accounting Policies:
Revenue Recognition:
Revenues are generated from the design and development of web sites and
for services for hosting web sites. Revenue for design and development
contracts is recognized on the percentage of completion method and
service revenue are recognized ratably over the service period.
Deferred revenues represent billings in excess of revenue recognized.
Property and Equipment:
Property and equipment are carried at cost and are depreciated on the
straight-line basis over their estimated useful lives, which is five to
seven years. Expenditures for improvement or expansion of electronic
equipment are capitalized. Repairs and maintenance are charged to
expense as incurred. When the assets are sold or retired, their cost
and related accumulated depreciation are removed from the accounts with
the resulting gain or loss reflected in the income statement.
Income Taxes:
The Company accounts for income taxes using the liability method.
Deferred income tax assets and liabilities are computed annually for
differences between the financial reporting and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the
future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets
to the amount expected to be realized.
Continued
6
<PAGE>
INTERNET WORLDWIDE BUSINESS SOLUTIONS
NOTES TO FINANCIAL STATEMENTS
-----------------
2. Summary of Significant Accounting Policies, continued:
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
3. Property and Equipment:
Property and equipment are summarized by major category as follows as
of June 24, 1996:
Network equipment $ 80,977
Furniture and fixtures 6,314
Computer software 14,354
-------------
101,645
Depreciation and amortization (11,509)
-------------
Net property and equipment $ 90,136
=============
Depreciation and amortization included in the statement of operations
amounted to $11,509 for the period from October 1, 1995 through June 24,
1996.
4. Related Party Transactions:
At June 24, 1996, the Company had a note payable to EDnet in the amount of
$25,000 bearing interest at 8%, maturing on August 6, 1996. Subsequent to
the acquisition of the Company by EDnet (Note 1), the note was converted
to an advance with no repayment terms or interest being due.
5. Income Taxes:
The provision for income taxes consists of current taxes of $12,094 and
deferred taxes of $(1,759).
A reconciliation of the expected and reported provision for income taxes
follows:
Taxes using U.S. federal statutory rate $ 6,025
State taxes, net of federal benefit 3,173
Impact of nondeductible expenses 1,137
-----------
Net income tax provision $ 10,335
===========
Continued
7
<PAGE>
INTERNET WORLDWIDE BUSINESS SOLUTIONS
NOTES TO FINANCIAL STATEMENTS
-----------------
5. Income Taxes, continued:
The tax effects of significant temporary differences representing deferred
tax assets and liabilities are as follows:
Bad debt allowance $ 3,380
Depreciation (1,009)
State income taxes (612)
----------
Net deferred tax asset $ 1,759
==========
6. Lease Commitments:
The Company leases office space under a noncancelable operating lease,
expiring March 3, 1997. Future minimum lease payments under this lease for
the year ending June 30, 1997 are $35,213.
Rental expense for the period from October 1, 1995 to June 24, 1996
amounted to $25,301.
7. Concentration of Credit Risk:
The Company maintains its cash in a bank deposit account at a financial
institution. The balance at times may exceed federally insured limits. At
June 30, 1996, the Company exceeded the insured limit by approximately
$53,000.
8. Major Customer:
The Company had one customer representing approximately 18% of its overall
revenue for the period from October 1, 1995 through June 24, 1996. All
other customers represented less than 10% of its overall revenue during
the same period.
9. Line of Credit:
The Company has a $25,000 line of credit with a financial institution, of
which $16,638 was outstanding as of June 24, 1996. The line of credit
bears interest at the institution's reference rate plus 5.06% (12.31% as
of June 24, 1996) and is payable monthly. The line of credit expires on
March 8, 1997. The carrying value approximates fair value due to the
relatively short maturity of this financial instrument.
8
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission file number 000-21659
EDnet, INC.
(Exact name of small business issuer as specified in its charter)
Colorado 84-1273795
- --------------------------------------------------------------------------------
State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
One Union Street, San Francisco, California 94111
- --------------------------------------------------------------------------------
Address of principal executive offices (Zip Code)
Issuer's telephone number, including area code (415) 274-8800
-------------------
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes_X_ No___.
