PROSPECTUS Field Pursuant Rule 424(b)(1)
Registration No. 333-4319
K2 DESIGN, INC.
1,000,000 UNITS
CONSISTING OF 1,000,000 SHARES OF COMMON STOCK
AND 1,000,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
-------------------
K2 Design, Inc. (the "Company") is offering hereby 1,000,000 Units, each
consisting of one share of its common stock (the "Common Stock") and one
redeemable common stock purchase warrant (the "Warrants"). The shares of Common
Stock and Warrants will be separately transferable immediately upon issuance.
Two Warrants will entitle the registered holder thereof to purchase one share of
Common Stock at a price of $7.50 per share at any time commencing on the date of
this Prospectus and terminating on July 25, 2001. The Warrants will be
redeemable at a price of $.05 per Warrant upon not less than 30 days' written
notice if the closing price of the Common Stock has been equal to or greater
than 140% of the then exercise price of the Warrants for 20 consecutive trading
days ending on the fifth day prior to the notice of redemption. See "Description
of Securities" for additional terms of the Warrants.
Prior to this offering there has been no public market for the Common Stock
or Warrants. For factors considered in determining the initial public offering
price, see "Underwriting." The Common Stock and Warrants have been approved for
quotation on The Nasdaq SmallCapTM Market under the symbols, "KTWO" and "KTWOW,"
respectively.
The Registration Statement of which this Prospectus is a part also includes
600,002 shares of Common Stock held by certain stockholders of the Company.
These shares will not be included in the underwritten offering of the Company's
Units and may not be sold for one year from the date hereof. None of the
proceeds from the sale thereof will be paid to the Company. Sales of those
shares may be effected by the holders thereof directly to purchasers or through
broker-dealers. See "Selling Stockholders and Plan of Distribution."
-------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 9 HEREOF.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS(1) COMPANY(2)
<S> <C> <C> <C>
Per Unit.......................................... $6.00 $.60 $5.40
Total(3).......................................... $6,000,000 $600,000 $5,400,000
</TABLE>
<TABLE>
<C> <S>
(1) Does not include additional compensation to Donald & Co. Securities Inc., acting as
representative (the "Representative") of the several underwriters identified elsewhere herein
(the "Underwriters"), in the form of a non- accountable expense allowance of 3% of the gross
proceeds of this offering. The Company has also agreed to sell to the Representative warrants to
purchase up to 100,000 Units at $8.04 per Unit, exercisable over a period of four years
commencing one year from the date hereof (the "Representative's Warrants") and to indemnify the
Underwriters against certain liabilities, including liabilities under the Securities Act of 1933,
as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting estimated expenses payable by the Company, including the Representative's
non-accountable expense allowance of $180,000 ($207,000 if the Representative's over-allotment
option is exercised in full), of $680,000 ($707,000 if the Representative's over-allotment option
is exercised in full).
(3) The Company has granted the Representative a 30-day option to purchase up to 150,000 Units upon
the same terms and conditions as set forth below, solely to cover over-allotments, if any. If
such over-allotment option is exercised in full, the total Price to Public, Underwriting
Discounts and Proceeds to Company will be $6,900,000, $690,000 and $6,210,000, respectively. See
"Underwriting."
</TABLE>
-------------------
The Units are being offered by the Underwriters subject to receipt and
acceptance by the Underwriters, subject to approval of certain legal matters by
counsel and subject to prior sale. The Underwriters reserve the right to
withdraw, cancel or modify this offering and to reject any order in whole or in
part. It is expected that delivery of certificates will be made against payment
therefor on or about July 31, 1996, at the offices of Donald & Co. Securities
Inc., 65 East 55th Street, New York, New York 10022.
DONALD & CO. SECURITIES INC.
THE DATE OF THIS PROSPECTUS IS JULY 26, 1996
<PAGE>
The photographs presented on the inside front cover and inside back cover of
this Prospectus depict pages from Web sites, Intranets and proprietary on-line
services and collateral marketing materials designed and created by K2 Design,
Inc., in whole or in part, and are not necessarily indicative of future
projects. Since Web sites vary significantly in their size and complexity, the
scope of services rendered by the Company in connection with particular
projects has ranged from limited consulting services to complete creative and
technical design. See "Business."
IBM Deep Blue vs. Kasparov Chess Challenge
Together with Ogilvy & Mather Advertising, K2 designed and created this Web site
to promote a chess match between Gary Kasparov and an IBM computer.
Features:
* Capture of live video feed
of the Match
* Real-time chat boards
* Animation to display
progress of the Match
K2 Design, Inc
K2 Design, Inc.
K2 Design, Inc.
K2 Design, Inc.
Producing the
Internet
LIVE!
www.chess.ibm.park.org
Public Theater
K2 created this Web site and incorporated the theater's intricate (and already
well-known) graphic style. This Web site includes:
* Pre-recorded portions of
"Bring In `Da Noise,
Bring In `Da Funk"
* Capture of live video feed
Opening night simulcast
of scenes from the opening
night cast party for
"Noise/Funk."
* Three-dimensional VRML
walk-through of a theater.
On-line promotion of "THE TEMPEST"
starring Patrick Stewart
www.publictheater.org
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK OR WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
Copy Rights Netscape Communications, the Netscape Communications Logo,
Netscape and News Navigator are trademarks of Netscape Communications
Corporation. Netscape has not endorsed or otherwise sponsored the products
or services described herein.
Outside Cover Spread/CMYK
<PAGE>
[PHOTOGRAPHS]
www.prusec.com
MCI
Expert Business Solutions
K2 designed and created this page for an MCI Intranet.
America Online
Games Channel
AOL engaged K2 to create a new identity for its Games Channel section on its
proprietary on-line service, including name and new logo, along with postcards,
posters, promotional marketing kit, and animated art.
K2 also designed the graphic interfaces for this section.
America Online
Developers Studio
K2 designed and created this Web site that was also duplicated on AOL's
proprietary on-line service.
K2 was also responsible for creation of a product identity, including name and
logo, for a software product developed by AOL for on-line content providers,
sales promotion kit and CDROM jewel case with silk screened cd.
Prudential Securities
K2 designed this site which is Prudential Securities Virtual Branch Office.
Features:
* Wealth accumulation calculator
* Geographic branch locator
* Financial personality quiz
* Daily market updates
www.aol.com/about/devstudio/
National Association Of
Printers & Lithographers
K2 designed and created this site that includes a database application utility
that enables users to input certain sales and operating data and instantly
generate a bar chart of statistical information comparing their data to the rest
of the industry.
www.k2design.com Content, Tools & Creative Solutions For The Digital World
www.k2design.com
K2 was engaged by marketplaceMCI to design and create virtual retail stores on
marketplaceMCI for Champs Sporting Goods, Footlocker and Lady Footlocker.
Columbia House
Video Library
Database driven library of television and movie classics.
K2 was responsible for the creative design and html programming within this
transactionally driven site.
marketplaceMCI
K2 redesigned the graphics and copy for this site, MCI's on-line shopping mall.
Morgan Stanley's "The Internet Report" named the site one of the eight "coolest
Web sites for commerce."
www.vplaces.com
Pipeline New York
K2 designed and created point-of-purchase displays, diskette covers and
packaging along with thematic advertising and marketing campaigns.
America Online
Virtual Places
Virtual Places utilizes chat technology on the World Wide Web.
Features:
* Animated JAVA Applications
* Virtual character creation
* Printed press kits.
Button Icons
www.columbiahouse.com
www2.pcy.mci.net/marketplace
Portfolio
Inside Spread/CMYK
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety. Unless otherwise indicated, all financial
information and share and per share information in this Prospectus has been
restated to reflect the recapitalization described in "Certain
Transactions--Formation and Financing of the Company" and assumes (i) no
exercise of outstanding options to purchase an aggregate of 100,000 shares of
Common Stock or options which may be granted to purchase 125,000 additional
shares under the Company's stock option plan, (ii) no exercise of the Warrants,
(iii) no exercise of the Representative's over-allotment option and (iv) no
exercise of the Representative's Warrants. Unless the context otherwise
requires, the "Company" refers to K2 Design, Inc., a Delaware corporation, its
wholly-owned subsidiary and its predecessor entities.
Certain terms used in this Prospectus are defined in the Glossary on page
53.
THE COMPANY
The Company's primary business is the design and creation of sites ("Web
sites") for commercial organizations on that part of the Internet known as the
World Wide Web. The Company has designed and created, alone and with others,
more than 35 Web sites, including Web sites for the customers of MCI
Telecommunications Corporation ("MCI"), a subsidiary of MCI Communications
Corporation, and for Prudential Securities, America Online Incorporated and
International Business Machines, Inc., among others. Accordingly, management
believes that the Company is a recognized provider of these services.
Web sites are increasingly being utilized as a new medium for advertisement,
promotion and technical support of an organization's products and services. The
Company believes Web sites can provide commercial organizations benefits in
addition to those available through conventional media, including the ability to
engage and entertain consumers, provide in-depth information, reduce selling and
operating costs, expand distribution channels, promote major sporting and
entertainment events, monitor popularity of content and make timely changes in
response to real-time feedback. Web sites also offer businesses the ability to
obtain certain information about visitors to their sites.
To be effective, it is essential that a Web site be more than attractive and
that both the Web site and the information therein be easily accessible and
intuitively organized. As a provider of these services, the Company must combine
creative and technical expertise to meet its customers' needs. The Company's
services add value to Web site projects at every stage, from concept development
through completion. Web sites vary significantly in their size and complexity,
and the scope of services rendered by the Company in connection with projects
has ranged from limited consulting services to complete creative and technical
design and construction of multi-level sites, including capture of live video
feeds and audio feeds from remote locations. Should a customer so desire, the
Company also offers numerous integrated services in conjunction with Web site
projects, including traditional graphic design services such as logo design for
the Web site or a particular product, brochures, point-of-sale displays and
other collateral marketing materials and print advertisement design and layout.
The Company is also engaged in preliminary negotiations to license a World Wide
Web software program known as Visitrac and plans to develop another program
known as Web Express. Visitrac is intended to provide detailed information about
visitors to a particular Web site and Web Express is intended to enable an
individual or organization to design a graphically enhanced Web site without
incurring substantial design and development costs. Beta testing of Visitrac
commenced in July 1996. Research and development of Web Express has not
commenced. See "Business--K2's Services."
3
<PAGE>
The Company markets its services directly and seeks to form strategic
marketing relationships with third parties. To date, the Company's only
significant continuing strategic marketing relationship has been and continues
to be with MCI. During 1995, the Company designed and created one Web site for
MCI and five Web sites for MCI's customers on MCI's online shopping mall,
marketplaceMCI. The Company is aware that MCI is presently redefining its online
shopping mall concept and, therefore, marketplaceMCI may not provide any future
business for the Company. Nevertheless, the Company continues to derive revenues
from another Internet initiative of MCI commenced in February 1996 called
"Webworks," pursuant to which MCI salespersons offer comprehensive Web site
services to their customers and potential customers in the northeastern United
States. In connection with Webworks, MCI co-markets the Company's services and
after pre-screening an interested customer, introduces that customer to the
Company. The Company has been advised that it is considered by MCI to be a "best
of breed" vendor. However, MCI has no obligation to refer projects to the
Company, is expected to refer Webworks projects to others, and utilizes the
services of certain of the Company's competitors for other Web site projects.
The Company has commenced work on two projects generated from Webworks,
including one for the New Jersey Sports and Exposition Authority pursuant to a
non-binding letter of intent for the design and creation of the main Web site
for the Meadowlands Sports Complex.
The Company has designed and created, alone and with others, more than 35
Web sites, including:
. Together with Ogilvy & Mather Advertising, the design and creation of
a Web site for International Business Machines, Inc. ("IBM")
(http://www.chess.ibm.park.org), to promote a chess match between Gary
Kasparov and an IBM computer that utilizes a computer chip called "Deep
Blue." The Web site incorporated the capture of live video feed of the
match, real-time chat boards, simultaneous transcription of commentary and
the integration of animation to display the progress of the match. An
article disseminated by Reuters indicated that the Web site received
approximately 5 million hits during the match (hits are an indicator of the
volume of traffic at a Web site).
. The design and creation of a Web site that is Prudential Securities'
Virtual Branch Office (http://www.prusec.com), containing interactive
features such as a wealth accumulation calculator, geographic branch
locator, daily market updates and a financial personality quiz.
. The redesign of the graphics and copy for MCI's marketplaceMCI Web
site (http://www2.pcy.mci.net/marketplace), MCI's online shopping mall.
Morgan Stanley's, "The Internet Report" named the site one of the eight
"coolest Web sites for commerce." During that project, the Company was
engaged by MCI to design and create a virtual retail store in the
marketplaceMCI mall for Champs Sporting Goods and thereafter for related
businesses, Footlocker and Lady Footlocker, and other unrelated businesses.
. The design and creation of a Web site for The Joseph Papp Public
Theater that was originally used to publicize its production of "The
Tempest," starring Patrick Stewart (http://www.publictheater.org). The
Company incorporated the theater's intricate (and already well known)
graphic style into the Web site, which was originally designed to
accommodate several Web browsers, including most versions of the Netscape
Navigator, America Online, Pipeline, Mosaic, Spyglass and Chameleon. The Web
site integrated standard production photographs from The Tempest with a plot
summary of the show, to create a click-to-enlarge tour of the production.
The Web site was launched at the after-show party following its opening
performance. Thereafter, the theater hired the Company to design and create
another Web site to promote its hit Broadway show, "Bring on Da Noise/Bring
on Da Funk," on which, among other things, was capture of live video feed
from the opening night party and pre-recorded portions of the show. The site
also featured a three-dimensional VRML (virtual reality mark-up language)
walk-through of a theater,
4
<PAGE>
digitized portions of the show's soundtrack, live commentary and electronic
mail telegram capabilities to the cast. VRML is a three-dimensional browsing
environment that is an advanced state of environment creation on the Web.
. The creation of product identity, including name and logo, for a
software product developed by America Online Incorporated ("AOL") for
potential on-line content providers, together with a Web site dedicated to
that product (http://www.aol.com/about/devstudio/). AOL needed full
collateral systems as well as multiple online presences to announce and
advertise the tools. The Web site features multi-level informational
architecture, and was replicated as a location on AOL's proprietary on-line
service. The Company also designed and created a variety of collateral
products, including CD-ROM packaging.
. The design and creation of a Web site for the National Association of
Printers and Lithographers (http://www.napl.org) that includes a database
application utility that enables users to input certain sales and operating
data and instantly generate a graphical representation of statistical
information comparing their data to the rest of the industry.
The Company was founded in 1993 and initially operated a traditional graphic
design business. In August 1994 the Company shifted its principal business to
Web site design and creation but did not begin to generate significant revenues
therefrom until late 1995. The Company's principal offices are located at The
New York Information Technology Center, 55 Broad Street, New York, New York
10004 and its telephone number is (212) 614-0191. The Company's Web site is
located at http://www.k2design.com.
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Securities offered by the Company... 1,000,000 Units, each Unit consisting of one share of
Common Stock and one Warrant. Two Warrants entitle
the registered holder thereof to purchase one share
of Common Stock. See "Description of Securities."
Securities offered by Selling
Stockholders...................... 600,002 shares of Common Stock. These shares may not
be sold for a period of one year from the date hereof
and will not be included in the underwritten offering
of the Company's securities. Sales of these shares
may be effected by the holders thereof directly to
purchasers or through broker-dealers. See "Selling
Stockholders and Plan of Distribution."
Offering Price...................... $6.00 per Unit.
Common Stock outstanding prior to
this offering....................... 2,495,482 shares of Common Stock.
Common Stock to be outstanding after
the offering........................ 3,495,482 shares of Common Stock.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Warrants--Number to be outstanding
after the offering.................. 1,000,000 Warrants.
Exercise Price.................... $7.50 per share, subject to adjustment in certain
cases. See "Description of Securities."
Exercise Period................... Commencing on the date hereof and expiring five years
from the date hereof.
Redemption........................ Commencing on the date hereof, the Warrants will be
redeemable in whole or in part at the Company's
option at a price of $.05 per Warrant upon not less
than 30 days' written notice, if the closing price of
the Common Stock has been equal to or greater than
140% of the then exercise price of the Warrants for
20 consecutive trading days ending on the fifth day
prior to the notice of redemption.
Use of Proceeds..................... Working capital and general corporate purposes and
only in connection with the business as described in
this Prospectus, including to (i) increase the
Company's sales, marketing, production and
programming staff, (ii) pay for increased occupancy
costs as a result of its recent move, (iii) open a
new sales office in Germany and (iv) finance research
and development activities.
Nasdaq Symbols(1)
Common Stock...................... KTWO
Warrants.......................... KTWOW
Boston Stock Exchange Symbols(1)
Common Stock...................... KTOO
Warrants.......................... KTOOW
Risk Factors........................ Purchase of the securities offered hereby involves a
high degree of risk. Prospective investors should
consider carefully certain risks concerning the
Company and its business. See "Risk Factors."
</TABLE>
- ------------
(1) Quotation on The Nasdaq Small CapTM Stock Market and listing on the Boston
Stock Exchange does not imply that a meaningful, sustained market for the
Common Stock or the Warrants will develop. See "Risk Factors--Risks
Associated with the Failure to Meet Maintenance Criteria of The Nasdaq
SmallCapTM Market and the Boston Stock Exchange."
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The summary financial information presented below is derived from the
consolidated financial statements of the Company and its subsidiary. The Company
was founded in 1993 and entered into its first Web site design and creation
transaction with a customer in 1994. Accordingly, and recognizing that the
Company has engaged in its current primary line of business only for
approximately two years, the Company has a limited operating history upon which
an evaluation of the Company and its prospects can be based. Management
therefore believes that period-to-period comparisons of the Company's results of
operations are not indicative of future results. The financial information
presented below should be read in conjunction with the financial statements and
notes thereto included elsewhere in this Prospectus. In addition, operating
results for the three months ended March 31, 1996 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1996. See
"Risk Factors--Recent Operating Losses; Limited Operating History; Early Stage
of Development" and "Risk Factors--Fluctuations in Quarterly Operating Results,
Cash Requirements and Margins."
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED MARCH 31,
DECEMBER 31, (UNAUDITED)
----------------------- ---------------------
1994 1995 1995 1996
--------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Revenues....................................... $ 249,379 $1,196,208 $ 33,639 $ 512,434
Direct Salaries and Costs...................... 215,865 957,027 68,152 499,109
--------- ---------- -------- ---------
Gross Profit (Loss)............................ 33,514 239,181 (34,513) 13,325
Selling, General and Administrative Expenses... 73,601 200,931 12,449 125,958
Depreciation................................... 13,013 24,485 4,779 9,113
--------- ---------- -------- ---------
Income (loss) from operations................ (53,100) 13,765 (51,741) (121,746)
Interest expense, net.......................... 0 869 319 982
--------- ---------- -------- ---------
Income (loss) before provision for income
taxes.......................................... (53,100) 12,896 (52,060) (122,728)
Pro Forma income tax expense(1)................ 0 0 0 0
--------- ---------- -------- ---------
Pro Forma net income (loss)(1)................. $ (53,100) $ 12,896 $(52,060) $(122,728)
--------- ---------- -------- ---------
--------- ---------- -------- ---------
Pro Forma net income (loss) per equivalent
common share(1)................................ $ .01 $ (.06)
---------- ---------
---------- ---------
Common Stock and equivalent common stock
outstanding.................................... 1,946,373 2,013,040
---------- ---------
---------- ---------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
(UNAUDITED)
------------------------------------------------
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
-------------- ------------ --------------
<S> <C> <C> <C>
Working Capital (deficit)........................... $(23,472) $ 595,928 $5,315,928
Total assets........................................ $559,174 $ 1,178,574 $5,898,574
Stockholders' equity................................ $ 69,222 $ 688,622 $5,408,622
</TABLE>
- ------------
(1) For the period from inception, March 1, 1993, through December 31, 1994, the
Company operated as a partnership. Effective January 1995 the Company
elected to be taxed as an S Corporation under the provisions of the Internal
Revenue Code of 1986. Effective January 1996, the Company's S Corporation
election was voluntarily revoked, subjecting the Company to corporate income
taxes subsequent to that date. Pro forma income tax expense, pro forma net
income (loss) and pro forma
(Footnotes continued on following page)
7
<PAGE>
(Footnotes continued from preceding page)
net income (loss) per equivalent common share represent the Company's income
tax position had the Company been a C Corporation for all periods presented.
(2) Adjusted to reflect the sale of 400,002 shares of Common Stock in a private
placement subsequent to March 31, 1996.
(3) As further adjusted to reflect the sale of 1,000,000 Units offered by the
Company hereby and the application of the estimated net proceeds therefrom.
8
<PAGE>
RISK FACTORS
An investment in the Company involves a high degree of risk. The following
risk factors should be considered carefully before purchasing the securities
offered hereby.
CASH FLOW DEFICIT; NEED FOR ADDITIONAL FINANCING; LACK OF LIQUIDITY
The Company's current primary focus is on increasing its Web site design and
creation business. As a result, the Company has hired and will continue to hire
additional personnel and has incurred and will continue to incur substantial
expenses related to administration, production, technical resources, marketing,
customer support and infrastructure in order to enhance and expand its
operations. In addition, the Company had an operating cash flow deficit of
$(2,404) in 1995 and of $(172,575) in the three months ended March 31, 1996,
which hampered the Company's ability to expand. Delays in collecting accounts
receivable have reduced the Company's cash flow and could in the future
aggravate this situation. The Company is dependent on the successful completion
of this offering for working capital in order to be competitive, to meet the
increasing demands for service, quality and pricing and for any expansion of its
business. While the Company believes the proceeds of this offering together with
available funds and cash expected to be generated by operations will be
sufficient to finance its operations for at least one year, the Company may
nevertheless require substantial alternative financing in order to satisfy its
working capital needs, which may be unavailable or prohibitively expensive since
the Company's only assets available to secure additional financing are accounts
receivable. Should such financing be unavailable or prohibitively expensive when
the Company requires it, the Company would not be able to finance any expansion
of its business and may not be able to satisfy its working capital needs, either
of which would have a material adverse effect on the Company's business,
operating result and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
RECENT OPERATING LOSSES; LIMITED OPERATING HISTORY; EARLY STAGE OF DEVELOPMENT
The Company's revenues for the years ended December 31, 1994 and 1995 were
$249,379 and $1,196,208, respectively, with a net loss of $(53,100) in 1994 and
net income of $11,896 in 1995. The Company's revenues for the first quarter of
1995 and 1996 were $33,639 and $512,434 with net losses of $(52,060) and
$(122,728), respectively. The Company expects that its revenues and gross
margins in the quarter ending June 30, 1996 will be comparable to those in the
quarter ended March 31, 1996, and that it will incur a loss in the June 30
quarter substantially higher than that in the March 31 quarter. There can be no
assurance that the Company will be profitable in the future or that revenue
growth, if any, can be sustained. In addition, as of March 31, 1996, the Company
had stockholders' equity of $69,222 and pro forma stockholders' equity of
$688,622, as adjusted to reflect the sale of 400,002 shares of Common Stock in a
private placement subsequent to March 31, 1996.
The prospects of the Company (which has only been engaged in its primary
line of business for approximately two years) must be considered in light of the
risks, expenses and difficulties frequently encountered by companies in their
early stage of development, particularly companies in new and rapidly evolving
markets and especially those in Internet and other computer related markets.
There can be no assurance that the Company will be successful in addressing
these risks. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
EVOLVING MARKETING STRATEGY
The Company's marketing efforts have substantially focused on, and will for
the foreseeable future continue to focus on, developing strategic relationships
with other companies, such as advertising agencies and Internet service
providers ("Channel Sources") that seek to augment their businesses by directly
or indirectly offering to their customers Web site services provided by the
Company and other
9
<PAGE>
third parties. To try to avoid any conflict with a Channel Source, the Company
does not intend to offer services to customers referred by a particular Channel
Source that could be provided to those customers by that Channel Source. Since
the Company does not expect to offer its full range of services to these
customers, projects for them may be less profitable than full-service production
projects for other customers.
Should a Channel Source favor other providers of similar services, fail to
effectively market the Company's services as a result of the Channel Source's
competitive position or otherwise, or not utilize the Company's services to the
extent anticipated by the Company, the Company may also be adversely affected.
To date, the Company's only continuing significant Channel Source relationship
has been and continues to be with MCI. The inability to recruit, manage or
retain additional Channel Sources, or their inability to market the Company's
services effectively or provide timely and cost-effective customer support and
service, could materially adversely affect the Company's business, operating
results and financial condition. See "Business--Marketing--Relationship with MCI
As Only Significant Channel Source."
RELATIONSHIP WITH MCI AS ONLY SIGNIFICANT CHANNEL SOURCE
To date, the Company's only significant continuing Channel Source
relationship has been and continues to be with MCI. During 1995, the Company
designed and created one Web site for MCI and five Web sites for MCI's customers
on MCI's online shopping mall, which collectively accounted for approximately
15% of the Company's revenues for that year. The Company is aware that MCI is
presently redefining its online shopping mall concept, marketplaceMCI and,
therefore, marketplaceMCI may not provide any future business for the Company.
Nevertheless, the Company continues to derive revenues from another Internet
initiative of MCI commenced in February 1996 called "Webworks," pursuant to
which MCI salespersons offer comprehensive Web site services to their customers
and potential customers in the northeastern United States. In connection with
Webworks, MCI co-markets the Company's services and after pre-screening an
interested customer, introduces that customer to the Company. However, MCI has
no obligation to refer projects to the Company, is expected to refer Webworks
projects to others, and utilizes the services of certain of the Company's
competitors, including CKS Group, Inc., for other Web site projects. The Company
believes that MCI also has an equity interest in another unrelated provider of
Web site services. The Company is also aware that AT&T and UUNET Technologies,
Inc., among others, have introduced programs directly competing with Webworks.
The termination of either of the Company's relationships with MCI, and
especially relating to Webworks, a material reduction in the use of the
Company's services by MCI or the Company's inability to generate repeat business
from MCI would have a material adverse effect on the Company's business,
financial condition and operating results. See "Business--Marketing--
Relationship with MCI."
ONE-TIME CUSTOMERS
Since substantially all of the Company's direct customers (and certain
Channel Sources) have retained the Company on a single project basis, customers
from whom the Company generated substantial revenue in one period have not been
a substantial source of revenue in a subsequent period. During 1995, single
customers accounted for approximately 18%, 15% and 12% of the Company's revenues
and during the first quarter of 1996 one customer accounted for approximately
60% of the Company's revenues. Due to the Company's limited operating history
and the emerging nature of the Internet, the Company generally cannot be sure
whether its relationships with customers will continue to be on a one project
per customer basis, although it does not anticipate ongoing revenues from the
customers that accounted for 18% and 12% of the Company's revenues during 1995.
To the extent the Company does not generate repeat or ongoing business from its
customers, it will incur the higher sales and marketing expenses associated with
attracting new customers as compared to those in attracting
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additional business from existing customers. Moreover, the Company's inability
to generate additional business from any source upon completion of existing
projects would also have a material adverse effect on the Company's business,
financial condition and operating results. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and
"Business--Customers."
MANAGEMENT DISCRETION IN USE OF ALL OF THE NET PROCEEDS
The Company intends to use the net proceeds from the sale of the Units
offered hereby for working capital and for general corporate purposes and only
in connection with the business as described in this Prospectus. The Company,
however, has not specifically allocated the use for these proceeds. Accordingly,
the Company's management will have broad discretion with respect to the use of
these proceeds and there can be no assurance that they will yield a significant
return. See "Use of Proceeds."
CONFLICTS OF INTEREST; RESTRICTIONS
The Company has been precluded and may be precluded in the future from
pursuing opportunities that require it to provide services to direct competitors
of existing customers or Channel Sources. For example, the non-binding letter of
intent between the Company and the New Jersey Sports and Exposition Authority
(the "NJ Authority") for the design and creation of the main Web site for the
Meadowlands Sports Complex requires the Company to act in good faith to remain
exclusive to the NJ Authority and events at its facilities and to notify the NJ
Authority if the Company is contacted by another sports or entertainment venue
and act accordingly. In addition, the Company risks alienating or straining
relationships with customers and Channel Sources each time the Company agrees to
provide services to even indirect competitors of existing customers or Channel
Sources. Conflicts of interest may jeopardize the stability of revenues
generated from existing customers and Channel Sources and preclude access to
business prospects, either of which could have a material adverse effect on the
Company's business, financial condition and operating results.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS, CASH REQUIREMENTS AND MARGINS
Quarterly revenues and operating results have fluctuated and will fluctuate
as a result of a variety of factors. These factors, some of which have affected
the Company and some of which are beyond the Company's control, include the
timing of the completion, material reduction or cancellation of major projects,
the loss of a major customer or the termination of a relationship with a Channel
Source, timing of the receipt of new business, timing of the hiring or loss of
personnel, changes in the pricing strategies and business focus of the Company
or its competitors, capital expenditures, operating expenses and other costs
relating to the expansion of operations, general economic conditions and
acceptance and use of the Internet. At the present time, the Company has
determined to increase expense levels, which to a large extent are fixed, based
in part on expectations as to future revenues. The Company will base future
expense levels similarly. As a result, operating expenses as a percentage of
revenues have increased in the three months ended March 31, 1996 as compared to
the prior three quarters. Revenues and operating results are difficult to
forecast because of these fluctuations and because the Company lacks historical
financial data for a significant number of periods. The Company may be unable to
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. Any significant shortfall of demand for the Company's services in
relation to the Company's expectations would have an adverse impact on the
Company's business, operating results and financial condition.
The Company's quarterly operating margins may also fluctuate from period to
period depending on the relative mix of lower cost full time employees versus
higher cost independent contractors. Due to the Company's lack of liquidity, the
Company continues to rely more heavily on independent contractors than it
otherwise would (and expects to do so for the foreseeable future), and to the
extent it does so, the Company will continue to incur these increased operating
expenses.
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PROFIT EXPOSURE ON CERTAIN TYPES OF CONTRACTS; RISK OF CANCELLATION
The Company has generated a substantial portion of its revenues through
project fees on a fixed fee for service basis. In 1995 and in the three months
ended March 31, 1996, approximately 34% and 10% of the Company's revenues,
respectively, were attributable to fixed price projects and the remainder was
attributable to time-and-material priced projects. In addition, the Company's
non-binding letter of intent with the NJ Authority provides that the Company's
fees for projects pursuant thereto will be paid from the proceeds of advertising
revenues generated by Web sites created for the NJ Authority. The Company
assumes greater financial risk on both fixed-price contracts and contracts that
are dependent upon advertising revenues to pay the Company's fees than on either
time-and-material or cost-reimbursable contracts. Failure to anticipate
technical problems, estimate costs accurately or control costs during
performance of a fixed-price contract, and failure to generate advertising
revenues in connection with contracts dependent thereon to pay the Company's
fees, which may be dependent upon the ability of the Company's customer, may
reduce the Company's profit or cause a loss. A material shift away from the
fixed-fee based projects to more time-and-materials projects, however, could
also have an adverse effect on the Company's operating profit margin to the
extent that fixed-fee based projects sometimes reflect a premium over
time-and-materials costs of those projects. Moreover, projects are generally
terminable at will by a customer and the Company could sustain losses as a
result of expenses incurred prior to termination.
UNCERTAIN ADOPTION OF INTERNET AS A MEDIUM OF COMMERCE AND COMMUNICATIONS;
DEPENDENCE ON INTERNET
Demand and market acceptance for recently introduced services and products
like those offered by the Company are subject to a high level of uncertainty.
The use of the Internet in marketing and advertising and otherwise, particularly
by those individuals and enterprises that have historically relied upon
traditional means of marketing and advertising, generally requires the
acceptance of a new way of conducting business and exchanging information.
Enterprises that have already invested substantial resources in other means of
conducting business and exchanging information may be particularly reluctant or
slow to adopt a new strategy that may make their existing resources and
infrastructure less useful. There can be no assurance that the market for the
Company's services will develop and if it fails to develop, develops more slowly
than expected or becomes saturated with competitors, or if the Company's
services do not achieve market acceptance, the Company's business, operating
results and financial condition will be materially adversely affected.
The Company's ability to derive revenues will also depend upon a robust
industry and the infrastructure for providing Internet access and carrying
Internet traffic. The Internet may not prove to be a viable commercial
marketplace because of inadequate development of the necessary infrastructure or
timely development of complementary products, such as high speed modems.
Moreover, other critical issues concerning the commercial use of the Internet
(including security, reliability, cost, ease of use and access, and quality of
service) remain unresolved and may impact the growth of Internet use. Because
global commerce and online exchange of information on the Internet and other
similar open wide area networks are new and evolving, it is difficult to predict
with any assurance whether the Internet will prove to be and remain a viable
commercial marketplace. If the infrastructure necessary to support the
Internet's commercial viability is not developed, or if the Internet does not
become a viable marketplace, the Company's business, operating results and
financial condition would be materially and adversely affected. See
"Business--Industry Overview."
RISK OF CHANGING TECHNOLOGY
The services the Company offers and the services and products the Company
expects to offer in the future, are impacted by rapidly changing technology,
evolving industry standards, emerging competition and frequent new service,
software and other product introductions. There can be no assurance
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that the Company can successfully identify new business opportunities and
develop and bring new services or products to market in a timely and
cost-effective manner, or that services, products or technologies developed by
others will not render the Company's services or products noncompetitive or
obsolete. In addition, there can be no assurance that services, products or
enhancements introduced by the Company will achieve or sustain market acceptance
or be able to effectively address compatibility, inoperability or other issues
raised by technological changes or new industry standards.
Required technological advances by the Company as the industry evolves will
likely include the ability to incorporate full-motion video, and the integration
of video, voice, data and graphics in Web sites. The Company's pursuit of these
technological advances will also likely require the Company to seek assistance
from third parties. There can be no assurance that the Company will succeed in
incorporating these features in Web sites. See "Business--Industry Overview."
INTELLECTUAL PROPERTY RIGHTS; RISK OF INFRINGEMENT; POSSIBLE LITIGATION
The Company believes that its success in its core business of Web site
design and creation is not dependent upon patents, copyrights or trademarks and
the Company does not currently have any registered patents, copyrights or
trademarks. Consequently, the Company relies solely on a combination of
common-law and statutory law to protect its proprietary information and
know-how. The Company also utilizes technology owned by third parties. There can
be no assurance that licenses for any technology developed by third parties that
might be required for the Company's services would be available on reasonable
terms, if at all.
Although the Company does not believe that its services infringe the
proprietary rights of any third parties, there can be no assurance that third
parties will not assert claims based on these services against the Company in
the future or that any of those claims would not be successful. In addition,
many of the Company's competitors rely upon trade secret law. Litigation may be
necessary in the future to enforce the Company's intellectual property rights
and to protect its proprietary information, to determine the validity and scope
of the proprietary rights of others, or to defend against claims of infringement
or invalidity. Litigation of this nature, whether or not successful, could
result in substantial costs and diversions of resources, either of which could
have a material adverse effect on the Company's business, financial condition
and operating results. Furthermore, parties making claims against the Company
could secure a judgment awarding substantial damages, as well as injunctive or
other equitable relief which could directly or indirectly prohibit the Company
from providing certain services and products. A judgment of this nature could
have a material adverse effect on the Company's business, financial condition
and results of operations.
RISK OF DEFECTS; LACK OF INSURANCE COVERAGE
Web site services and other services based on software and computing systems
often encounter development and completion delays and the underlying software
may contain undetected errors or failures when introduced and, in the case of
Web sites, when the volume of traffic on a site increases. In addition, there
can be no assurance that errors will not be found in the software underlying a
Web site, resulting in delays in the completion of a Web site or other project,
the commercial release of particular services or products, and the market
acceptance thereof, or unanticipated costs to cure any defect if it is subject
to cure, to refund money paid to the Company or to pay for damages caused by the
delay or defect, any of which could have a material adverse effect on the
Company's business, financial condition and operating results, especially since
the Company lacks errors and omissions insurance and business interruption
insurance that might otherwise be available to mitigate such costs.
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DEPENDENCE ON KEY PERSONNEL; NEED FOR ADDITIONAL PERSONNEL
The Company's success depends to a significant extent upon its senior
management, David J. Centner, Douglas E. Cleek, Bradley K. Szollose and Matthew
G. de Ganon and their ability to operate effectively, both independently and as
a group. None of the Company's senior management has any prior executive
management experience. The Company has entered into employment agreements with
these individuals that take effect upon consummation of this offering. The loss
of any of these members of senior management could have a material adverse
effect upon the Company's business, financial condition and operating results.
The Company does not currently carry key person life insurance on its executive
management personnel, but intends to insure the lives of David J. Centner and
Matthew G. de Ganon for $1,000,000 each upon consummation of this offering.