Number of shares outstanding of the issuer's common stock as of March 31, 1997:
5,665,465
Transitional Small Business Disclosure Format (Check one): Yes___ No_X_
<PAGE>
<TABLE>
Part I. FINANCIAL INFORMATION
EDnet, Inc.
CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months ended March 31, 1997 & 1996
<CAPTION>
Three Months Nine Months
Ended March 31 Ended March 31
( Unaudited ) ( Unaudited )
------------------------------ ------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Equipment sales and installation $ 192,778 $ 352,299 $ 834,483 $ 1,050,123
Site development and services 205,157 -- 781,032 --
Access, Usage, and Hosting fees 504,199 215,087 1,306,063 720,340
Other fees 36,718 28,257 95,357 157,439
----------- ----------- ----------- -----------
938,852 595,643 3,016,935 1,927,902
Cost of sales 515,022 358,451 1,718,837 1,177,555
----------- ----------- ----------- -----------
Gross Profit 423,830 237,192 1,298,098 750,347
Research & Development 51,188 -- 974,284 --
Sales and Marketing expenses 232,412 11,460 670,284 19,130
General and Administrative expenses 838,319 405,014 1,949,637 1,066,274
----------- ----------- ----------- -----------
Loss from operations (698,089) (179,282) (2,296,107) (335,057)
----------- ----------- ----------- -----------
Other income (expense):
Interest expense (164,118) (2,956) (261,412) (26,522)
Gain on sales of fixed assets 2,323 -- 2,323 --
----------- ----------- ----------- -----------
Total other income (expense), net (161,795) (2,956) (259,089) (26,522)
----------- ----------- ----------- -----------
Loss before provision for income taxes (859,884) (182,238) (2,555,196) (361,579)
Income taxes 3,266 -- 3,266 --
----------- ----------- ----------- -----------
Net Loss $ (863,150) $ (182,238) $(2,558,462) $ (361,579)
=========== =========== =========== ===========
Net Loss Per Common Share $ (0.17) $ (0.08) $ (0.54) $ (0.16)
=========== =========== =========== ===========
Weighted Average Number 5,178,909 2,261,945 4,747,188 2,261,945
=========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
EDnet, Inc.
CONSOLIDATED BALANCE SHEETS
As of March 31, 1997 and June 30, 1996
<CAPTION>
ASSETS
3/31/97 6/30/96
(Unaudited)
-----------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash $ 58,219 $ 221,875
Accounts Receivable, net 634,758 478,076
Inventories 236,235 147,409
Other Current Assets 768,400 14,298
-----------------------------------
TOTAL CURRENT ASSETS 1,697,612 861,658
PROPERTY AND EQUIPMENT, NET 623,951 488,943
GOODWILL, NET 714,996 1,088,568
OTHER ASSETS 64,445 79,342
-----------------------------------
TOTAL ASSETS $ 3,101,004 $ 2,518,511
===================================
LIABILTIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 1,531,048 $ 659,709
Accrued expenses 427,037 390,002
Deferred revenue 17,279 69,623
Line of credit 34,465 16,638
Notes payable 1,332,122 990,991
Current portion of capital lease obligations 36,172 24,493
-----------------------------------
TOTAL CURRENT LIABILITIES 3,378,123 2,151,456
CAPITAL LEASE OBLIGATIONS-LONG TERM 23,863 43,622
-----------------------------------
TOTAL LIABILITIES 3,401,986 2,195,078
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock; par value $.001 per share
Authorized 50,000,000 shares, 5,665,465 and
4,468,322 shares issued and outstanding as of
March 31, 1997 and June 30,1996 respectively 5,665 4,468
Preferred Stock; par value $1,000 per share
Authorized 1,750 shares, 150 shares issued and
outstanding as of March 31, 1997 163,352 --
Common stock warrants 222,920
Capital paid in excess of par value of common stock 4,351,032 2,758,644
Accumulated Deficit (5,043,951) (2,439,679)
-----------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (300,982) 323,433
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 3,101,004 $ 2,518,511
===================================
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
EDnet, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Nine Months ended March 31, 1997 and 1996
<CAPTION>
3/31/97 3/31/96
(Unaudited) (Unaudited)
----------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,558,462) $ (361,579)
Adjustments to reconcile net loss to
cash used in operating activities:
Depreciation and amortization 307,771 73,109
Noncash compensation expenses 222,541 --
Decrease (increase) in other current assets 12,539 (8,804)
Increase in accounts receivable (156,682) (158,935)
Increase in inventory (88,826) (252,302)
Increase (decrease) in accounts payable
and accrued expenses 926,202 (141,485)
Decrease in deferred revenue (52,344) (124,477)
----------------------------------
Net cash used in operating activities (1,387,261) (974,473)
----------------------------------
Cash flows from investing activities:
Purchase of property and Equipment (276,116) (39,301)
----------------------------------
Net cash used in investing activities (276,116) (39,301)
----------------------------------
Cash flows from financing activities:
Repayment on borrowings (379,116) (126,725)
Proceeds from borrowings 1,000,000 --
Repayments on capital leases (22,526) (12,604)
Issuance of shares under Reg D 738,011 1,159,727
Issuance of shares under Reg S 163,352 --
----------------------------------
Net cash provided by financing activities 1,499,721 1,020,398
----------------------------------
Net increase (decrease) in cash (163,655) 6,624
==================================
Cash at beginning of period 221,875 56,437
----------------------------------
Cash at end of period $ 58,219 $ 63,061
==================================
<FN>
The accompanying notes are an integral part of these consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
EDNET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
In the opinion of management, the unaudited consolidated condensed
financial statements included herein have been prepared on a consistent
basis with the June 30, 1996 audited consolidated financial statements and
include all material adjustments, consisting of normal recurring
adjustments, necessary to fairly present the information set forth therein.
As reported in the audited financial statements of June 30, 1996, EDnet,
Inc. (the Company) has not been able to generate any operating profit since
inception, and is attempting to raise additional funds as described in Note
8. In addition, as described in Notes 7 and 9, the Company is delinquent in
principal payments on its senior collateralized promissory notes (Notes),
and has entered into preliminary discussions with several companies
regarding merger, acquisition, asset sales, and other potential
transactions. However, if the Company is unable to raise additional funds
or consummate a merger or other transaction, it may not have the financial
resources to continue as a going concern. The financial statements do not
contain any adjustments that may be needed if the Company is unable to
continue as a going concern.
2. Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries Entertainment Digital Network, Inc. (EDN)
and Internet Worldwide Business Solutions, Inc. (IBS). Material
inter-company transactions and balances have been eliminated.
3. Loss per Share
Loss per share has been computed using the weighted average number of
common shares outstanding totaling 5,178,909 shares for the three months
ended March 31, 1997 and 4,747,188 shares for the nine months ended March
31, 1997. There were 2,261,945 weighted average shares outstanding for the
three and nine months ended March 31, 1996. Due to the Company's loss
position, common equivalent shares have been excluded because they are
anti-dilutive.
4. Research and Development
The Company incurred $51,188 of research and development expense during the
three months ended March 31, 1997. This is a reduction from prior quarters
due primarily to the licensing of the Company's IBS Internet software
product to Breakthrough Software Inc. (Breakthrough) completed in the prior
quarter. Total nine month expenditures on research and development were
$974,284.
5. Consulting Agreements
The Company entered into an agreement effective January 12, 1997 with
Liviakis Financial Communications, Inc. (Liviakis), to provide investor
relations consulting services to the Company for a term of one year ending
on January 2, 1998. As payment for its services, Liviakis received 490,000
unregistered shares of common stock from the Company, valued at $643,125,
which amount will be amortized over the term of the agreement. At the end
of the consulting agreement, Liviakis will have the same demand
registration rights to register such shares with the Securities and
Exchange Commission (SEC) as given to investors in the December 31,1996
private placement of common stock initiated by the Company in the prior
quarter.
On January 31, 1997, the Company entered into a Consulting Agreement with
NET Financial International, Ltd. (NET) to assist the Company in raising up
to $5,000,000 in a series of private placements of stock, discussed below.