Although the employment agreements contain non-compete and non-disclosure
provisions, the Company's ability to benefit from them is uncertain since
non-compete covenants typically must be limited in geographic scope to be
enforceable. Restrictions limited in geographic scope may not effectively
prohibit competition with the Company because of the global nature of the
Internet.
The Company generally lacks employment agreements with the rest of its
employees. If one or more of the Company's employees resigns from the Company to
join a competitor or to form a competing company, any resulting loss of existing
or potential customers or other unauthorized disclosure or use of the Company's
proprietary information, technical knowledge, practices, procedures or customer
lists could also have a material adverse effect on the Company's business,
financial condition and operating results.
The Company believes that its future success will depend in large part upon
its ability to attract and retain additional highly skilled creative, technical,
financial and strategic marketing personnel. Competition for such personnel,
especially creative talent, is intense. The Company hired a Controller in April
1996, and intends to identify and hire a Chief Financial Officer after the
consummation of this offering. There can be no assurance the Company will be
successful in attracting and retaining such personnel, and the failure to do so
could have a direct and immediate material adverse effect on the Company's
business, financial condition and operating results. See "Management."
ABILITY TO MANAGE GROWTH
Since the Company shifted its primary business focus to Web site design and
creation, there has been substantial growth in the number of employees and in
increased (i) responsibility for both existing and new management personnel,
(ii) strain on the Company's existing management, administrative, operational,
financial and technical resources and (iii) demands on its management
information systems and controls. There can be no assurance that the Company
will effectively develop and implement systems, procedures or controls adequate
to support the Company's operations or that management will be able to achieve
the rapid execution necessary to fully exploit the opportunity for the Company's
services. To manage its business and any growth, the Company must continue to
implement and improve its operational and financial systems and continue to
expand, train and manage its employees. In particular, management believes that
the Company will need to hire additional qualified administrative and management
personnel in the accounting and finance areas to establish and manage financial
control systems. If the Company is unable to manage its business effectively,
the Company's business, operating results and financial condition will be
materially adversely affected.
COMPETITION; NO SUBSTANTIAL BARRIERS TO ENTRY INTO THE COMPANY'S BUSINESS; PRICE
EROSION
The markets for the Company's services are highly competitive and are
characterized by pressures to reduce prices, incorporate new capabilities and
accelerate completion schedules. The Company expects competition for its
services to intensify in the future, partly because there are no substantial
barriers to entry into the Company's business. There can be no assurance that
the Company will be able to offset the effects of any resulting price reductions
with an increase in the number of its customers or projects, higher revenue from
enhanced services or products, cost reductions or otherwise and its failure to
do so could have a material adverse effect on its business, financial condition
and operating results.
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The Company faces competition from a number of sources, including potential
customers that perform Web site development services in-house. These sources
also include other Web site service boutique firms, communications, telephone
and telecommunications companies such as Telecommunications Inc., computer
hardware and software companies such as Microsoft Corporation and Adobe Systems
Incorporated, established online services companies, advertising agencies,
direct access Internet and Internet-services and access providers as well as
specialized and integrated marketing communication firms such as CKS Group, Inc.
and Eagle River Interactive, Inc., all of which are entering the Web site design
and creation market in varying degrees and are competing with the Company, and
many of which have announced plans to offer expanded Web site design and
creation services. Many of the Company's competitors or potential competitors
have longer operating histories, longer customer relationships and significantly
greater financial, management, technological, development, sales, marketing and
other resources than the Company. The Company's ability to retain relationships
with Channel Sources and its customers and generate new customers and Channel
Sources depends to a significant degree on the quality of its services and its
reputation, as compared with the quality of services provided by and the
reputations of the Company's competitors. The Company also competes on the basis
of creative talent, price, reliability of services and responsiveness. There can
be no assurance that the Company will be able to compete and its inability to do
so would have a material adverse impact on the Company's business, financial
condition and operating results. See "Business-- Competition."
GOVERNMENT REGULATION, LEGAL UNCERTAINTIES AND REGULATORY POLICY RISKS
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to Web site service
companies. However, due to the increasing media attention focused on the
Internet, it is possible that a number of laws and regulations may be adopted
with respect to the Internet, covering issues such as user privacy, and pricing
and characteristics and quality of products and services. The adoption of any
such laws or regulations may decrease the growth of the Internet, which could in
turn decrease the demand for the Company's services and products and increase
the Company's cost of doing business or cause the Company to modify its
operations, or otherwise have an adverse effect on the Company's business,
operating results and financial condition. Moreover, the applicability to the
Internet of existing laws governing issues such as property ownership, libel and
personal privacy is uncertain. The Company cannot predict the impact, if any,
that future regulation or regulatory changes may have on its business. In
addition, Web site developers such as the Company face potential liability for
the actions of customers and others using their services, including liability
for infringement of intellectual property rights, rights of publicity,
defamation, libel and criminal activity under the laws of the U.S. and foreign
jurisdictions. Moreover, the Company lacks errors and omissions insurance. Any
imposition of liability could have a material adverse effect on the Company.
The Communications Decency Act of 1996 (the "1996 Act"), which became
effective on February 8, 1996, imposes criminal liability on persons sending or
displaying in a manner available to minors indecent material on an interactive
computer service such as the Internet. The 1996 Act also imposes criminal
liability on an entity knowingly permitting facilities under its control to be
used for those activities. The penalties imposed by the 1996 Act include fines
and imprisonment. Although the Third Circuit Court of Appeals recently
preliminarily enjoined the enforcement of portions of the 1996 Act, that ruling
is expected to result in a trial or an expedited appeal to the United States
Supreme Court. If upheld, the interpretation and enforcement of these provisions
are uncertain. This legislation may decrease demand for Internet access, chill
the development of Internet content, or have other adverse effects on Web site
service providers such as the Company. In addition, in light of the uncertainty
of the interpretation and application of this law, there can be no assurance
that the Company would not have to modify its operations to comply with the
statute. The impact of the 1996 Act on the Company and its business cannot be
predicted. See "Business--Government Regulation."
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NO ASSURANCE OF PUBLIC MARKET; ARBITRARILY DETERMINED OFFERING PRICE
Prior to this offering, there has been no market for the Common Stock or the
Warrants. Consequently, the offering prices of the Common Stock and Warrants
have been determined arbitrarily by negotiations between the Company and the
Representative and are not necessarily related to the Company's asset value, net
worth or other established criteria of value. There can be no assurance that a
regular trading market will develop or that if developed, will be sustained. In
the absence of a trading market, an investor may be unable to liquidate its
investment. See "Underwriting."
NO DIVIDENDS
The Company does not intend to declare any dividends on its Common Stock in
the foreseeable future. See "Dividend Policy."
CONTROL BY MANAGEMENT; VOTING AGREEMENT
Following the sale of the Units offered hereby, the directors and executive
officers of the Company will own approximately 54% of the Company's outstanding
Common Stock. As a result of a 10-year Voting Agreement to be entered into by
Messrs. Centner, de Ganon, Cleek and Szollose upon the consummation of the
offering, Matthew de Ganon will have voting control over all of these shares,
except that these shares will be required to be voted in favor of the election
as directors of Messrs. Centner, de Ganon, Cleek and Szollose. Consequently, Mr.
de Ganon will be in a position to control all other matters requiring approval
by the stockholders of the Company, including the approval of significant
corporate matters, such as a merger, consolidation or sale of all or
substantially all of the Company's business or assets. In addition, the Voting
Agreement will grant each party thereto a right of first refusal as to the sale
of the others' Common Stock. See "Management--Voting Agreement."
AUTHORIZATION OF PREFERRED STOCK AND OTHER ANTI-TAKEOVER DEVICES
The Board of Directors is also authorized to issue shares of preferred stock
and to fix the relative voting, dividend, liquidation, conversion, redemption
and other rights, preferences and limitations thereof without any further vote
or action of the stockholders. The issuance of preferred stock could adversely
affect the voting power or other rights of the holders of Common Stock. In the
event of issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change of
control of the Company. Although the Company has no present intention to issue
any preferred stock, there can be no assurance that the Company will not do so
in the future. The Company's certificate of incorporation and by-laws contain
other provisions that may discourage, delay or prevent a change of control of
the Company that a stockholder might consider to be in the stockholder's best
interest, including those that might result in a premium over the market price
of the Company's securities should a market develop. See "Description of
Securities."
IMMEDIATE SUBSTANTIAL DILUTION
Upon completion of this offering, there will be an immediate and substantial
dilution of the net tangible book value of the Company from the public offering
price of the Common Stock (assuming no value is attributed to the Warrants
included in the Units). As of March 31, 1996, the Company had a pro forma net
tangible book value (as adjusted to reflect the sale of Common Stock in a
private placement subsequent thereto and the net proceeds therefrom) of
$688,622. After giving effect to the receipt of the net proceeds from this
offering, the pro forma as adjusted net tangible book value as of March 31, 1996
would have been $5,408,622. As a result, the public investors will suffer an
immediate dilution of $4.45 per share which represents approximately 74% of the
initial public offering price of the Common Stock (assuming no value is
attributed to the Warrants included in the Units). See "Dilution."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS
The Warrants will be redeemable in whole or in part at the Company's option
at a price of $.05 per Warrant upon not less than 30 days' written notice if the
closing price of the Common Stock has been equal to or greater than 140% of the
then exercise price of the Warrants for 20 consecutive trading days
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ending on the fifth day prior to the notice of redemption. Holders' rights to
exercise the Warrants will terminate on the redemption date thereof, depriving
holders of any value except the right to receive the redemption price of the
Warrants. Notice of redemption of the Warrants could force the holders to
exercise the Warrants and to pay the exercise price at a time when it may be
disadvantageous to do so, to sell the Warrants at the current market price when
they might otherwise wish to hold the Warrants, or to accept the redemption
price which is likely to be substantially less than the market value of the
Warrants at the time of the redemption. See "Description of
Securities--Warrants."
SHARES ELIGIBLE FOR FUTURE SALE
All of the 2,495,482 shares of Common Stock outstanding as of the date of
this Prospectus are "restricted securities," as that term is defined under Rule
144 promulgated under the Securities Act. Of those shares, an aggregate of
947,740 shares owned by Messrs. Cleek and Szollose have been held for the
minimum two year period required by Rule 144 and will be eligible for public
sale pursuant to Rule 144 commencing 90 days after the date of this Prospectus.
The two-year holding period will expire with respect to 473,870 shares owned by
Mr. Centner and 473,870 shares owned by Mr. de Ganon in January 1997 and July
1997, respectively. Messrs. Centner, Cleek, Szollose and de Ganon have agreed,
however, not to sell any of their shares of Common Stock until July 25, 1998 (24
months from the date hereof) without the Representative's prior written consent.
The remaining 600,002 shares are included in the Registration Statement of which
this Prospectus is a part but the holders thereof have agreed not to sell these
shares within one year of the date of this Prospectus unless the Nasdaq
SmallCapTM Market's requirement to extend such lock-ups to one year is deemed to
be improper by the applicable governmental authority, in which case such shares
may not be sold within six months of the date of this Prospectus without the
Representative's prior written consent. The original holders purchased 200,000
of such shares at $1.25 per share in February 1996 and 400,002 of such shares at
$1.75 per share in May 1996 from the Company. The Company has also agreed to
sell to the Representative and its designees warrants to purchase up to 100,000
Units and to register the Common Stock and Warrants comprising the Units under
the Securities Act, together with the Common Stock underlying the Warrants
included in those Units. No prediction can be made as to the effect, if any,
that sales of such Common Stock or its availability for sale will have on the
market prices prevailing from time to time of the securities offered hereby or
on the Company's ability to raise capital. See "Selling Stockholders and Plan of
Distribution," "Certain Transactions--Private Placements," "Shares Eligible for
Future Sale" and "Underwriting."
RESTRICTIONS ON EXERCISE OF THE WARRANTS
The sale by the Company of Common Stock on any exercise of the Warrants must
be registered, or exempt from registration, under applicable federal and state
securities laws. The Warrants will not be exercisable if any required
registration or exemption has not been obtained. The Company may decide not to
seek or may not be able to obtain qualification of the issuance of such Common
Stock in all of the states in which the holders of the Warrants reside. In such
a case, the Warrants held by such holders will expire and have no value if such
Warrants cannot be sold. In addition, Warrants will not be exercisable at any
time during which the Company does not have a current prospectus relating
thereto effective under the Securities Act. The maintenance of a current
prospectus could result in substantial expense to the Company, and there can be
no assurance that the Company will be able to maintain a current effective
prospectus. The Warrants may be deprived of any value if the current prospectus
covering the shares underlying the Warrants is not kept effective or if such
underlying shares are not or cannot be registered in the applicable states. See
"Description of Securities--Warrants."
RISKS ASSOCIATED WITH THE FAILURE TO MEET MAINTENANCE CRITERIA OF THE NADAQ
SMALLCAPTM MARKET AND THE BOSTON STOCK EXCHANGE
The National Association of Securities Dealers, Inc. (the "NASD"), which
administers The Nasdaq SmallCapTM Market, requires that in order to continue to
be included in The Nasdaq SmallCapTM Market, a company must maintain $2 million
in total assets, a $200,000 market value of
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the public float and $1 million in total capital and surplus. In addition,
continued inclusion requires, among other things, two market-makers and a
minimum bid price of $1.00 per share; provided, however, that if a company falls
below such minimum bid price, it will remain eligible for continued inclusion if
the market value of the public float is at least $1 million and the Company has
$2 million in capital and surplus. The Boston Stock Exchange also has standards
that must be maintained for continued listing. The failure to meet these
maintenance criteria in the future may result in the discontinuance of the
inclusion of the Units, the Common Stock and the Warrants in The Nasdaq
SmallCapTM Market or the delisting of them from the Boston Stock Exchange. In
such event, trading, if any, in the Units, the Common Stock and the Warrants may
then continue to be conducted in the non-Nasdaq over-the-counter market in what
is commonly referred to as the "bulletin board." As a result, an investor may
find it more difficult to dispose of, or to obtain accurate quotations as to the
market value of, the Units, the Common Stock and the Warrants.
In the event that securities issued by the Company cease to be included in
The Nasdaq SmallCapTM Market or listed on the Boston Stock Exchange, sales of
such securities will be within the scope of a Securities and Exchange Commission
rule that imposes additional sales practice requirements on broker-dealers who
sell such securities to persons other than their established customers and
institutional accredited investors. For transactions covered by the rule, the
broker-dealer must make a special suitability determination for the purchaser
and receive the purchaser's written agreement to the transaction prior to the
sale. Consequently, the rule may affect the ability of broker-dealers to sell
the Company's securities and also may affect the ability of purchasers in this
offering to sell their securities in a secondary market, if such market were to
develop.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Units offered hereby
are estimated to be $4,720,000, after deducting underwriting discounts and
estimated offering expenses of approximately $1,280,000, from gross proceeds of
$6,000,000. The principal purposes of this offering are to increase the
Company's working capital, capitalization and financial flexiblity, to provide a
public market for the Company's securities and to facilitate future access to
public capital markets. The Company currently expects to use the net proceeds
for working capital and general corporate purposes and only in connection with
the business as described in this Prospectus, including to (i) increase the
Company's sales, marketing, production and programming staff, (ii) pay for
increased occupancy costs as a result of its recent move, (iii) open a new sales
office in Germany and (iv) finance research and development activities. The
Company may also use a portion of the net proceeds to acquire products or
companies that complement the Company's business. While the Company from time to
time may evaluate potential acquisitions, no such transactions are presently
contemplated.
The foregoing represents the Company's best estimate of its use of the net
proceeds of this offering, based upon present planning, industry, economic and
business conditions, and the Company's estimated future revenues and
expenditures. Specific dollar amounts for the use of proceeds are not provided
above since the Company may change its use of proceeds in response to
unanticipated events such as increased expenses, growth or competition or new
attractive opportunities, which may cause the Company to redirect its priorities
and to reallocate a portion of the proceeds or use portions thereof for other
purposes, or to seek additional debt or equity financing or curtail its business
activities. See "Risk Factors--Fluctuations in Quarterly Operating Results, Cash
Requirements and Margins."
The Company anticipates that the net proceeds of this offering together with
available funds and cash expected to be generated by operations will be adequate
to fund the Company's currently proposed activities for at least one year.
Pending application of the net proceeds of this offering as described above, the
Company intends to invest those proceeds in short-term, investment grade,
interest-bearing instruments. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
18
<PAGE>
DILUTION
The difference between the public offering price per share of Common Stock
included in the Units and the adjusted net tangible book value per share of
Common Stock after this offering constitutes the dilution to investors in this
offering. Net tangible book value per share is determined by dividing the net
tangible book value (total assets less intangible assets and total liabilities)
by the number of outstanding shares of Common Stock. The following discussion
and tables allocate no value to the Warrants and the Common Stock issuable upon
exercise thereof.
At March 31, 1996, the Company had a pro forma net tangible book value of
$688,622 or $.28 per share of Common Stock, after giving effect to the receipt
of net proceeds totalling approximately $620,000 subsequent thereto from the
sale of Common Stock in a private placement. After giving effect to the sale of
the securities offered hereby at an assumed offering price of $6.00 per share
(less underwriting discounts and estimated expenses of this offering) and
allocating no value to the Warrants, the as adjusted pro forma net tangible book
value of the Company at March 31, 1996 would have been $5,408,622 or $1.55 per
share of Common Stock, representing an immediate increase in net tangible book
value of $1.27 per share to existing stockholders and an immediate dilution of
$4.45 per share to new investors or 74%. See "Certain Transactions--Private
Placements."
The following table indicates the per share dilution to be incurred by the
investors in this offering.
<TABLE>
<CAPTION>
<S> <C> <C>
Public offering price per Unit............................... $6.00
Pro forma net tangible book value per share at March 31,
1996......................................................... .28
Increase per share attributable to new investors........... 1.27
----
As adjusted pro forma net tangible book value per share after
giving effect to this offering............................... 1.55
-----
Dilution in net tangible book value per share to new
investors.................................................... $4.45
-----
-----
</TABLE>
If the Representative's over-allotment option is exercised in full, the
increase per share attributable to new investors, the as adjusted pro forma net
tangible book value per share and the dilution in net tangible book value per
share to new investors would be $1.42, $1.70 and $4.30, respectively.
The following table summarizes the number and percentage of shares of Common
Stock purchased from the Company, the amount and percentage of the consideration
paid, and the average price per share paid by existing stockholders and by new
investors pursuant to this offering.