The Company has agreed to pay NET fees equal to 10% of
5
<PAGE>
the total capital raised in the financing as well as issuing to it a
warrant exercisable for two years allowing the purchase of shares of common
stock with a value on the date of the closing of the financing equal to 6%
of the capital raised in the financing, at an exercise price equal to the
closing bid price of the common stock on the date of the closing of the
financing. The agreement has a term of three months and thereafter is
terminable by either party upon ten days prior written notice. In addition,
if the Company seeks additional financing during the twelve month period
after the execution of the NET consulting agreement, the Company must give
NET the right of first refusal to obtain such additional financing, upon
the compensation terms described above. As of March 31, 1997 the Company
has paid NET cash fees of $15,000 and is obligated to issue warrants as
described in Note 8 in compensation for assistance in placing the Series A
Preferred Stock described in Note 8.
6. Notes Receivable
In connection with the licensing by IBS to Breakthrough of IBS' software,
completed in the prior quarter, the Company has an unsecured note
receivable from Breakthrough of $250,000 as of March 31, 1997. No further
advances will be made to Breakthrough under the note. The Company has
extended the due date of the note receivable from Breakthrough to March 31,
1998, and has established a 100% reserve against the note.
7. Notes Payable
On January 31, 1997, the Notes, in the amount of $1,000,000, converted into
a term loan, with interest increasing to 18% and principal payments of
$100,000 per month commencing February 15, 1997. The Company made a
$100,000 principal payment on February 15, 1997. On March 11, 1997, the
Company's financial advisor, Morgan Fuller Capital Group (Morgan Fuller)
verbally agreed to defer the March 15, 1997 payment for a two week period.
Subsequent to March 31, 1997, the Company received a written payment demand
notice from Morgan Fuller, placing the Company in default. The Company is
currently in negotiation with Morgan Fuller and participants regarding the
Notes.
8. Equity Private Placements
As of March 31, 1997 the Company had issued 265,000 shares of common stock
priced at $1.00 per share under its equity private placement of up to
$5,000,000 initiated December 31, 1996. The Company anticipates terminating
this private placement on June 30, 1997, whether fully subscribed or not.
Holders of this common stock will have piggyback and Form S-3 registration
rights.
Pursuant to a Certificate of Designation filed with the Colorado Secretary
of State on February 2, 1997, the Company's Articles of incorporation were
amended to allow the Company to issue Series A Preferred Shares. On
February 3, 1997, the Company offered up to $1,750,000 of its Series A
Preferred Stock at $1,000 per share to non-United States persons in an
offering exempt from registration under Regulation S of the Securities Act
of 1933, as amended, under its agreement with NET, described above. The
shares are convertible into common stock at any time until the third
anniversary of their issuance at the lesser of 70% of: (i) the average of
the closing bid price of the common stock on the five trading days
preceding conversion (the "Market Price"); or (ii) the average of the
closing bid price for the common stock on the five trading days preceding
the closing (the "Closing Price"), or (iii) if the Market Price or the
Closing Price is less than $1.43 per share, the minimum price shall be
deemed to be $1.43 per share (the "Floor"). The Series A Preferred Shares
are also subject to mandatory conversion on the third anniversary of their
issuance at the lesser of 70% of the Market Price or the Closing Price,
subject to the Floor. Upon conversion, the holders of Series A Preferred
Shares will be paid a 6% cumulative dividend measured from the issuance
date through the conversion date, payable in common stock valued at the
Market Price. The Series A
6
<PAGE>
Preferred Shares have a liquidation preference of $1,000 per share and all
other stock of the Company is subordinate to such preference. Holders of
Series A Preferred Shares or the underlying conversion common stock will be
granted piggyback and Form S-3 registration rights for the underlying
common stock. As of March 31, 1997, the Company has issued 150 shares of
Series A Preferred Stock for $150,000 under this offering, has recorded a
30% preferred stock dividend associated with the conversion discount, and
has accrued a 6% cumulative dividend from the date of issuance through
March 31, 1997. The Company anticipates terminating this offering on June
30, 1997, whether fully subscribed or not. Under the agreement with NET
described in Note 5, the Company is obligated to issue warrants to NET
equal to 6% of the capital raised for its assistance in placing this stock.