<TABLE>
<CAPTION>
SHARES
PURCHASED CONSIDERATION PAID(1) AVERAGE
-------------------- --------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders....................... 2,495,482 71.4% $ 985,000 14.1% $0.39
New Investors............................... 1,000,000 28.6% $6,000,000 85.9% $6.00
--------- ------- ---------- -------
Total................................... 3,495,482 100.0% $6,985,000 100.0%
--------- ------- ---------- -------
--------- ------- ---------- -------
</TABLE>
- ------------
(1) Excludes non-cash consideration consisting of the contribution of all of the
partnership interests in the general partnership predecessor of the Company
and includes $25,000 of non-cash consideration consisting of the
contribution of a loan due from the Company. See "Certain Transactions--
Formation and Financing of the Company."
In addition, holders of the Warrants may incur additional dilution on the
exercise thereof.
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (a) as of
March 31, 1996, (b) as of March 31, 1996, pro forma to give effect to the
receipt of net proceeds of approximately $620,000 from the sale of 400,002
shares of Common Stock in a private placement in May 1996, and (c) pro forma as
of March 31, 1996 as adjusted to reflect the sale of the securities offered
hereby and the application of the estimated net proceeds therefrom. This
information should be read in conjunction with the Company's historical
financial statements and related notes appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------------------
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current portion of long-term debt......................... $ 55,708 $ 55,708 $ 55,708
Long-term debt, net of current portion.................... 46,382 46,382 46,382
----------- ----------- -----------
Total debt.............................................. 102,090 102,090 102,090
----------- ----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value per share; 1,000,000
shares authorized; no shares issued and outstanding... 0 0 0
Common stock, $.01 par value per share, 9,000,000 shares
authorized; 2,095,480 shares issued and outstanding;
2,495,482 shares issued and outstanding, pro forma;
and 3,495,482 shares issued and outstanding, as
adjusted.................................................. 20,955 24,955 34,955
Additional paid-in capital................................ 170,995 786,395 5,496,395
Retained earnings (deficit)............................... (122,728) (122,728) (122,728)
----------- ----------- -----------
Total stockholders' equity................................ 69,222 688,622 5,408,622
----------- ----------- -----------
Total Capitalization.................................. $ 171,312 $ 790,712 $ 5,510,712
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
DIVIDEND POLICY
The Company does not expect to pay dividends in the foreseeable future as
any earnings are expected to be retained to finance the Company's growth.
Declaration of dividends in the future will remain within the discretion of the
Company's Board of Directors, which will review its dividend policy from time to
time.
20
<PAGE>
SELECTED FINANCIAL DATA
The following financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto included in this
Prospectus. The data insofar as it relates to each of the years 1994 and 1995
have been derived from audited financial statements and notes thereto appearing
elsewhere herein. The data for the three months ended March 31, 1995 and 1996
have been derived from unaudited financial statements which, in the opinion of
management, include all adjustments, consisting of only normally recurring
adjustments, necessary for a fair statement of the results for unaudited interim
periods. The Company was founded in 1993 and entered into its first Web site
design and creation transaction with a customer in 1994. Accordingly, and
recognizing that the Company has engaged in its current primary line of business
only for approximately two years, the Company has a limited operating history
upon which an evaluation of the Company and its prospects can be based.
Management therefore believes that period-to-period comparisons of the Company's
results of operations are not indicative of future results. In addition,
operating results for the three months for the ended March 31, 1996 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1996.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
FISCAL YEAR ENDED MARCH 31,
DECEMBER 31, (UNAUDITED)
---------------------- ----------------------
1994 1995 1995 1996
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Revenues........................................ $249,379 $1,196,208 $ 33,639 $ 512,434
Direct Salaries and Costs....................... 215,865 957,027 68,152 499,109
-------- ---------- -------- ----------
Gross Profit (Loss)............................. 33,514 239,181 (34,513) 13,325
Selling, General and Administrative Expenses.... 73,601 200,931 12,449 125,958
Depreciation.................................... 13,013 24,485 4,779 9,113
-------- ---------- -------- ----------
Income (loss) from operations............... (53,100) 13,765 (51,741) (121,746)
Interest expense, net........................... 0 869 319 982
-------- ---------- -------- ----------
Income (loss) before provision for income
taxes........................................... (53,100) 12,896 (52,060) (122,728)
Pro Forma income tax expense(1)................. 0 0 0 0
Pro Forma net income (loss)(1).................. $(53,100) $ 12,896 $(52,060) $ (122,728)
-------- ---------- -------- ----------
-------- ---------- -------- ----------
Pro Forma net income (loss) per equivalent
common share(1)............................... $ .01 $ (.06)
---------- ----------
---------- ----------
Common Stock and equivalent common stock
outstanding..................................... 1,946,373 2,013,040
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
(UNAUDITED)
------------------------------------------
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
-------- ------------ --------------
<S> <C> <C> <C>
Working Capital (deficit)................................ $(23,472) $ 595,928 $5,315,928
Total assets............................................. $559,174 $ 1,178,574 $5,898,574
Stockholders' equity..................................... $ 69,222 $ 688,622 $5,408,622
</TABLE>
- ------------
(1) For the period from inception, March 1, 1993, through December 31, 1994, the
Company operated as a partnership. Effective January 1995 the Company
elected to be taxed as an S Corporation under the provisions of the Internal
Revenue Code of 1986. Effective January 1996, the Company's S Corporation
election was voluntarily revoked, subjecting the Company to corporate income
taxes subsequent to that date. Pro forma income tax expense, pro forma net
income (loss) and pro forma net income (loss) per equivalent common share
represent the Company's income tax position had the Company been a C
Corporation for all periods presented.
(2) Adjusted to reflect the sale of 400,002 shares of Common Stock in a private
placement subsequent to March 31, 1996.
(3) As further adjusted to reflect the sale of 1,000,000 Units offered by the
Company hereby and the application of the estimated net proceeds therefrom.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following presentation of management's discussion and analysis of the
Company's financial condition and results of operations should be read in
conjunction with the Company's Consolidated Financial Statements, the
accompanying notes thereto and other financial information appearing elsewhere
in this Prospectus.
OVERVIEW
The Company was founded in 1993 as a general partnership and initially
operated a traditional graphic design business. The Company was hired to design
a graphical user interface in March 1994 for Sierra Magazine Online, a
proprietary online service, and in August 1994 for NetMarket Inc., the first
company to perform a secure online transaction on the Internet, at which time
the Company shifted its principal business to Web site design and creation. In
January 1995, the Company was reorganized as a New York corporation that elected
to be treated as an S corporation for tax purposes. In January 1996 the Company
was reorganized as a Delaware holding company and the New York corporation
became a wholly-owned operating subsidiary thereof and thus ceased to be an S
corporation for tax purposes. For financial reporting purposes, the Company's
Consolidated Financial Statements include the Company and its wholly-owned
subsidiary.
Since the Company has engaged in its current primary line of business only
for approximately two years, the Company has a limited operating history upon
which an evaluation of the Company and its prospects can be based. Management
therefore believes that period-to-period comparisons of the Company's results of
operations are not indicative of future results. In addition, operating results
for the three months ended March 31, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996. See "Risk
Factors--Recent Operating Losses; Limited Operating History; Early Stage of
Development" and "Risk Factors--Fluctuations in Quarterly Operating Results,
Cash Requirements and Margins."
RESULTS OF OPERATIONS
General
Web site design and creation projects for which the Company has been engaged
have generally been completed within six to eight weeks, although certain past,
current and future projects have taken and are expected to take longer to
complete. Revenues are recognized on the completed contract method on an
individual project basis. Provisions for any estimated losses on uncompleted
projects are made in the period in which such losses are determinable. A
substantial portion of the Company's revenues have been generated on a fixed fee
for service basis. See "Risk Factors--Profit Exposure on Certain Types of
Contracts; Risk of Cancellation."
The Company has increased and is currently increasing its expense levels to
accommodate its past growth and anticipated growth in its business, including
substantially increasing the number of employees, relocating its offices and
investing in equipment. The Company's failure to expand its business in an
efficient manner could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, there can be no
assurance that the Company's revenues will continue to grow at a rate that will
support its increasing expense levels.
See "Risk Factors--Uncertain Adoption of Internet as a Medium of Commerce
and Communications; Dependence on Internet," "Risk Factors--Risk of Changing
Technology," "Risk Factors-- Evolving Marketing Strategy," "Risk
Factors--Conflicts of Interest; Restrictions," "Risk Factors-- One-Time
Customers" and "Risk Factors--Relationship with MCI As Only Significant Channel
22
<PAGE>
Source" for a discussion of other uncertainties that may adversely affect the
Company's business, operating results and financial condition.
The Company has also generated a significant portion of its revenues through
project fees on a fixed fee for service basis. In 1995 and in the three months
ended March 31, 1996, approximately 34% and 10% of the Company's revenues,
respectively, were attributable to fixed price projects and the remainder was
attributable to time-and-material priced projects. In addition, the Company's
non-binding letter of intent with the New Jersey Sports and Exposition Authority
(the "NJ Authority") provides that the Company's fees for projects pursuant
thereto will be paid from the proceeds of advertising revenues generated by Web
sites created for the NJ Authority. The Company assumes greater financial risk
both on fixed-price contracts and contracts dependent upon advertising revenues
to pay the Company's fees than on either time-and-material or cost-reimbursable
contracts. Failure to anticipate technical problems, estimate costs accurately
or control costs during performance of a fixed-price contract, and failure to
generate advertising revenues in connection with contracts dependent thereon to
pay the Company's fees, which may be dependent upon the ability of the Company's
customer, may reduce the Company's profit or cause a loss. A material shift away
from the fixed-fee based projects to more time-and-materials projects, however,
could also have an adverse effect on the Company's operating profit margin to
the extent that fixed-fee based projects sometimes reflect a premium over
time-and-materials costs of those projects. See "Risk Factors--Profit Exposure
on Certain Types of Contracts; Risk of Cancellation."
The changes in the various line-items discussed below result from the
increase in the Company's revenues since it shifted its principal business to
Web site design and creation and the attendant increases in expenses.
Revenues
Revenues for the years ended December 31, 1995 and 1994 were $1,196,208 and
$249,379, respectively, and revenues for the three months ended March 31, 1996
(the "1996 Quarter") and March 31, 1995 (the "1995 Quarter") were $512,434 and
$33,639, respectively. In fiscal 1994 and in the 1995 Quarter, substantially all
of the Company's revenues were generated by traditional graphic design services.
The Company did not generate a significant portion of its revenue from its Web
site services until later in fiscal 1995, during which year approximately 80% of
revenues were generated from Web site design and creation services. During the
1996 Quarter substantially all of the Company's revenues were generated from Web
site design and creation services. The Company expects that the ratio of
revenues derived from Web site services as compared to revenues derived from
traditional graphic design services will continue to increase, since the Company
expects to continue to focus its resources on promoting its Web site services
and to limit its traditional graphic design services to those provided in
conjunction with Web site services.
In addition, the Company expects that its revenues and its gross profit
margins in the quarter ending June 30, 1996 will be comparable to those in the
1996 Quarter and that it will incur a loss in the June 30 quarter substantially
higher than that in the 1996 Quarter. The increased loss on flat revenues is
expected primarily because (i) the Company's executive management devoted
substantially more time to sales and marketing in the 1996 Quarter as compared
to the June 30 quarter as a result of the demands on their time relating to this
offering in the June 30 quarter and (ii) the Company continued to incur
increased expenses related to new personnel, the relocation of its offices and
research and development in the June 30 quarter.
Direct Salaries and Costs
Direct salaries and costs include all direct labor costs and other direct
costs related to project performance, such as independent contractors, freelance
labor, supplies, and printing and equipment costs. The Company's direct salaries
and costs for the year ended December 31, 1995 were $957,027,
23
<PAGE>
and consisted primarily of approximately $405,000 paid to freelance artists and
other independent contractors (approximately half of which was paid to a vendor
of complex computer programming services required for special features on Web
sites), and secondarily of approximately $300,000 paid as direct salaries. The
Company's direct salaries and costs for the year ended December 31, 1994 were
$215,865 and consisted primarily of approximately $110,000 of printing and film
processing costs and of approximately $80,000 paid as direct salaries.
The Company's direct salaries and costs for the 1996 Quarter were $499,109
and consisted primarily of approximately $260,000 paid to freelance artists and
other independent contractors (approximately $150,000 of which was paid to a
vendor of complex computer programming services) and approximately $210,000 paid
as direct salaries. During the 1996 Quarter, the Company hired three full-time
computer programmers skilled in various computer operating systems, tools and
languages, who are responsible for periodically assessing new technologies and
to provide complex computer programming for special features on Web sites. The
Company expects that it will hire additional programmers in anticipation of
future projects and will consequently incur increased direct costs in both (i)
absolute dollars and (ii) as a percentage of revenues, until such time, if ever,
that revenues increase. In the 1995 Quarter, the Company's direct salaries and
costs were $68,152 and consisted of payments for complex computer programming
services, freelance artists and other outside labor, printing and film
processing costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the year ended December 31,
1995 were approximately $201,000 and primarily consisted of professional fees,
occupancy costs, travel, office expenses and supplies and marketing and
advertising, among other things. Selling, general and administrative expenses
for the year ended December 31, 1994 were approximately $74,000 and primarily
consisted of occupancy costs, office expenses and supplies and travel. Selling,
general and administrative expenses for the 1996 Quarter were $125,958 and
primarily consisted of the same types of expenses as those incurred during
fiscal 1995. During the 1995 Quarter, selling, general and administrative
expenses were $12,449 and primarily consisted of professional fees, occupancy
costs and office expenses.
In addition, the Company expects to open additional sales offices, including
one in Germany. As a result of any such expansion, the Company's selling,
general and administrative expenses, particularly occupancy costs and office
expenses and supplies, are expected to increase.
Depreciation
Depreciation expense was $24,485 and $13,013 in the years ended December 31,
1995 and 1994, respectively, and $9,113 and $4,779 in the 1996 Quarter and the
1995 Quarter respectively, and related to depreciation of equipment and
leasehold improvements. The Company expects that depreciation expense in 1996
will increase significantly as a result of depreciation of the Company's
equipment and leasehold improvements anticipated in connection with the
relocation of its offices. See "Business-- Properties."
Income Taxes
The Company operated as a partnership during the year ended December 31,
1994. As a result, the partners were individually liable for federal and state
income taxes on the Company's taxable income. Effective January 1995, the
Company elected to be treated as an S Corporation for federal income tax
purposes. As a result, the shareholders were individually liable for federal
income tax on the Company's taxable income. In January 1996, the Company began
to be treated as a C corporation for federal and state income tax purposes. The
Company is also liable for New York state and city income taxes. See "Certain
Transactions--Formation and Financing of the Company."
24
<PAGE>
SELECTED QUARTERLY OPERATING RESULTS (UNAUDITED)
The following table presents unaudited quarterly financial information for
the period from January 1, 1995 to March 31, 1996. The information has been
derived from the Company's unaudited Consolidated Financial Statements. The
unaudited quarterly financial information has been prepared on the same basis as
the audited Consolidated Financial Statements and includes all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of such information when read in conjunction
with the Company's audited Consolidated Financial Statements and the
accompanying notes thereto appearing elsewhere in this Prospectus. These results
are not indicative of results for any future period. See "Risk
Factors--Fluctuations in Quarterly Operating Results, Cash Requirements and
Margins."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1995 1995 1995 1995 1996
--------- -------- ------------- ------------ ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.......................... $ 33,639 $383,423 $ 301,481 $477,665 $ 512,434
--------- -------- ------------- ------------ ---------
Operating Expenses:
Direct salaries and costs......... 68,152 274,309 268,074 346,492 499,109
Selling, general and
administrative expenses......... 12,449 72,294 53,090 63,098 125,958
Depreciation...................... 4,779 10,147 4,779 4,780 9,113
--------- -------- ------------- ------------ ---------
Total operating expenses.......... 85,380 356,750 325,943 414,370 634,180
--------- -------- ------------- ------------ ---------
Operating income (loss)........... $ (51,741) $ 26,673 $ (24,462) $ 63,295 $(121,746)
--------- -------- ------------- ------------ ---------
--------- -------- ------------- ------------ ---------
</TABLE>
Quarterly revenues and operating results have fluctuated and will fluctuate
as a result of a variety of factors. These factors, some of which have affected
the Company and some of which are beyond the Company's control, include the
timing of the completion, material reduction or cancellation of major projects,
the loss of a major customer or the termination of a relationship with a Channel
Source, timing of the receipt of new business, timing of the hiring or loss of
personnel, changes in the pricing strategies and business focus of the Company
or its competitors, capital expenditures, operating expenses and other costs
relating to the expansion of operations, general economic conditions and
acceptance and use of the Internet. At the present time, the Company has
determined to increase expense levels, which to a large extent are fixed, based
in part on expectations as to future revenues and will base future expense
levels similarly. As a result, operating expenses as a percentage of revenues
have increased in the 1996 Quarter as compared to the prior three quarters.
Revenues and operating results are difficult to forecast because of these
fluctuations and because the Company lacks historical financial data for a
significant number of periods. The Company may be unable to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall.
Any significant shortfall of demand for the Company's services in relation
to the Company's expectations would have an adverse impact on the Company's
business, operating results and financial condition.
The Company's quarterly operating margins may also fluctuate from period to
period depending on the relative mix of lower cost full time employees versus
higher cost independent contractors. Due to the Company's lack of liquidity, the
Company continues to rely more heavily on independent contractors than it
otherwise would (and expects to do so for the foreseeable future), and to the
extent it does so, the Company will continue to incur these increased operating
expenses.
25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's current primary focus is on increasing its Web site business
and the Company continues to hire additional personnel and to increase expenses
related to administration, production, technical resources, marketing, customer
support and infrastructure to enhance and expand its operations. In addition,
the Company had an operating cash flow deficit of $(2,404) in 1995 and of
$(172,575) in the 1996 Quarter, which hampered the Company's ability to expand.
The Company is dependent on the successful completion of this offering for
working capital in order to be competitive, to meet the increasing demands for
service, quality and pricing and for any expansion of its business. While the
Company believes the proceeds of this offering together with cash expected to be
generated by operations will be sufficient to finance its operations for at
least one year, the Company may nevertheless require substantial alternative
financing in order to satisfy its working capital needs, which may be
unavailable or prohibitively expensive since the Company's only assets available
to secure additional financing are accounts receivable. Accordingly, the Company
may not have the funds to relieve its liquidity problems in the one year after
this offering and thereafter, or to finance any expansion of its business.
Net cash used in the Company's operating activities of $(2,404) in the year
ended December 31, 1995 and $(172,575) in the 1996 Quarter related primarily to
the loss during the 1996 Quarter and a substantial increase in accounts
receivable (including an increase in days outstanding from 23 for the year ended
December 31, 1995 to 40 for the quarter ended March 31, 1996) in the later half
of the 1996 Quarter as a result of an increase in revenue as well as a lack of
administrative personnel to focus on the collection of the increased receivable
balance in the 1996 Quarter. That increase was partially offset by an increase
in accounts payable. Delays in collecting accounts receivable have reduced the
Company's cash flow and could in the future aggravate this situation. Net cash
provided by operating activities was $45,160 in the year ended December 31, 1994
and related primarily to accrued compensation that offset the Company's
$(53,100) net loss during that year.
During 1995, the Company obtained a bank loan and a line of credit from two
banks totalling $35,000. The $25,000 bank loan bears interest at a fluctuating
rate of the bank's prime rate plus two percent and is due in October 1996. The
$10,000 line of credit bears interest at the bank's prime rate plus three
percent and each draw is repayable in 36 equal monthly installments of
principal, plus interest. In addition the Company financed the purchase of
certain equipment through capital leases. The principal balance of such leases
was $68,082 at March 31, 1996 and is payable in varying installments through the
year 2000.
Since March 31, 1996, the Company has spent approximately $70,000 on capital
expenditures, consisting of furniture, fixtures and leasehold improvements
acquired and made in connection with the Company's recent relocation of its
principal offices. The Company expects to make additional capital expenditures
of approximately $75,000 during the quarter ending September 30, 1996 consisting
of furniture and computer equipment for its principal offices. Additional
capital expenditures may be made in connection with the opening of additional
sales offices.
In 1996, the Company raised gross proceeds of $950,000 in connection with
two private placements. Any sale of additional equity or convertible debt
securities will result in additional dilution to the Company's stockholders. See
"Certain Transactions--Private Placements."
26
<PAGE>
BUSINESS
GENERAL
Since the Company's business is technical, readers of this Prospectus are
encouraged to refer to "Glossary" on page 53 for a definition of certain terms
used herein.
The Company's primary business is the design and creation of sites ("Web
sites") for commercial organizations on that part of the Internet known as the
World Wide Web. The Company has designed and created, alone and with others,
more than 35 Web sites, including Web sites for the customers of MCI
Telecommunications Corporation ("MCI"), a subsidiary of MCI Communications
Corporation, and for Prudential Securities, America Online Incorporated and
International Business Machines, Inc., among others. Accordingly, management
believes that the Company is a recognized provider of these services.
Web sites are increasingly being utilized as a new medium for advertisement,
promotion and technical support of an organization's products and services. The
Company believes Web sites can provide commercial organizations benefits in
addition to those available through conventional media, including the ability to
engage and entertain consumers, provide in-depth information, reduce selling and
operating costs, expand distribution channels, promote major sporting and
entertainment events and monitor popularity of content and make timely changes
in response to real-time feedback. Web sites also offer businesses the ability
to obtain certain information about visitors to their sites.
The Company was founded in 1993 and initially operated a traditional graphic
design business. In August 1994 the Company shifted its principal business to
Web site design and creation but did not begin to generate significant revenues
therefrom until late 1995. The Company's principal offices are located at The
New York Information Technology Center, 55 Broad Street, New York, New York
10004 and its telephone number is (212) 614-0191. The Company's Web site is
located at http://www.k2design.com.
INDUSTRY OVERVIEW
The Internet and the World Wide Web
The Internet is a global collection of thousands of computer networks
interconnected to enable commercial organizations, educational institutions,
government agencies and individuals to communicate electronically, access and
share information and conduct business. The Internet was historically used by a
limited number of academic institutions, defense contractors and governmental
agencies. Recently, use of the Internet by commercial organizations and
individuals has increased significantly, in part as the result of cultural and
business changes, technological advances, including increases in microprocessor
speed, and the development of easy-to-use graphical user interfaces. "Graphical
user interfaces" in the context of the Internet are the graphics and text that
appear on a computer screen.
Much of the recent growth in Internet use by businesses and individuals has
been driven by the emergence of a network of servers and information available
on the Internet called the World Wide Web. The Web is not only rich in content
and format, containing magazines, news feeds and corporate, product,
educational, research, and political information, it also enables users to
engage in activities, including providing customer service, conducting
electronic commerce and banking, making reservations, playing games and
participating in discussion groups.
Web Sites
A Web site is a collection of one or more electronic documents or "Web
pages," which may contain textual, audio and video information, that are
published in a common format. Each Web site could contain from one to hundreds
of Web pages. Users can view Web pages by using widely available
27
<PAGE>
software called "Web browsers" such as the Netscape Navigator or the Microsoft
Internet Explorer. Users specify which Web sites they wish to view with their
Web browser by entering a site's unique electronic Web address, known as its
Universal Resource Locator ("URL"). Alternatively, users can navigate the Web by
making use of the hypertext link capabilities of Web documents. Hypertext links
are active areas on a Web page which when selected by a user automatically cause
the browser to display a specific page which can be located anywhere else on the
Web, thus enabling users to move from one Web page to another without having to
know the underlying address or URL of either document.
The rapid deployment of the Web has introduced fundamental and structural
changes in the way information can be produced, distributed, gathered and
consumed, lowering the cost of publishing information and extending its
potential reach. Businesses from many industries are publishing product and
company information or advertising materials and collecting customer feedback
and demographic information interactively. The structure of Web documents allows
an organization to publish significant quantities of information while
simultaneously allowing each user to view selectively only those elements of the
information which are of particular interest. This feature makes possible the
dynamic tailoring of information delivery to each user's interest in a cost
effective and timely fashion. The Web, by facilitating the publishing and
exchange of information, is dramatically increasing the amount of information
available to users.
Web sites are increasingly being utilized as a new medium for advertisement,
promotion and technical support of an organization's products and services. The
Company believes Web sites can provide organizations one or more of the
following benefits in addition to those available through conventional media:
Engage and entertain consumers
Web sites can capture and maintain the attention of the target audience in a
way that is not easily achievable with conventional media. Web sites can be
designed to capture a consumer's attention by incorporating a variety of
entertaining motifs, such as games, storylines and interaction with fictional
characters. Web sites also can be designed to retain the audience's attention by
analyzing user responses, determining user interests and providing dynamically
tailored content. Businesses can encourage repeated consumer interaction by
continuously updating online information.
Provide in-depth information
Web sites can offer a wealth of information not easily conveyed through
traditional methods and can provide users with the ability to control the amount
and nature of the information they receive.
Reduce costs
Businesses may seek to reduce selling and operating costs in a variety of
ways with Web sites. For example, a consumer can be introduced to, gather
information regarding, and, in some cases, purchase a company's products
directly through a Web site without the use of salespersons or other
intermediaries.
Expand distribution channels; event promotion
Web sites may enable businesses to open new distribution channels and reach
new audiences. A retailer may seek to create an international presence through
the World Wide Web or a business may seek to promote a major sporting or
entertainment event.
Quantify results
With the use of Web sites, businesses can monitor the popularity of content
and make timely changes in response to real-time feedback. For example, a
company can estimate the volume of traffic on a Web site, gather information
about the visitors to that site and monitor their level of interest in the
company's products and services.
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K2 SERVICES
The Company follows a three-step creative and production process: design,
implementation, and testing. In the design phase the Company conducts a needs
assessment briefing with the customer in order to determine project objectives
and functional specifications of the product and then creates a flow chart
describing general concepts on a page by page basis. The creative approach is
then developed incorporating design, copy, programming and the navigational
system, focused on creating a user friendly Web site. During the implementation
phase, all artwork and copy are developed and digitized. The content is then
produced utilizing various authoring tools and programming languages. Product
testing on all anticipated computer configurations takes place at various stages
of the implementation process. The Company's Web site services also include
assistance in the demographic and marketing analysis relating to the Web site
and its intended purpose and strategic planning for the business use of the Web
site, including identifying other Web sites from which hypertext links could
increase traffic on the customer's Web site and placing those links on the
customer's Web site. The Company also offers special features on Web sites, such
as key-word searching and audio.
To be effective, it is essential that a Web site be more than attractive and
that both the Web site and the information therein be easily accessible and
intuitively organized. As a provider of these services, the Company must combine
creative and technical expertise to meet its customers' needs. The Company's
services add value to Web site projects at every stage, from concept development
through completion. Web sites vary significantly in their size and complexity
and the scope of services rendered by the Company in connection with projects
has ranged from limited consulting services to complete creative and technical
design and construction of multi-level sites, including capture of live video
feeds and audio feeds from remote locations. Should a customer so desire, the
Company also offers numerous integrated services in conjunction with Web site
projects, including traditional graphic design services such as logo design for
the Web site or a particular product, brochures, point-of-sale displays and
other collateral marketing materials and print advertisement design and layout.
The Company recently began to offer media placement services intended to
increase traffic on Web sites, principally by identifying, negotiating for and
purchasing hypertext links from other heavily trafficked Web sites. The Company
believes that if businesses increasingly embrace the Internet as an advertising
vehicle, their participation will subsidize in part the creation and expansion
of the information and resources available on the Web which in turn is expected
to stimulate an increase in the utilization of the Web by businesses. The
Company believes that advertisers will seek to advertise on Web sites that offer
a high volume of traffic and feature flexible advertisement programs capable of
reaching targeted audiences. However, the Internet as an advertising medium is
still evolving and, consequently, advertisers seek demonstration of its
effectiveness to justify its use. Due to the limited information and experience
regarding Web advertising and a general unfamiliarity with the concept of
interactive advertising, advertisers require assistance with the design and
placement of advertisements on the Internet.
Because of the proliferation of new and sophisticated tools and
technologies, the Company believes that many businesses are unsure about whether
to use Web sites and how best to utilize them. The Company believes that its
potential customers will demand creative and technical expertise and attention
to the customers' business objectives from providers of Web site services in
order to realize one or more of the benefits described above.
Creative Expertise
The Company believes that, in addition to the creative elements required in
traditional graphic design, superior Web sites require easy-to-use and intuitive
interfaces, seamlessly integrated technologies and an engaging look and feel.
Management believes that the Company's creative developers are fully capable
across the spectrum of expertise required to meet customers' creative needs. In
order to maintain high levels of creativity and quality, the Company intends to
recruit the best talent available.
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However, competition for creative personnel is especially intense and there can
be no assurance that the Company will attract or retain adequate creative talent
to accomplish these goals. See "Risk Factors-- Dependence on Key Personnel; Need
for Additional Personnel" and "--Ability to Manage Growth."
Technological Expertise
The Company believes the creative application of leading technologies is
also crucial to the success of its business. During the three months ended March
31, 1996, the Company hired three full-time computer programmers skilled in
various computer operating systems, tools and languages, including Basic,
FORTRAN, UNIX, Perl, Java, VRML, VDO and Real Audio, among others. These
programmers are responsible for providing complex computer programming for
special features on Web sites as well as periodically assessing new technologies
in order to identify and deploy, directly and through independent contractors,
those that are most promising for enhancing the Company's business. Although the
Company had previously relied on a single unaffiliated contractor to provide
complex computer programming services for special features on Web sites, the
Company expects its staff programmers to provide most of these services in the
future. To the extent additional complex programming is required the Company
believes that alternative providers of these services are available from the
contractor that provided these services in the past as well as from others, on
terms no less favorable to the Company than it enjoyed with such contractor.
Focus on Customers' Business Objectives
The Company has made understanding customers' business challenges a primary
focus in guiding the design of Web sites to address those challenges. The
Company often works with customers' management to determine how best to
integrate Web sites into the customers' business goals.
COMPLETED PROJECTS
The Company has designed and created, alone and with others, more than 35
Web sites, including:
. Together with Ogilvy & Mather Advertising, the design and creation of
a Web site for International Business Machines, Inc. ("IBM")
(http://www.chess.ibm.park.org), to promote a chess match between Gary
Kasparov and an IBM computer that utilizes a computer chip called "Deep
Blue." The Web site incorporated the capture of live video feed of the
match, real-time chat boards, simultaneous transcription of commentary and
the integration of animation to display the progress of the match. An
article disseminated by Reuters indicated that the Web site received
approximately 5 million hits during the match (hits are an indicator of the
volume of traffic at a Web site).
. The design and creation of a Web site that is Prudential Securities'
Virtual Branch Office (http://www.prusec.com), containing interactive
features such as a wealth accumulation calculator, geographic branch
locator, daily market updates and a financial personality quiz.
. The redesign of the graphics and copy for MCI's marketplaceMCI Web
site (http://www2.pcy.mci.net/marketplace), MCI's online shopping mall.
Morgan Stanley's, "The Internet Report" named the site one of the eight
"coolest Web sites for commerce." During that project, the Company was
engaged by MCI to design and create a virtual retail store in the
marketplaceMCI mall for Champs Sporting Goods and thereafter for related
businesses, Footlocker and Lady Footlocker, and other unrelated businesses.
. The design and creation of a Web site for The Joseph Papp Public
Theater that was originally used to publicize its production of "The
Tempest," starring Patrick Stewart (http://www.publictheater.org). The
Company incorporated the theater's intricate (and already well known)
graphic style into the Web site, which was originally designed to
accommodate several Web browsers, including most versions of the Netscape
Navigator, America Online, Pipeline,
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Mosaic, Spyglass and Chameleon. The Web site integrated standard production
photographs from The Tempest with a plot summary of the show, to create a
click-to-enlarge tour of the production. The Web site was launched at the
after-show party following its opening performance. Thereafter, the theater
hired the Company to design and create another Web site to promote its hit
Broadway show, "Bring on Da Noise/Bring on Da Funk," on which, among other
things, was capture of live video feed from the opening night party and
pre-recorded portions of the show. The site also featured a
three-dimensional VRML (virtual reality mark-up language) walk-through of a
theater, digitized portions of the show's soundtrack, live commentary and
electronic mail telegram capabilities to the cast. VRML is a three
dimensional browsing environment that is an advanced state of environment
creation on the Web.
. The creation of product identity, including name and logo, for a
software product developed by America Online Incorporated ("AOL") for
potential on-line content providers, together with a Web site dedicated to
that product (http://www.aol.com/about/devstudio/). AOL needed full
collateral systems as well as multiple online presences to announce and
advertise the tools. The Web site features multi-level informational
architecture, and was replicated as a location on AOL's proprietary on-line
service. The Company also designed and created a variety of collateral
products, including CD-ROM packaging.
. The design and creation of a Web site for the National Association of
Printers and Lithographers (http://www.napl.org) that includes a database
application utility that enables users to input certain sales and operating
data and instantly generate a graphical representation of statistical
information comparing their data to the rest of the industry.
K2 STRATEGY
Capitalize on Accomplishments and Market Opportunities
The Company believes that the proliferation of the Internet will continue to
provide substantial opportunities to the Company and that its successfully
completed projects will continue to enhance its marketing efforts.
Leverage Development Efforts
In the course of developing customized Web sites for certain customers, the
Company may gain technical know-how that can be applied in other efforts. This
knowledge is preserved by the Company in order to facilitate access by the
entire production staff, potentially reducing future development costs.
Deploy Leading Technologies
The Company's objective is to apply both proven and emerging technologies as
they become available in order to maximize the effectiveness of its Web site
services. The Company plans to form non-exclusive relationships with key
technology providers in an effort to gain access to, and influence the features
of, their technologies in development.
Channel Marketing
The Company will continue to focus on developing strategic relationships
with Channel Sources that seek to augment their businesses by making available
Web site design and creation services provided by the Company and other third
parties. To date, the Company's only significant continuing Channel Source
relationship has been and continues to be with MCI. See "--Marketing--Channel
Sources."
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MARKETING
General
The Company markets its services directly and seeks to form strategic
marketing relationships with third parties. The Company has three employees
dedicated to sales and marketing and each of the Company's executive officers
spends a portion of his time marketing the Company's services. The Company also
seeks to attract new customers through other methods, including referrals from
existing customers, and the Company intends to commence advertising its services
in certain trade and business publications by September 1996.
Channel Sources
The Company's marketing efforts to date have substantially focused on, and
will continue to focus on, developing strategic relationships with other
companies, such as advertising agencies and Internet service providers ("Channel
Sources") that seek to augment their businesses by making available Web site
design and creation services provided by the Company and other third parties.
The Company therefore targets advertising agencies that do not offer Web site
related services, providers of other Internet services (e.g., access,
connectivity and Web site hosting) and other businesses whose customers are
likely to require the services that the Company provides. See "Risk
Factors--Evolving Marketing Strategy."
Relationship with MCI
To date, the Company's only significant continuing Channel Source
relationship has been and continues to be with MCI. In 1995, sales to MCI and to
referrals from MCI, were approximately $180,000 in the aggregate and accounted
for approximately 15% of the Company's revenues, making MCI the Company's second
largest source of revenues. All revenues derived from MCI in 1995 related to an
MCI Internet initiative known as marketplaceMCI, an online shopping mall. In
October 1995, the Company completed the redesign of the graphics and provided
copy for MCI's marketplaceMCI Web site and thereafter designed and created five
Web sites for MCI's customers (three of which were for businesses under common
control, which in the aggregate accounted for approximately 80% of referral
revenues derived from MCI during 1995). The Company is aware that MCI is
presently redefining its online shopping mall concept and, therefore, may not
provide any future business for the Company.
Nevertheless, the Company continues to derive revenues from another Internet
initiative of MCI commenced in February 1996 called "Webworks," pursuant to
which MCI salespersons offer comprehensive Web site services to their customers
and potential customers. In connection with Webworks, MCI co-markets the
Company's services and after pre-screening an interested customer, introduces
that customer to the Company. If the customer retains the Company, the MCI
salesperson receives a commission ranging from two to four percent of the gross
revenues derived by the Company from that project. Executives of the Company
have participated in presentations made to MCI salespersons in the northeastern
United States regarding the mechanics of the program and the Company's role in
the program and the Company has been advised that it is considered by MCI to be
a "best of breed" vendor. The Company has commenced work on two projects
generated from Webworks, including one for the New Jersey Sports and Exposition
Authority pursuant to a non-binding letter of intent for the design and creation
of the main Web site for the Meadowlands Sports Complex. See "Risk Factors--
Relationship with MCI As Only Significant Channel Source."