The warrants will be priced and issued upon closing of the financing.
9. Subsequent Events
Consulting Agreement
The Company is finalizing an agreement to be effective April 7, 1997 with
an individual to act as the Company's President and Chief Executive
Officer. The agreement will specify cash compensation, participation in an
incentive stock option plan to be developed by the Company in the next
ninety days, and membership on the Company's Board of Directors. The
agreement may be terminated by either party with thirty days advance
notice.
Merger Discussions
On April 25, 1997, the Company announced that it has initiated preliminary
discussions with several potential partners as merger candidates. To date,
those discussions have covered merger, acquisition, asset sales, and other
potential transactions. As of the date of this filing, no definitive
agreement has been reached.
7
<PAGE>
EDNET, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
For the three months ended March 31, 1997, the Company's revenues were $938,852,
an increase of 58% compared to revenues of $595,643 in the comparable period
last year. Revenues for the nine months ended March 31, 1997 increased 56% to
$3,016,935, compared to revenues of $1,927,902 in the comparable period last
year. Increases in revenue are attributed to increases in network access and
usage fees associated with a larger installed base and the addition of web
development and hosting revenues associated with the acquisition of IBS. The
equipment component of revenue declined in the three months ended March 31, 1997
due to unavailability of inventory for shipment due to vendor credit
restrictions, and comparison to unusually high equipment sales in the comparable
period of the prior year which resulted from equipment promotions.
Gross Profit increased to $423,830 or 45% of sales, in the three months ended
March 31, 1997 compared to $237,192, or 40% of sales, in the equivalent period
last year. For the nine months ended March 31, 1997 gross profit increased to
$1,298,098, or 43% of sales, from $750,347, or 39% of sales, in the equivalent
period last year. Increases in gross profit as a percentage of sales are
attributed to growth in usage revenues, which carry a higher profit margin, and
the addition of web development and hosting revenues, which carry a high profit
margin.
Operating expenses (including Research & Development, Sales & Marketing, and
General & Administrative) increased to $1,121,919 in the three months ended
March 31, 1997 compared to $416,474 in the equivalent period last year. For the
nine months ended March 31, 1997 operating expenses increased to $3,594,205 from
$1,085,404 in the equivalent period last year. The Company incurred $51,188 of
research and development expense during the three months ended March 31, 1997.
This is a reduction from prior quarters due primarily to the licensing of the
Company's IBS Internet software product to Breakthrough Software Inc.
(Breakthrough) completed in the prior quarter. Total nine month expenditures on
research and development were $974,284. Operating expenses for the three and
nine month periods ending March 31, 1997 also include $313,160 and $561,112
respectively, which represent amortization of the cost of the current Liviakis
consulting agreement, amortization of goodwill, and non-recurring legal and
accounting costs associated with the prior quarter's Breakthrough transaction,
the filing of a Form 10-SB registration statement with the SEC, and the
Company's initial three-year audit. With these items excluded, operating
expenses were $757,571 for the three months ended March 31, 1997 and $2,058,809
for the nine months ended March 31, 1997, representing an 82% and 90% increase
respectively over the comparable periods in the prior year. This increase is
consistent with the necessary addition of infrastructure associated with the
Company's increase in sales. Current year operating expenses also include public
and investor relations, and other costs associated with being a public company
that were not incurred in comparable periods of the prior fiscal year.
Other expenses increased to $161,795 in the three months ended March 31, 1997
compared to $2,956 in the equivalent period last year. For the nine months ended
March 31, 1997 other expenses increased to $259,089 from $26,522 in the
equivalent period last year. The increase in other expenses was due to increases
in interest expense and amortization of debt issuance costs and note discounts
associated with the Notes (Note 7).
8
<PAGE>
For the three months ended March 31, 1997, the Company incurred a net loss of
$863,150 or ($0.17) per share based on a weighted average of 5,178,909 shares
outstanding, compared with a net loss of $182,238, or ($0.08) per share based on
a weighted average of 2,261,945 shares outstanding in the prior year. The
Company incurred a net loss for the nine months ended March 31, 1997 of
$2,558,462, or ($0.54) per share based on 4,747,188 weighted average shares
outstanding, compared with a net loss of $361,579, or ($0.16) per share, based
on 2,261,945 weighted average shares outstanding for the same period last year.
Financial Condition, Liquidity, and Capital Resources
At March 31, 1997, the Company's accumulated deficit was $5,043,951 and its
working capital deficit was $1,680,511. The rate of increase in the Company's
accumulated deficit declined in the quarter ended March 31, 1997 due primarily
to the elimination of Research and Development expense associated with the
licensing of the IBS Internet software product to Breakthrough (Note 4), and
elimination of other non-recurring operating expenses incurred in prior
quarters. The Company's working capital deficit improved by $437,805 since
December 31, 1996 due primarily to common and preferred shares issued under the
equity private placements described in Note 8. The Company was unable to
complete and close these offerings as planned, however, due to a decline in the
Company's stock price late in the quarter, which reduced investor's interest in
the offerings. This came at a time of critical need and prevented the Company
from making its second principal payment on the Notes (Note 7). As a result, the
Company has made several adjustments to its operations to further reduce costs,
and, partially as a result of funding needs, has initiated preliminary
discussions with several potential partners regarding merger, acquisition, asset
sales and other potential transactions (Note 9). The Company is in active
discussions with Morgan Fuller regarding payment, conversion, and other options
on the Notes. Subsequent to March 31, 1997, the Company's stock price increased,
renewing investor interest in the Company's equity private placements.
Management is continually monitoring the Company's cash position and the status
of all of its financing alternatives.
Disclosure Pursuant to the Private Securities Litigation Reform Act of 1995
When used in this Management's Discussion and Analysis, the words "anticipate,"
"estimate," "expect," and similar expressions are intended to identify
forward-looking statements. These statements are subject to certain risks and
uncertainties, including, but not limited to, the following: risks associated
with fundraising and the company's ability to secure resources necessary to
fully develop business products; risks associated with mergers and acquisitions,
the nature of any transaction consummated, and the ability to successfully
operate a merged entity; business conditions in the telecommunications,
entertainment, advertising and Internet-related industries, and the general
economy; competitive factors such as rival networking technology, competing
products, and competitive pricing; risks associated with development,
introduction, and acceptance of new products; the company's ability to manage
its rapid growth and attract and retain key employees; and other risk factors.
Actual results may differ materially from management expectations as discussed
here.
9
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
Pursuant to a Certificate of Designation filed with the Colorado Secretary of
State on February 2, 1997, the Company's Articles of Incorporation were amended
to allow the Company to issue Series A Preferred shares (see Note 8 to the
unaudited consolidated condensed financial statements).
Item 3. Defaults Upon Senior Securities
On January 31, 1997, the Company's senior collateralized promissory notes, in
the amount of $1,000,000, converted into a term loan, with interest increasing
to 18% and principal payments of $100,000 per month commencing February 15,
1997. The Company made a $100,000 principal payment on February 15, 1997. On
March 11, 1997, the Company's financial advisor, Morgan Fuller Capital Group
(Morgan Fuller) verbally agreed to defer the March 15, 1997 payment for a two
week period. Subsequent to March 31, 1997, the Company received a written
payment demand notice from Morgan Fuller, placing the Company in default. The
Company is currently in negotiation with Morgan Fuller and participants
regarding the Notes (see Note 7 to the unaudited consolidated condensed
financial statements).
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a)(27) Financial Data Schedule, filed electronically.
(b) Form 8-K filed March 13, 1997 to report the February 27, 1997 sale of
Equity Securities exempt from registration pursuant to Regulation S of
the Securities Act of 1933 (Note 8).
10
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EDNET, INC.
May 15, 1997 By: /s/Tom Kobayashi
------------------------------
Tom Kobayashi
Chairman of the Board
By: /s/Alan K. Geddes
------------------------------
Alan K. Geddes
Vice President, Finance and
Chief Financial Officer
11
<PAGE>
<TABLE>
PART III
<CAPTION>
ITEM 1. INDEX TO EXHIBITS Page Number
Exhibit No. Type of Exhibit
<S> <C> <C>
(2) (a) Articles of Incorporation, as amended. PREVIOUSLY
FILED.