Expand Scope of Services and Geographic Sales Offices
The Company seeks to expand both the breadth and depth of its Web site
services abilities. The Company seeks to achieve these objectives both by
continuing to expand the scope of the services that it currently offers and
adding new sales offices in cities where clients have recognized the need for
the Company's services while performing the services in the New York office. The
Company plans to open a
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sales office in Dusseldorf, Germany. The Company may also acquire products,
technologies or businesses that may expand the scope of services offered by the
Company and geographic locations of the Company.
CUSTOMERS
Since substantially all of the Company's direct customers (and certain
Channel Sources) have retained the Company on a single project basis, customers
from whom the Company generated substantial revenue in one period have not been
a substantial source of revenue in a subsequent period. Due to the Company's
limited operating history and the emerging nature of the Internet, the Company
generally cannot be sure whether its relationships with customers will continue
to be on a one project per customer basis. The Company's three largest sources
of revenues during 1995 were J. Walter Thompson (relating to one project for the
benefit of Bell Atlantic) MCI and Prudential Securities, which accounted for
approximately 18%, 15% and 12%, respectively, of the Company's revenues during
that year. During the 1996 Quarter, IBM accounted for approximately 60% of the
Company's revenues. Since the Company believes that J. Walter Thompson no longer
provides substantial services to Bell Atlantic, the Company does not expect to
generate additional revenues from J. Walter Thompson in the immediate future, if
at all. Moreover, the Company is aware that J. Walter Thompson uses providers of
Web site services substantially similar to those provided by the Company and
also has an equity interest in a provider of Web site services. Similarly, since
Prudential Securities and IBM each hired the Company for a specific project,
each of which has been completed, the Company does not expect to generate
ongoing revenues from Prudential Securities or IBM in the foreseeable future.
See "Risk Factors--Fluctuations in Quarterly Operating Results, Cash
Requirements and Margins" and "Management's Discussion and Analysis of Results
of Operations and Financial Condition."
As of May 1, 1996, the Company has completed more than 35 Web site design
and creation projects, each generating gross revenue ranging from $1,500 to more
than $300,000, in addition to several consulting engagements and interactive
projects other than on the World Wide Web. As of May 1, 1996, the Company is
also currently engaged to design and create 18 additional Web site projects. One
additional customer with whom the Company established a relationship since then,
among others, is Toys R Us, although no formal contract has been entered into
with them. Since the Company has a limited operating history and has completed
only approximately 35 projects in connection with which the scope of its
services varied greatly, and since the market for the Company's services is new
and rapidly evolving, management does not believe that any project that it has
completed is necessarily typical of its past experience or indicative of the
future, including with respect to the nature and purpose of the relationship or
project, the scope of services provided by the Company in connection therewith
or the fee payable to the Company. However, management believes that revenues
generated by these 18 projects will collectively be consistent with the
Company's past experience.
Because the Company's projects are generally completed in a relatively short
period of time, the Company has not experienced significant backlog.
FUTURE SOFTWARE DEVELOPMENT PROJECTS
The Company is also engaged in preliminary negotiations to license one World
Wide Web related software program known as Visitrac and plans to develop another
program known as Web Express. Visitrac is intended to provide detailed
information about visitors to a particular Web site and Beta testing of Visitrac
commenced in July 1996. Web Express is intended to enable an individual or
organization to design a graphically enhanced Web site without incurring
substantial design and development costs. Research and development of Web
Express has not yet commenced. There can be no assurance that either of these
programs will be developed or if developed, successfully commercialized. The
Company did not expend any money in connection with research and development in
1994 or 1995. In the quarter ended March 31, 1996, the Company's research and
development expenditures were
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immaterial. During the quarter ending June 30, 1996, the Company's research and
development expenditures were approximately $70,000, and related primarily to
Visitrac.
GOVERNMENT REGULATION
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to Web site service
companies. However, due to the increasing media attention focused on the
Internet, it is possible that a number of laws and regulations may be adopted
with respect to the Internet, covering issues such as user privacy, and pricing
and characteristics and quality of products and services. The adoption of any
such laws or regulations may decrease the growth of the Internet, which could in
turn decrease the demand for the Company's services and products and increase
the Company's cost of doing business or cause the Company to modify its
operations, or otherwise have an adverse effect on the Company's business,
operating results or financial condition. Moreover, the applicability to the
Internet of existing laws governing issues such as property ownership, libel and
personal privacy is uncertain. The Company cannot predict the impact, if any,
that future regulation or regulatory changes may have on its business. In
addition, Web site developers such as the Company face potential liability for
the actions of customers and others using their services, including liability
for infringement of intellectual property rights, rights of publicity,
defamation, libel and criminal activity under the laws of the U.S. and foreign
jurisdictions. Moreover, the Company lacks errors and omissions insurance. Any
imposition of liability could have a material adverse effect on the Company.
The Communications Decency Act of 1996 (the "1996 Act"), which became
effective on February 8, 1996, imposes criminal liability on persons sending or
displaying in a manner available to minors indecent material on an interactive
computer service such as the Internet. The 1996 Act also imposes criminal
liability on an entity knowingly permitting facilities under its control to be
used for those activities. Although the Third Circuit Court of Appeals recently
preliminarily enjoined the enforcement of portions of the 1996 Act, that ruling
is expected to result in a trial or an expedited appeal to the United States
Supreme Court. If upheld, the interpretation and enforcement of these provisions
are uncertain and the penalties imposed by the 1996 Act include fines and
imprisonment. This legislation may decrease demand for Internet access, chill
the development of Internet content, or have other adverse effects on Web site
service providers such as the Company. In addition, in light of the uncertainty
of the interpretation and application of this law, there can be no assurance
that the Company would not have to modify its operations to comply with the
statute. The impact of the 1996 Act on the Company and its business cannot be
predicted.
COMPETITION
The markets for the Company's services are highly competitive and are
characterized by pressures to reduce prices, incorporate new capabilities and
accelerate completion schedules. The Company expects competition for its
services to intensify in the future, partly because there are no substantial
barriers to entry into the Company's business. There can be no assurance that
the Company will be able to offset the effects of any resulting price reductions
with an increase in the number of its customers or projects, higher revenue from
enhanced services or products, cost reductions or otherwise and its failure to
do so could have a material adverse effect on its business, financial condition
and operating results.
The Company faces competition from a number of sources, including potential
customers that perform Web site development services in-house. These sources
also include other Web site service boutique firms, communications, telephone
and telecommunications companies such as Telecommunications Inc., computer
hardware and software companies such as Microsoft Corporation and Adobe Systems
Incorporated, established online services companies, advertising agencies,
direct access Internet and Internet-services and access providers as well as
specialized and integrated marketing communication firms such as CKS Group, Inc.
and Eagle River Interactive, Inc., all of which are
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entering the Web site design and creation market in varying degrees and are
competing with the Company, and many of which have announced plans to offer
expanded Web site design and creation services. Many of the Company's
competitors or potential competitors have longer operating histories, longer
customer relationships and significantly greater financial, management,
technological, development, sales, marketing and other resources than the
Company. The Company's ability to retain relationships with Channel Sources and
its existing customers and generate new customers and relationships with Channel
Sources depends to a significant degree on the quality of its services and its
reputation, as compared with the quality of services provided by and the
reputations of the Company's competitors. The Company also competes on the basis
of creative reputation, price, reliability of services and responsiveness. There
can be no assurance that the Company will be able to compete and its inability
to do so would have a material adverse impact on the Company's business,
financial condition and operating results.
EMPLOYEES
As of May 21, 1996, the Company has 29 employees, of which 27 are full-time
employees and the remaining two are part-time employees. Full-time employees
include five salespeople, four account managers and eight production personnel,
in addition to executive management and support staff.
PROPERTIES
The Company's offices occupy approximately 5,800 square feet of an office
building known as The New York Information Technology Center, 55 Broad Street,
New York, New York at an annual rent ranging from $86,955 to $98,549, payable in
equal monthly installments, plus the Company's allocable share of certain real
property taxes and building operating expenses in excess of fixed levels as
provided in the lease. The lease has a five-year term.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings as of the date
of this Prospectus.
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MANAGEMENT
The Company's executive officers and directors, and their ages as of May 1,
1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ------------------------------------------
<S> <C> <C>
David J. Centner.......................... 30 Chairman of the Board, Chief Executive
Officer, Chief Financial Officer and
Director
Matthew G. de Ganon....................... 33 Vice Chairman, President, Chief Operating
Officer and Director
Douglas E. Cleek.......................... 33 Executive Vice President--Chief Creative
Officer and Director
Bradley K. Szollose....................... 33 Executive Vice President--Marketing,
Treasurer, Secretary and Director
James A. Favia(1)......................... 62 Director
Steven N. Goldstein(1).................... 56 Director
</TABLE>
- ------------
(1) Will assume a position of director immediately upon consummation of the
offering.
David J. Centner joined the Company in July 1994. Mr. Centner has been the
Company's Chairman of the Board of Directors, Chief Executive Officer and Chief
Financial Officer since March 1995. From August 1989 to July 1994, Mr. Centner
operated a business that offered computer consulting, custom application
programming and computer personnel placement services for such clients as
Merrill Lynch, Bankers Trust, Chase Manhattan Bank, Chemical Bank and American
Express. Mr. Centner has a Bachelors of Science degree in Entrepreneurial
Management from the Wharton School of Business.
Matthew G. de Ganon has been the Company's Vice Chairman, Chief Operating
Officer and a Director since he joined the Company in July 1995 and has been
President since June 1996. For the two years prior to joining the Company, Mr.
de Ganon operated a business that created CD-ROM products and offered consulting
services regarding the use of electronic delivery to publishers of newsletters
and directories. Mr. de Ganon is co-author of the essay "Overcoming Future Shock
on the Superhighway: Suggestions for Providers and Technocrats" published and
presented in the 1994 National Online Conference Proceedings. From August 1992
to July 1993, Mr. de Ganon was the Vice President of New Media of a small
software developer and value added reseller. Mr. de Ganon's work focused on UNIX
based 4GL accounting software customization for corporate clients. From May 1991
to July 1992, Mr. de Ganon was an Executive Assistant--Casting Administration
for the Motion Picture Group of Universal Studios, Inc. Prior to that, Mr. de
Ganon was a franchised theatrical agent with the Stone Manners Agency in Los
Angeles, California from August 1987 to May 1991.
Douglas E. Cleek, who co-founded the Company in 1993, has been the Company's
Executive Vice President--Chief Creative Officer and a Director of the Company
since it was reorganized as a corporation in January 1995. From 1993 until then,
Mr. Cleek was a general partner of the Company. For more than five years prior
thereto, Mr. Cleek was an Art Director for William Allen & Co. and its
successor, A.J. Bart & Sons, graphic design firms specializing in graphic
promotional materials for the hospitality industry.
Bradley K. Szollose, who co-founded the Company in 1993, has been the
Company's Executive Vice President--Marketing, Treasurer, Secretary and a
Director of the Company since it was reorganized as a corporation in January
1995. From 1993 until then, Mr. Szollose was a general partner of the
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Company. For more than five years prior thereto, Mr. Szollose was a freelance
Art Director for the Caribiner Group, producers of corporate theater and related
promotional/entertainment events, where he managed a team of artists and
photographers to coordinate film shooting and art preparation under the
direction of senior designers.
James A. Favia is presently retired. Mr. Favia is a part-time consultant to
Donald & Co. Securities, Inc., the Representative of the several underwriters in
this offering. From November 1988 to June 1992, Mr. Favia was a principal of
Shaw Venture Partners, a venture capital fund. From 1983 to 1988, Mr. Favia was
president of Favia, Hill & Associates, a wholly owned subsidiary of Chemical
Bank responsible for money management for institutional clients. From 1974 to
1983, Mr. Favia was senior vice president, Chemical Bank, and prior to that he
was in charge of Chemical Bank's research department from 1965 to 1974. Prior to
that, Mr. Favia was a general partner and research director for Kuhn, Loeb &
Company, an international investment bank. Mr. Favia has a Masters of Business
Administration degree in business administration from New York University, and a
Bachelor's of Arts degree in economics from Brooklyn College. Mr. Favia is also
a director of Eastco Industrial Safety Corp., a public company that manufactures
industrial safety products.
Dr. Steven N. Goldstein has been Program Director, Inter-Agency and
International (Networking) Coordination Director of Network Services at the
National Science Foundation ("NSF") since June 1989 and is responsible for the
international networking coordination in support of the communication needs of
the United States research and education community. Dr. Goldstein has directed
NSF's International Connections Management ("ICM") project which, in the past
five years, has assisted in connecting approximately 20 countries to the
Internet. Dr. Goldstein has also collaborated with Japanese networkers in the
formation of academic Internet service in Japan. Presently, Dr. Goldstein is
also the U.S. coordinator for the G-7 Global Information Society initiative's
theme "Global Interoperability of Broadband Networks" under which he coordinates
closely with Japan's high-performance networking projects. Dr. Goldstein has a
B.S. and Masters degrees in physics from the Massachusetts Institute of
Technology and a Doctorate in Engineering and Public Policy from Carnegie-Mellon
University. Dr. Goldstein is also a member of the Institute of Electrical and
Electronics Engineers, the Association for Computing Machinery and the Internet
Society.
Directors are elected annually at the Company's annual stockholders'
meeting. Each director of the Company serves until his successor is elected and
qualified or until his earlier death, resignation, removal or disqualification.
The officers are elected annually by the directors. The Board of Directors plans
to establish compensation and audit option committees upon completion of this
offering. The compensation committee will consist of Mr. Centner, Mr. Favia and
Mr. Goldstein, and will make recommendations to the Board concerning salaries
and incentive compensation for employees and consultants of the Company. The
audit committee will consist of Mr. Centner, Mr. Favia and Mr. Goldstein and
will make recommendations to the Board regarding the selection of independent
auditors and review and evaluate the Company's internal controls.
The Company currently does not compensate its directors for acting in that
capacity. In addition, non-employee directors are entitled to receive stock
options under the stock option plan described below. To date, no director of the
Company has been compensated for serving in such capacity.
EXECUTIVE COMPENSATION
The following table sets forth the amount of all compensation paid by the
Company for services rendered during 1995 to the Company's Chief Executive
Officer. No executive officer had total salary and bonus compensation in excess
of $100,000.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1)
- ------------------------------------------------------ ---- ------- ----- ---------------
<S> <C> <C> <C> <C>
David J. Centner, Chief Executive Officer............. 1995 $30,000 -- --
</TABLE>
- ------------
(1) The aggregate amounts of personal benefits not included in the Summary
Compensation Table do not exceed 10% of the total annual salary and bonus
reported for the named executive officer.
VOTING AGREEMENT
As a result of a Voting Agreement to be entered into by Messrs. Centner, de
Ganon, Cleek and Szollose prior to the consummation of this offering, Matthew de
Ganon will have voting control over all of the Common Stock owned by all of
them, except that such shares must always be voted in favor of the election as
directors of each of them. In addition, the Voting Agreement will grant each
party thereto a right of first refusal as to the sale of the others' Common
Stock. The Voting Agreement will expire on the 10th anniversary of this offering
and may be extended for an additional 10-year period if a majority of the
parties approve such an extension. See "Risk Factors--Control by Management;
Voting Agreement."
EMPLOYMENT AGREEMENTS
Upon consummation of this offering, David J. Centner, Matthew G. de Ganon,
Bradley K. Szollose and Douglas E. Cleek will be employed under employment
agreements expiring December 31, 1998, pursuant to which they will each receive
annual base salaries of $90,000 for the remainder of 1996, $117,500 for 1997 and
$127,500 for 1998. They will each also be entitled to 1.88% of the Company's
income before provision for federal income tax and before deductions of these
bonuses in the applicable fiscal year. All of the employment agreements prohibit
competition with the Company during the term of the agreements.
1996 STOCK OPTION PLAN
The Company has adopted its 1996 Stock Option Plan (the "Plan"), pursuant to
which designated employees, including officers and directors of the Company will
be entitled to receive stock options. Options to purchase an aggregate of
225,000 shares of Common Stock are authorized under the Plan. The exercise price
of all options will be at least 85% of the fair market value of the Common Stock
on the date of grant.
Options to purchase an aggregate of 75,000 shares of Common Stock have been
granted to executive officers of the Company. In January 1996, Messrs. Centner,
de Ganon, Szollose and Cleek were each granted options to acquire (i) 6,250
shares of Common Stock at an exercise price of $1.75 per share, (ii) 6,250
shares of Common Stock at an exercise price of $3.50 per share and (iii) 6,250
shares of Common Stock at an exercise price of $6.75 per share.
In addition, in January 1996 an option to purchase an aggregate of 25,000
shares of Common Stock at an exercise price of $1.75 per share was granted to a
consultant to the Company. The Company also plans to grant 45,000 options to an
employee upon consummation of this offering, 20,000 at 110% of the initial
public offering price and 25,000 at 125% of the initial public offering price.
All of these options vest in five equal annual installments commencing on
the date of grant.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of the Common Stock as of the date of this Prospectus by (i)
each person known by the Company to own beneficially 5% or more of the
outstanding shares of Common Stock, (ii) each director of the Company, and (iii)
all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENT BENEFICIALLY
BENEFICIALLY OWNED
OWNED BEFORE --------------------
AND AFTER BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OFFERING OFFERING OFFERING
- ---------------------------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
David J. Centner.......................................... 477,620(2)(3) 19.1 13.6
Matthew G. de Ganon....................................... 477,620(2)(3) 19.1 13.6
Douglas E. Cleek.......................................... 477,620(2)(3) 19.1 13.6
Bradley K. Szollose....................................... 477,620(2)(3) 19.1 13.6
James A. Favia............................................ 0 -- --
Steven N. Goldstein....................................... 0 -- --
All Directors and executive officers as a group (six
persons).................................................. 1,910,480(4) 77.0 54.9
</TABLE>
- ------------
(1) The address of each beneficial owner is that of the Company's principal
executive offices.
(2) Includes 3,750 shares of Common Stock underlying presently exercisable stock
options and excludes 15,000 shares of Common Stock underlying stock options
that are not presently exercisable. See "Management--1996 Stock Option
Plan."
(3) Pursuant to a Voting Agreement, the voting control over all of these shares
will be vested in Matthew de Ganon, except that these shares must always be
voted in favor of the election as directors of Messrs. Centner, de Ganon,
Cleek and Szollose. See "Management--Voting Agreement."
(4) Includes 15,000 shares of Common Stock underlying presently exercisable
stock options and excludes 60,000 shares of Common Stock underlying stock
options that are not presently exercisable. See "Management--1996 Stock
Option Plan."