(b) Bylaws, as amended. PREVIOUSLY FILED.
(c) Certificate of Designation, filed with the Colorado
Secretary of State on February 2, 1997. FILED
HEREWITH.
(3) (a) Security Agreement dated as of July 5, 1996, made by
the Company, in favor of Morgan Fuller Capital Group
L.L.C. PREVIOUSLY FILED.
(b) Amendment No. 1 to Security Agreement dated as of
August 1, 1996. PREVIOUSLY FILED.
(c) Form of Senior Secured Promissory Note in favor of
Morgan Fuller Capital Group L.L.C., executed on the
following dates for the following amounts:
1. dated July 5, 1996, in the amount of $500,000;
2. dated July 22, 1996, in the amount of $200,000;
and
3. dated July 22, 1996, in the amount of $300,000.
PREVIOUSLY FILED.
(d) Amendment No. 1 to Senior Secured Promissory Notes,
dated as of November 15, 1996, executed by the Company
and Fuller Capital Group L.L.C. FILED HEREWITH.
(e) Promissory Note dated February 8, 1996 in favor of
Irawan Onggara, in the principal amount of $250,000.
PREVIOUSLY FILED.
(f) Promissory Note dated April 18, 1996 in favor of
Irawan Onggara, in the principal amount of $100,000.
PREVIOUSLY FILED.
(g) Promissory Note dated May 20, 1996 in favor of Irawan
Onggara, in the principal amount of $75,000.
PREVIOUSLY FILED.
33.
<PAGE>
(h) Form of Promissory Note dated June 24, 1996 in the
principal amount of $125,000, payable to each of
Randall Schmitz and Trevor Stout. PREVIOUSLY FILED.
(i) Breakthrough Software, Inc. Convertible Promissory
Note dated January 31, 1997 in the principal amount
not to exceed $250,000 payable to the Company. FILED
HEREWITH.
(6) Material Contracts
(a) Agreement and Plan of Reorganization by and among
EDnet, Inc., EDN Sub, Inc. and Internet Worldwide
Business Solutions, dated as of June 24, 1996.
PREVIOUSLY FILED.
(b) Stock Purchase Agreement, dated September 22, 1995,
between AP Office Equipment, Inc., Entertainment
Digital Network, Inc. and certain shareholders of
Entertainment Digital Network, Inc. PREVIOUSLY FILED.
(c) Stock Purchase Agreement, dated October 18, 1995,
between EDnet, Inc. and certain shareholders of
Entertainment Digital Network, Inc. PREVIOUSLY FILED.
(d) Employment Agreement between the Company and Tom
Kobayashi dated September 1, 1995. PREVIOUSLY FILED.
(e) Employment Agreement between the Company and David
Gustafson dated September 1, 1995. PREVIOUSLY FILED.
(f) EDnet, Inc. Incentive Stock Option Plan. PREVIOUSLY
FILED.
(g) EDnet, Inc. 1995-1996 Nonstatutory Stock Option Plan.
PREVIOUSLY FILED.
(h) Entertainment Digital Network 1993 Flexible Stock
Incentive Plan. PREVIOUSLY FILED.
(i) Form of Entertainment Digital Network Nonqualified
Stock Option Agreement. PREVIOUSLY FILED.
(j) Form of Entertainment Digital Network Stock Purchase
Warrant. PREVIOUSLY FILED.
(k) Form of EDnet, Inc. Warrant. PREVIOUSLY FILED.
34.
<PAGE>
(l) Consulting Agreement, dated as of January 12, 1996,
between the Company and Liviakis Financial
Communications, Inc. PREVIOUSLY FILED.
(m) Consulting Agreement, effective as of January 12, 1997
between the Company and Liviakis Financial
Communications, Inc. FILED HEREWITH.
(n) Financial Advisory Agreement, dated as of July 31,
1995, between EDN and Century Financial Partners, Inc.
PREVIOUSLY FILED.
(o) Engagement letter dated May 20, 1996 between the
Company and Morgan Fuller Capital Group L.L.C.
PREVIOUSLY FILED.
(p) Engagement letter dated June 25, 1996 between the
Company and Morgan Fuller Capital Group L.L.C.
PREVIOUSLY FILED.
(q) Engagement letter dated June 28, 1996 between the
Company and Morgan Fuller Capital Group L.L.C.
PREVIOUSLY FILED.
(r) Engagement letter dated June 28, 1996 between the
Company and Morgan Fuller Capital Group L.L.C.
PREVIOUSLY FILED.
(s) Engagement letter dated October 17, 1996 between the
Company and LBC Capital Resources, Inc. PREVIOUSLY
FILED.
(t) Form of Subscription, Representation and Securities
Transfer Restriction Agreement between the Company and
investors in Units. FILED HEREWITH.
(u) Engagement letter dated November 19, 1996 between the
Company and Morgan Fuller Capital Group L.L.C. FILED
HEREWITH.
(v) Engagement letter dated November 21, 1996 between the
Company and Morgan Fuller Capital Group L.L.C. FILED
HEREWITH.
(w) Consulting Agreement dated January 31, 1997 between
the Company and Net Financial International, Ltd.
FILED HEREWITH.
(x) Form of Subscription, Representation and Securities
Transfer Restriction Agreement between Morgan Fuller
Capital Group L.L.C. and investors in Participations.
FILED HEREWITH.
35.
<PAGE>
(y) Form of Subscription, Representation and Securities
Transfer Restriction Agreement between the Company and
investors in Common Stock. FILED HEREWITH.
(z) Form of Subscription, Representation and Securities
Transfer Restriction Agreement between the Company and
investors in EDnet Series A Preferred Shares. FILED
HEREWITH.
(aa) Amendment No. 1 to the Agreement and Plan of
Reorganization by and among EDnet, Inc., EDN Sub, Inc.
and Internet Worldwide Business Solutions, dated as of
September 13, 1996. FILED HEREWITH.
(ab) Amendment No. 2 to the Agreement and Plan of
Reorganization by and among EDnet, Inc., EDN Sub, Inc.
and Internet Worldwide Business Solutions, dated as of
January 31, 1997. FILED HEREWITH.
(ac) Breakthrough Software, Inc. Stock Purchase Agreement
by and among Breakthrough Software, Inc. and EDnet,
Inc., dated as of January 31, 1997. FILED HEREWITH.
(ad) Technology License Agreement by and among Internet
Worldwide Business Solutions and Breakthrough
Software, Inc., dated as of January 31, 1997. FILED
HEREWITH.
(ae) Form of Consulting Agreement by and among EDnet, Inc.
and each of Randall Schmitz and Trevor Stout, dated as
of January 31, 1997. FILED HEREWITH.
(27) Financial Data Schedule. FILED HEREWITH.
</TABLE>
36.
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
EDnet, INC.
(Registrant)
Date: May 29, 1997 By: /s/Tom Kobayashi
-------------------------------
Tom Kobayashi,
Chairman
Date: May 29, 1997 By: /s/Alan Geddes
-------------------------------
Alan Geddes,
Chief Financial Officer
37.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 58,219
<SECURITIES> 0
<RECEIVABLES> 634,758
<ALLOWANCES> 0
<INVENTORY> 236,235
<CURRENT-ASSETS> 1,547,841
<PP&E> 623,951
<DEPRECIATION> 0
<TOTAL-ASSETS> 3,101,004
<CURRENT-LIABILITIES> 3,238,734
<BONDS> 0
163,352
0
<COMMON> 5,665
<OTHER-SE> (306,647)
<TOTAL-LIABILITY-AND-EQUITY> 3,101,004
<SALES> 0
<TOTAL-REVENUES> 3,016,935
<CGS> 1,718,837
<TOTAL-COSTS> 3,591,882
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 261,412
<INCOME-PRETAX> (2,555,196)
<INCOME-TAX> 3,266
<INCOME-CONTINUING> (2,558,462)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,558,462)
<EPS-PRIMARY> (0.54)
<EPS-DILUTED> 0
</TABLE>