39
<PAGE>
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
Up to 600,002 shares of Common Stock may be offered by the 39 selling
stockholders who either acquired those shares in private placements or purchased
such shares directly from a private placement investor, as indicated in the
column "Shares of Common Stock" in the chart below, but are not included in the
offering of securities by the Company that is underwritten by the
Representative. The Company has agreed to bear all expenses (other than
underwriting or selling commissions or any fees and disbursements of counsel to
such Selling Stockholders) in connection with the registration of their
securities. See "Certain Transactions--Private Placements."
The following table sets forth certain information with respect to holders
for whom the Company is registering these shares. None of the holders has held
any position or office or has had a material relationship with the Company or
any of its affiliates within the past three years, other than Harvey Berlent who
is a consultant to the Company. Except as set forth herein, the Company believes
that none of the holders listed below owns any other securities of the Company.
The Company will not receive any of the proceeds from the sale of these shares.
<TABLE>
<CAPTION>
PERCENT OF CLASS
BENEFICIALLY OWNED
SHARES OF ---------------------------------
NAME COMMON STOCK(1) BEFORE OFFERING AFTER OFFERING
- -------------------------------------------------- --------------- --------------- --------------
<S> <C> <C> <C>
Anaconda Capital, L.P............................. 40,000 1.60 1.14
Charles Abramowitz................................ 6,871 * *
Gerald R. Appel................................... 14,700 * *
Harvey N. Berlent(2).............................. 14,000 * *
Cooperative Holding Corporation................... 14,286 * *
Domaco Venture Capital Fund....................... 14,000 * *
Gregory D. Dwyer.................................. 5,000 * *
Andrew J. Finkelstein............................. 4,000 * *
Frog Hollow Partners/2............................ 15,000 * *
R. Ghosh.......................................... 12,000 * *
Harry F. Goldberg................................. 7,143 * *
D. Marlene Huls................................... 25,000 1.00 *
Ward Hunt......................................... 9,429 * *
Leo Holdings, Inc................................. 2,857 * *
Daniel E. Koshland Jr............................. 28,571 1.14 *
Milton Koffman.................................... 14,286 * *
E. Kohler......................................... 120,000 4.81 3.43
Joseph Lombardi................................... 8,571 * *
Alan J. Rubin..................................... 7,143 * *
Anthony Salvo..................................... 7,286 * *
Michael F. Sassi.................................. 7,143 * *
George Sayour Family Foundation Inc............... 7,000 * *
Paul Sayour....................................... 7,000 * *
Richard Serbin and Kathe Serbin JTWROS............ 14,286 * *
Ronald Setzkorn and Christina Setzkorn JTWROS..... 14,286 * *
B.L. Skinner...................................... 25,000 1.00 *
William Smith..................................... 28,571 1.14 *
Starfin International............................. 14,286 * *
Anthony P. Towell................................. 14,286 * *
Rainwater Enterprises, LTD--Defined Benefit
Pension Plan.................................... 6,000 * *
Richard L. Tuch................................... 5,000 * *
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
PERCENT OF CLASS
BENEFICIALLY OWNED
SHARES OF ---------------------------------
NAME COMMON STOCK(1) BEFORE OFFERING AFTER OFFERING
- -------------------------------------------------- --------------- --------------- --------------
<S> <C> <C> <C>
Carlton E. Turner................................. 4,000 * *
Bao Thu Nguyen Vo................................. 7,500 * *
Barron S. Wall, Inc............................... 17,143 * *
Henry G. Warner................................... 8,000 * *
Robert Westerheide................................ 14,286 * *
Anthony Yodice.................................... 14,286 * *
Adam D. Young..................................... 7,500 * *
Mark Young........................................ 14,286 * *
---------------
Total....................................... 600,002
---------------
---------------
</TABLE>
- ------------
* Less than one percent.
(1) Reflects the number of shares beneficially owned by each selling stockholder
and the number of shares that may be ultimately offered for sale by such
selling stockholder.
(2) Excludes options to purchase 25,000 shares of Common Stock for $1.75 per
share.
The sale of the aforementioned shares by the Selling Stockholders may be
effected from time to time in transactions (which may include block
transactions) in the over-the-counter market, in negotiated transactions,
through the writing of options on the Common Stock, or a combination of such
methods of sale, at fixed prices which may be changed, at market prices
prevailing at the time of sale, or at negotiated prices. The Selling
Stockholders may effect such transactions by selling their Common Stock directly
to purchasers or to or through broker-dealers which may act as agents or
principals. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Stockholders and/or the
purchasers of Common Stock from them for which such broker-dealers may act as
agents or to whom they sell as principal, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions). The
Selling Stockholders and any broker-dealers that act in connection with the sale
of such holders' Common Stock might be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act.
The Selling Stockholders have agreed that they will not sell any of the
Common Stock owned by them and registered herein for a period of one year from
the date hereof, unless the Nasdaq SmallCapTM Market's requirement to extend
such lock-ups to one year is deemed to be improper by the applicable
governmental authority, in which case such shares may not be sold within six
months of the date hereof, without the prior written consent of the
Representative.
41
<PAGE>
CERTAIN TRANSACTIONS
FORMATION AND FINANCING OF THE COMPANY
The Company was founded in 1993 by Messrs. Cleek and Szollose as a general
partnership. The aggregate capital accounts of Messrs. Cleek and Szollose at
December 31, 1993 were $13,231. During 1994, Messrs. Cleek and Szollose were
paid an aggregate of $38,552 in partnership draws and the Company also sustained
a net loss of $(53,100), resulting in partners' deficiency of $(78,421) at year
end. Since the Company was a partnership during that year, the Company's net
loss for that period is reportable on the personal tax returns of Messrs. Cleek
and Szollose in proportion to their relative partnership interests.
In January 1995, the Company was reorganized as a New York corporation that
elected to be treated as an S corporation for tax purposes which issued an
aggregate of 100 shares of Common Stock. In connection with that reorganization,
Messrs. Cleek and Szollose contributed all of their partnership interests in the
predecessor partnership to the newly formed corporation in exchange for 37.5
shares each of its common stock and Mr. Centner contributed $10,000 for 25
shares of its common stock.
In July 1995, Messrs. Szollose and Cleek each contributed back to the
Company 12.5 shares of Common Stock and the Company sold 25 shares of Common
Stock to Matthew de Ganon in exchange for his contribution to the Company of a
loan due to him by the Company of $25,000.
In January 1996, the New York corporation became a wholly-owned subsidiary
of a newly formed Delaware corporation as a result of the exchange by each of
Messrs. Centner, de Ganon, Cleek and Szollose of their respective 25 shares of
common stock of the New York corporation for 473,870 shares of Common Stock of
the Delaware corporation.
PRIVATE PLACEMENTS
In February 1996 (the "First Private Placement") and May 1996 (the "Second
Private Placement") the Company sold an aggregate of 600,002 shares of Common
Stock for total gross proceeds of $950,000. In the First Private Placement, the
Company sold 200,000 shares of Common Stock for $1.25 each and in the Second
Private Placement the Company sold 400,002 shares of Common Stock for $1.75
each. The investors in these offerings were granted piggyback registration
rights for all of their shares.
PERSONAL GUARANTEES
Messrs. Centner, de Ganon, Cleek and Szollose have each personally
guaranteed a $25,000 line of credit that the Company maintains with a bank and
one or more of them have also personally guaranteed several of the Company's
equipment leases. It is expected that upon consummation of this offering the
guarantees of the bank line of credit will be terminated.
BUSINESS TRANSACTIONS WITH AFFILIATES
Prior to joining the Company, Matthew de Ganon operated a business that
created CD-ROM products and offered consulting services regarding the use of
electronic delivery to publishers of newsletters and directories. During 1995,
Mr. de Ganon performed consulting services for the Company for which he earned
approximately $34,000, of which he was paid in cash approximately $9,000. In
July 1995, Mr. de Ganon contributed to the Company his right to receive the
remaining $25,000 in exchange for his 25% interest in the Company.
FUTURE TRANSACTIONS
All future transactions and loans between the Company and its officers,
directors and five percent shareholders will be on terms no less favorable to
the Company than could be obtained from unaffiliated third parties and will be
approved by a majority of the independent, disinterested directors of the
Company.
42
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 9,000,000 shares of
Common Stock, par value $.01 per share, and 1,000,000 shares of preferred stock,
par value $.01 per share.
UNITS
The Company is offering for sale 1,000,000 Units (excluding the
Representative's over-allotment option) at an offering price of $6.00 per Unit.
Each Unit consists of one share of Common Stock and one Warrant. The Common
Stock and the Warrants will be separately transferable upon issuance. The Units
will not trade separately subsequent to issuance.
COMMON STOCK
Each holder of Common Stock is entitled to one vote per share in the
election of the Company's directors and all other matters submitted to a vote of
stockholders and to share ratably in all assets available for distribution to
holders of record of Common Stock upon liquidation or dissolution. There are no
cumulative voting rights with respect to the election of the Company's
directors. The holders of Common Stock have no pre-emptive or other subscription
rights. The Company's outstanding Common Stock is fully paid, validly issued and
non-assessable. The Company does not intend to pay any dividends on its Common
Stock in the foreseeable future. See "Dividend Policy."
WARRANTS
Each Unit will include one Warrant which will be issued pursuant to a
Warrant Agreement between the Company and Continental Stock Transfer & Trust
Company as warrant agent. The following statements are qualified in their
entirety by reference to the Warrant Agreement, which is included as an exhibit
to the Registration Statement of which this Prospectus is a part. Two Warrants
will entitle the holder thereof to purchase one share of Common Stock at a price
of $7.50 per share at any time commencing on the date of this Prospectus and
terminating five years thereafter. The Warrants will be redeemable at the
Company's option, upon not less than 30 days' written notice to the holders at a
price of $.05 per warrant if the closing price of the Common Stock has been
equal to or greater than 140% of the then exercise price of the Warrants for 20
consecutive trading days ending on the fifth day prior to the notice of
redemption. During such 30 day period, the holders shall have the right to
exercise such Warrants. The right to purchase Common Stock upon exercise of the
Warrants will be forfeited unless the Warrants are exercised prior to the date
specified in the notice of redemption. See "Risk Factors--Potential Adverse
Effect of Redemption of Warrants."
The Warrants will not confer upon the holders thereof any voting,
pre-emptive or other rights as stockholders of the Company.
The exercise price of the Warrants and/or the amount of shares of Common
Stock or other securities and property to be obtained upon the exercise of the
Warrants are subject to adjustment only under certain circumstances, including
stock-splits, stock dividends, any subdivision, combination or recapitalization
of the Common Stock, or the sale of all or substantially all of the Company's
assets or the merger or consolidation of the Company with or into another
corporation in which the Company is not the surviving corporation.
The Warrants may be exercised upon the surrender of the Warrant certificate
therefor, duly endorsed by the holder thereof, at the office of the Company (or
the warrant agent in respect of Warrants registered under the Act), on or prior
to the expiration date thereof accompanied by payment of the full exercise price
for the Warrants to be exercised by certified or bank cashier's check payable to
the order of the Company. Upon receipt by the Company (or the warrant agent), of
duly executed
43
<PAGE>
certificates and payment of the requisite exercise price, the Company (or the
warrant agent), shall issue and deliver certificates representing the number of
shares of Common Stock so purchased to the exercising warrantholder. If less
than all of the Warrants evidenced by a Warrant certificate are so exercised, a
new Warrant certificate representing the remaining Warrants will be issued and
delivered to such warrantholder.
Warrants may not be exercised for fractional shares. If, however, a
warrantholder exercises all of his Warrants, the Company will pay to such
warrantholder an amount in cash based upon the then market value of the
fractional interest of the Common Stock on the last trading date prior to the
date of exercise of the Warrants in lieu of issuing any fractional shares.
No Warrant will be exercisable unless at the time of exercise the Common
Stock to be purchased has been registered, or is exempt from registration, under
applicable federal and state securities laws. The Company will use its best
efforts to have all shares so registered or exempted and to maintain a current
prospectus relating thereto until the expiration of the Warrants, although there
can be no assurance that it will be able to do so. See "Risk
Factors--Restrictions on Exercise of the Warrants."
PREFERRED STOCK
The Board of Directors may issue, without further action of the stockholders
of the Company, preferred stock in one or more series and fix the rights and
preferences thereof, including the dividend rights, dividend rates, conversion
rights, voting rights, terms and redemption (including sinking fund provisions),
redemption price or prices, liquidation preferences and the number of shares
constituting any series.
The rights of the holders of Common Stock, including voting rights, will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. Any issuance of preferred
stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from acquiring, a
majority of outstanding voting stock of the Company. The Company has no current
plans to issue any shares of preferred stock.
TRANSFER AGENT AND WARRANT AGENT
The Transfer Agent and Warrant Agent for the Common Stock and Warrants is
Continental Stock Transfer & Trust Company.
CERTAIN ANTI-TAKEOVER EFFECTS
In addition to the provisions of a Voting Agreement among Messrs. Centner,
de Ganon, Cleek and Szollose, the provisions of the Company's certificate of
incorporation ("Certificate") and by-laws ("Bylaws") summarized in the
succeeding paragraphs may be deemed to have anti-takeover effects and may delay,
defer or prevent a tender offer or takeover attempt that a stockholder might
consider to be in such stockholder's best interest, including those attempts
that might result in a premium over the market price for the Company's
securities. See "Risk Factors-- "Control by Management; Voting Agreement,"
"--Authorization of Preferred Stock and Other Anti-Takeover Devices" and
"Management--Voting Agreement."
REMOVAL OF DIRECTORS AND FILLING VACANCIES
The Certificate and Bylaws provide that a director may be removed by
stockholders with or without cause with the approval of the holders of a
majority of the total voting power of all outstanding securities of the Company
then entitled to vote generally in the election of directors, voting together as
a
44
<PAGE>
single class, subject to the rights of the holders of any class of preferred
stock then outstanding to remove additional directors elected by such holders
under specified circumstances.
The Certificate and Bylaws provide that, subject to any rights of holders of
any class of preferred stock then outstanding, all vacancies on the Board of
Directors, including those resulting from an increase in the number of
directors, may be filled solely by a majority of the remaining directors, even
if they do not constitute a quorum. When one or more directors resign from the
Board of Directors effective at a future date, a majority of directors then in
office, including the directors who are to resign, may vote on filling the
vacancy.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
The Bylaws establish advance notice procedures with regard to stockholder
proposals and the nomination, other than by or at the direction of the Board of
Directors or a committee thereof, of candidates for election as directors. These
procedures provide that the notice of stockholder proposals and stockholder
nominations for the election of directors at any meeting of stockholders must be
in writing and be received by the Secretary of the Company not less than 60 nor
more than 90 days prior to the meeting (or if less than 70 days' notice or prior
public disclosure of the date of the meeting is given, the notice of stockholder
proposals or nominations must be in writing and received by the Secretary no
later than the close of business on the tenth day following the day on which
notice of the meeting was mailed or public disclosure thereof was made,
whichever occurs first). The Company may reject a stockholder proposal or
nomination that is not made in accordance with such procedures.
LIMITATIONS ON STOCKHOLDER ACTION BY WRITTEN CONSENT AND LIMITATIONS ON CALLING
STOCKHOLDER MEETINGS
The Certificate and Bylaws prohibit stockholder action by written consent in
lieu of a meeting and provide that stockholder action can be taken only at an
annual or special meeting of stockholders. The Certificate and Bylaws provide
that, subject to the rights of holders of any series of Preferred Stock to elect
additional directors under specified circumstances, special meetings of
stockholders can be called only by the Board of Directors, the Chairman of the
Board of Directors or the Vice Chairman of the Board of Directors of the Company
or at the request in writing of the holders of not less than 10 percent of all
the shares entitled to vote at the meeting.
AMENDMENT OF CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
The Certificate provides that the affirmative vote of the holders of at
least 51% of the total voting power of all outstanding securities of the Company
then entitled to vote generally in the election of directors, voting together as
a single class, is required to amend certain provisions of the Certificate,
including those provisions relating to the number, election and term of
directors; the removal of directors and the filling of vacancies; the
prohibition of stockholder action without a meeting; prohibition on cumulative
voting by stockholders; indemnification of directors, officers and others; and
the super majority voting requirements in the Certificate. The Certificate
further provides that the Bylaws may be amended by the Board of Directors or by
an affirmative vote of the holders of not less than a majority of the total
voting power of all outstanding securities of the Company then entitled to vote
generally in the election of directors, voting together as a single class. These
voting requirements will have the effect of making more difficult any amendment
by stockholders.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Subject to certain exclusions summarized below, Section 203 of the Delaware
General Corporation Law ("Section 203") prohibits any Interested Stockholder
from engaging in a "business combination" with a Delaware corporation for three
years following the date such person became an Interested
45
<PAGE>
Stockholder. Interested Stockholder generally includes (i) any person who is the
beneficial owner of 15% or more of the outstanding voting stock of the
corporation and (ii) any person who is an affiliate or associate of the
corporation and who held 15% or more of the outstanding voting stock of the
corporation at any time within three years before the date on which such
person's status as an Interested Stockholder is determined. Subject to certain
exceptions a "business combination" includes, among other things (i) any merger
or consolidation involving the corporation, (ii) the sale, lease, exchange,
mortgage, pledge, transfer or other disposition of assets having an aggregate
market value equal to 10% or more of either the aggregate market value of all
assets of the corporation determined on a consolidated basis or the aggregate
market value of all the outstanding stock of the corporation, (iii) any
transaction that results in the issuance or transfer by the corporation of any
stock of the corporation to the Interested Stockholder, except pursuant to a
transaction that effects a pro rata distribution to all stockholders of the
corporation, (iv) any transaction involving the corporation that has the effect
of increasing the proportionate share of the stock of any class or series, or
securities convertible into the stock of any class or series, of the corporation
that is owned directly or indirectly by the Interested Stockholder, and (v) any
receipt by the Interested Stockholder of the benefit (except proportionately as
a stockholder) or any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation.
Section 203 does not apply to a business combination if (i) before a person
became an Interested Stockholder, the board of directors of the corporation
approved the transaction in which the Interested Stockholder became an
Interested Stockholder or the business combination, (ii) upon consummation of
the transaction that resulted in the person becoming an Interested Stockholder,
the Interested Stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commences (other than
certain excluded shares), or (iii) following a transaction in which the person
became an Interested Stockholder, the business combination is (a) approved by
the board of directors of the corporation and (b) authorized at a regular or
special meeting of stockholders (and not by written consent) by the affirmative
vote of the holders of at least two-thirds of the outstanding voting stock of
the corporation not owned by the Interested Stockholder.
LIMITATION OF LIABILITY OF DIRECTORS
The Certificate provides that a director will not be personally liable for
monetary damages to the Company or its stockholders for breach of fiduciary duty
as a director, except to the extent such exemption for liability or limitation
thereof is not permitted under the Delaware General Corporation Law (i.e.,
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for paying a
dividend or approving a stock repurchase in violation of Section 174 of the
Delaware General Corporation Law, or (iv) for any transaction from which the
director derived an improper personal benefit).
While the Certificate provides directors with protection from awards for
monetary damages for breaches of their duty of care, it does not eliminate such
duty. Accordingly, the Certificate will have no effect on the availability of
equitable remedies, such as an injunction or rescission based on a director's
breach of such director's duty of care. The provisions of the Certificate
described above apply to an officer of the Company only if such person is also a
director of the Company and is acting in his or her capacity as director, and do
not apply to officers of the Company who are not also directors.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Certificate provides that each person (and the heirs, executors, or
administrators of such person) who was or is a party or is threatened to be made
a party to, or is involved in any threatened pending or completed action, suit
or proceeding, whether civil, criminal, administrative, or investigative, by
reason of the fact that such person is or was a director or officer of the
Company or is or was serving
46
<PAGE>
at the request of the Company as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, will be indemnified and
held harmless by the Company to the fullest extent permitted by the Delaware
General Corporation Law. The Certificate further provides that the right to
indemnification includes the right to be paid by the Company for expenses
incurred in connection with any such proceeding in advance of its final
disposition to the fullest extent permitted by the Delaware General Corporation
Law, and that the right to indemnification conferred thereunder is a contract
right.
The Certificate further provides that the Company may, by action of its
Board of Directors, provide indemnification to such of the employees and agents
of the Company and such other persons serving at the request of the Company as
employees or agents of another corporation, partnership, joint venture, trust or
other enterprise to such extent and to such effect as is permitted by the
Delaware General Corporation Law and the Board of Directors.
Pursuant to the Certificate, the Company has the power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Company, or is or was serving at the request of the
Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any expense,
liability or loss incurred by such person in any such capacity or arising out of
his or her status as such, whether or not the Company would have the power to
indemnify such person against such liability under the Delaware General
Corporation Law.
The Certificate provides that (i) the rights and authority described above
are not exclusive of any other right that any person otherwise may have or
acquire and (ii) no amendment, modification or repeal of the Certificate, or
adoption of any additional provision of the Certificate or the Bylaws or, to the
fullest extent permitted by the Delaware General Corporation Law, any amendment,
modification or repeal of law will eliminate or reduce the effect of the
provisions in the Certificate limiting liability or indemnifying certain persons
or adversely affect any right or protection then existing thereunder in respect
of any acts or omissions occurring prior to such amendments, modification,
repeal or adoption.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that in
the opinion of the Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
47
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering (and assuming no exercise of the
Representative's over-allotment option), the Company will have outstanding
3,495,482 shares of Common Stock (excluding the shares of Common Stock issuable
upon exercise of the Warrants and underlying the Representative's Warrants). Of
such shares, the 1,000,000 shares sold in this offering together with the
Warrants (plus any additional shares sold upon the Representative's exercise of
its over-allotment option) will be freely tradeable without restriction or
further registration under the Securities Act, except for any shares held by an
"affiliate" of the Company, as that term is defined under the Securities Act and
the Regulations promulgated thereunder, which will be subject to the resale
limitations of Rule 144 promulgated under the Securities Act ("Rule 144"). In
addition, 1,895,480 shares that will be outstanding upon consummation of this
offering have been issued and sold by the Company in reliance on one or more
exemptions from the registration requirements of the Securities Act and will be
"restricted securities" within the meaning of Rule 144 ("Restricted Shares")
and, therefore, may be publicly sold only if subsequently registered under the
Securities Act or pursuant to Rule 144. Of those shares, 947,740 have been held
for the minimum two year period required by Rule 144 and are eligible for public
sale pursuant to Rule 144. The two-year holding period will expire with respect
to half of the remaining 947,740 shares in January 1997 and with respect to the
remainder in July 1997. Notwithstanding the foregoing, the Restricted Shares are
subject to the lock-up agreements described below. The Registration Statement
also includes (i) 600,002 shares on behalf of certain stockholders and (ii)
500,000 shares of Common Stock underlying the Warrants offered hereby (plus up
to an additional 225,000 shares depending upon the extent to which the
Representative's over-allotment option is exercised) all of which will be
similarly freely tradeable.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated with those of others), including any person who may
be deemed an "affiliate" of the Company, as that term is defined in Rule 144,
would be entitled to sell in brokers' transactions or directly to market makers
within any three-month period a number of Restricted Shares that does not exceed
the greater of (i) 1% of the class of such shares then outstanding (34,955
shares of Common Stock based on the number of shares to be outstanding after
consummation of this offering) or (ii) the average weekly trading volume of the
class of such shares in the over-the-counter market during the four calendar
weeks preceding the date on which notice of such sale is filed with the
Commission, provided that certain current public information concerning the
Company is then available, the seller complies with certain manner of sale
provisions and notice requirements, and that at least two years have elapsed
since the Restricted Shares were fully paid for and acquired by any person from
the Company or an affiliate of the Company. A person (or persons whose shares
are aggregated with those of others) who is not an affiliate of the Company at
any time during the three months preceding any sale by such person, would be
entitled to sell such shares, under Rule 144(k), without regard to the
limitations described above, provided that at least three years have elapsed
since the Restricted Shares were fully paid for and acquired by any person form
the Company or an affiliate of the Company. The above is a summary of Rule 144
and is not intended to be a complete description thereof or of the rights of the
parties to sell shares of Common Stock thereunder.
Upon consummation of this offering, there will be outstanding options to
purchase 100,000 shares of Common Stock, which vest on various dates commencing
January 1996. Upon exercise of these options, all of such shares will be
eligible for sale to the public in the open market under Rule 701 promulgated
under the Securities Act ("Rule 701") (assuming 90 days have elapsed after the
effective date of this Prospectus). See "Management--1996 Stock Option Plan."
In general, under Rule 701 as currently in effect, absent contractual
restrictions on transfer, any employee, officer, director, consultant or advisor
of the Company who purchases shares from the Company pursuant to a written
compensatory stock option or other benefit plan or written contract relating to
compensation is eligible to resell such shares 90 days after the effective date
of this offering in
48
<PAGE>
reliance upon Rule 144, but without compliance with certain restrictions
contained in Rule 144. Shares acquired pursuant to Rule 701 may be sold by
non-affiliates without regard to the holding period, volume limitations,
information or notice requirements of Rule 144, and by affiliates without regard
to the holding period requirement.
Including the outstanding options to purchase 100,000 shares of Common
Stock, the Company has reserved for issuance an aggregate of 225,000 shares of
Common Stock pursuant to its 1996 Stock Option Plan. The Company may elect to
register on a Form S-8 Registration Statement under the Securities Act Common
Stock subject to options issued after the effective date of the Form S-8
Registration Statement. Shares covered by such a registration statement would be
eligible for sale in the public market after the effective date thereof, subject
to Rule 144 limitations applicable to affiliates and subject to the lock-up
agreements described below. See "Management--1996 Stock Option Plan."
The Company is unable to estimate the amount, timing or nature of future
sales of outstanding Common Stock. Prior to this offering, there has been no
market for the Common Stock and no predictions can be made of the effect, if
any, that market sales of shares or the availability of shares for sale will
have on the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of the Common Stock in the public market may have an adverse
effect on the market price thereof, and could impair the Company's ability to
raise capital through the sale of its equity securities. See "Risk Factors--No
Assurance of Public Market; Arbitrarily Determined Offering Price."
LOCK-UP AGREEMENTS
Messrs. Centner, Cleek, de Ganon and Szollose own an aggregate of 1,895,480
shares of Common Stock and options to purchase an additional 75,000 shares of
Common Stock and have agreed not to directly or indirectly sell, assign,
transfer, encumber, contract to sell, grant an option to purchase or otherwise
dispose of any shares of Common Stock or any other security convertible into or
exchangeable for shares of Common Stock which they beneficially own for a period
of 24 months after the date of this Prospectus without the prior written consent
of the Representative. In addition, the purchasers of Common Stock in the
Private Placements have agreed not to directly or indirectly sell, assign,
transfer, encumber, contract to sell, grant an option to purchase or otherwise
dispose of any of that Common Stock for a period of one year after the date of
this Prospectus, unless the Nasdaq SmallCapTM Market's requirement to extend
such lock-ups to one year is deemed improper by the applicable governmental
authority, in which case such shares may not be sold within six months after the
date of this Prospectus, without the prior written consent of the
Representative, which consent will not be unreasonably withheld.
49
<PAGE>
UNDERWRITING
The Underwriters named below, for whom Donald & Co. Securities Inc. is
acting as representative (the "Representative"), have severally agreed, subject
to the terms and conditions of the Underwriting Agreement, to purchase from the
Company a total of 1,000,000 Units. The number of Units which each Underwriter
has agreed to purchase is set forth opposite its name:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF UNITS
- ------------------------------------------------------------ ---------------
<S> <C>
Donald & Co. Securities Inc................................. 895,000
Kashner Davidson Securities Corporation..................... 75,000
Neidiger, Tucker, Bruner, Inc............................... 30,000
---------------
Total............................................... 1,000,000
---------------
---------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to approval of certain legal matters by counsel to the Underwriters
and various other conditions precedent, and that the Underwriters are obligated
to purchase all of the Units offered by this Prospectus (other than Units
covered by the over-allotment option described below), if any are purchased.
The Company has been advised by the Representative that the Underwriters
propose to offer the Units to the public at the initial offering price set forth
on the cover page of this Prospectus and to certain dealers (who may include
Underwriters) at that price less a concession not in excess of $.30 per Unit.
The Underwriters may allow, and such dealers may reallow, an aggregate
concession not in excess of $.10 per Unit to certain other dealers. After the
initial public offering, the offering price and other selling terms may be
changed by the Representative.
The Representative has informed the Company that the Underwriters do not
intend to confirm sales to accounts over which they exercise discretionary
authority.
The Company has granted to the Representative an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase from the
Company at the offering price, less underwriting discounts and the
non-accountable expense allowance, up to an aggregate of 150,000 additional
Units for the sole purpose of covering over-allotments, if any.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liability under the Securities Act.
The Company has also agreed to pay to the Representative an expense
allowance on a nonaccountable basis equal to 3% of the gross proceeds derived
from the sale of the Units underwritten (including the sale of any Units subject
to the Representative's overallotment option), $25,000 of which has been paid to
date.
The Company has granted the Representative for a period of three years from
the date hereof the right to have the Representative's designee present at all
meetings of the Company's Board of Directors and each of its committees. Such
designee will be entitled to the same notices and communications sent by the
Company to its directors and to attend directors' and committees' meetings, but
will not be entitled to vote thereat. Such designee will also be entitled to
receive the same compensation payable to directors as members of the Board and
its committees and all reasonable expenses in attending such meetings. The
Representative has not named such designee as of the date of this Prospectus.
In connection with this offering, the Company has agreed to sell to the
Representative, for nominal consideration, the right to purchase up to an
aggregate of 100,000 Units (the "Representative's Warrants"). The
Representative's Warrants are exercisable initially at $8.04 per Unit (the
"Exercise Price") for a period of four years commencing one year from the date
hereof. The Representative's Warrants contain anti-dilution provisions providing
for adjustment of the Exercise Price upon the
50
<PAGE>
occurrence of certain events, including any recapitalization, reclassification,
stock dividend, stock split, stock combination or similar transaction. In
addition, the Representative's Warrants grant to the holders thereof certain
"piggy back" and demand registration rights for periods of six and four years,
respectively, commencing one year from the date of this Prospectus with respect
to the registration under the Securities Act of the securities directly and
indirectly issuable upon exercise of the Representative's Warrants.
Prior to this offering there has been no public market for any of the
Company's securities. Accordingly, the initial public offering price of the
Units offered hereby was determined by negotiation between the Company and the
Representative. Factors considered in determining such price, in addition to
prevailing market conditions, included the history of and the prospects for the
industry in which the Company competes, an assessment of the Company's
management, the prospects of the Company, its capital structure and such other
factors as were deemed relevant.
In addition, subject to the rules of the National Association of Securities
Dealers, Inc. ("NASD"), the Company has agreed to appoint the Representative as
warrant solicitation agent 13 months after the date of this Prospectus, for
which it will be entitled to a 5% fee upon exercise of the Warrants solicited by
the Representative. No solicitation fee shall be paid in connection with the
exercise of the Representative's Warrants or the warrants included in the
Representative's Warrants. In accordance with the NASD Notice to Members 81-83,
no fee shall be paid: (i) upon exercise where the market price of the underlying
Common Stock is lower than the exercise price; (ii) for the exercise of Warrants
held in any discretionary account; (iii) upon the exercise of the Warrants where
disclosure of compensation arrangements has not been made in documents provided
to customers both as part of the original offering and at the time of exercise;
or (iv) unless the Representative has been designated in writing by the holder
of the Warrant as having solicited the exercise of the Warrant. Unless granted
an exemption by the Commission from its rule 10b-6, the Representative's and any
soliciting broker-dealers will be prohibited from engaging in any market making
activities or solicited brokerage activities with regard to the Company's
securities for the period from two or nine days, whichever is applicable, prior
to any solicitation of the exercise of Warrants until the later of the
termination of such solicitation activity or the termination (by waiver or
otherwise) of any right that the Representative and soliciting broker-dealers
may have to receive a fee for the exercise of Warrants following such
solicitation. As a result, the Representative and soliciting broker-dealers may
be unable to continue to provide a market for the Company's securities during
certain periods while the Warrants are exercisable. If the Representative has
engaged in any of the activities prohibited by Rule 10b-6 during the periods
described above, the Representative undertakes to waive unconditionally its
right to receive a commission on the exercise of such Warrants.
The Company has agreed that, upon consummation of this offering, it will
enter into a two year financial consulting agreement with the Representative
pursuant to which the Representative will provide the Company with investment
banking and financial consulting services at a fee of $60,000; $30,000 payable
upon consummation of this offering and $2,500 per month for the first twelve
months subsequent to the consummation of this offering. Such services will
include consulting with the Company's management with respect to, among other
matters, stockholder relations, corporate expansion and long term financial
planning.
LEGAL MATTERS
The legality of the securities offered hereby will be passed upon for the
Company by Sills Cummis Zuckerman Radin Tischman Epstein & Gross, P.A., Newark,
New Jersey. Parker Duryee Rosoff & Haft, New York, New York has acted as counsel
for the Underwriters in connection with this offering.
51
<PAGE>
EXPERTS
The audited financial statements included in this Prospectus and
Registration Statement have been audited by Arthur Andersen LLP, independent
certified public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a registration statement on Form SB-2 (the "Registration
Statement") under the Act with respect to the securities offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules filed therewith, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the
securities offered hereby, reference is hereby made to such Registration
Statement and to the exhibits and schedules filed therewith. Statements
contained in this Prospectus regarding the contents of any contract or other
document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being deemed to be
qualified in its entirety by such reference. The Registration Statement,
including all exhibits and schedules thereto, may be inspected without charge at
the principal office of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the Commission located at 7 World Trade
Center, New York, New York 10048 and 500 West Madison Street, Chicago, Illinois
60661-2511, and copies of all or any part thereof may be obtained from such
offices, upon the payment of proscribed fees.
The Company is not currently a reporting company under the Securities
Exchange Act of 1934, as amended. The Company intends to furnish its
stockholders with annual reports containing audited financial statements
together with an opinion on such statements expressed by independent public
accountants and quarterly reports for the first three quarters of each fiscal
year containing certain unaudited condensed consolidated financial information.
52
<PAGE>
GLOSSARY
<TABLE>
<S> <C>
Beta-testing................. Beta-testing refers to testing pre-release software by
making it available to selected users, a purpose of which is
to determine the software's reliability.
GUI:......................... Graphic user interface. A means of communicating with a
computer by manipulating icons and windows rather than using
text commands.
html:........................ Hypertext markup language. The computer language in which
electronic information is published on the Web.
http:........................ Hypertext transfer protocol. The standard communications
protocol used on the Web to retrieve information on the Web.
Hypertext transfer protocol makes browsing possible; the
user clicks on hypertext links in a Web document and moves
within that document or to another document that may be
located on a different computer.
hypertext links:............. Data in a Web site that links to other data within that Web
site or to other unrelated Web sites, allowing movement
through information on the Web non-sequentially.
Internet:.................... An open global network of interconnected commercial,
educational and government computer networks that allows any
interconnected computer to communicate with any other
interconnected computer utilizing a common communications
protocol, TCP/IP.
Protocol:.................... A formal description of message formats and the rules two or
more machines must follow in order to exchange such
messages.
Server:...................... Software that allows a computer to offer a service to
another computer. Other computers contact the server program
by means of matching client software. In addition, such term
means the computer on which server software runs.
TCP/IP:...................... Transmission Control Protocol/Internet Protocol. A
compilation of network and transport-level protocols that
allow computers with different architectures and operating
system software to communicate with other computers on the
Internet.
World Wide Web or
the Web:................... The world wide network of computer servers that uses a
special communications protocol (i.e., http) that links
different servers throughout the Internet and enables
non-technical users to access graphic information, including
video, photographs, audio and text therein contained.
</TABLE>
53
<PAGE>
K2 DESIGN, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Consolidated Balance Sheets as of December 31, 1995 and March 31, 1996................ F-3
Consolidated Statements of Operations for the years ended December 31, 1994 and 1995
and for the three months ended March 31, 1996 and 1995................................ F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December
31, 1994 and 1995 and for the three months ended March 31, 1996..................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994 and 1995
and for the three months ended March 31, 1996 and 1995................................ F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To K2 Design, Inc.:
We have audited the accompanying consolidated balance sheet of K2 Design,
Inc. (a Delaware corporation) and subsidiary as of December 31, 1995, and the
related consolidated statements of operations, changes in stockholders' equity
(deficit) and cash flows for the years ended December 31, 1995 and 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of K2 Design, Inc. and
subsidiary as of December 31, 1995, and the results of their operations and
their cash flows for the years ended December 31, 1995 and 1994, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Roseland, New Jersey
May 9, 1996
F-2
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
ASSETS 1995 1996
- --------------------------------------------------------------------- ------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash............................................................... $ 17,756 $ 52,268
Accounts receivable (net of allowance for doubtful
accounts of $10,000)............................................. 133,694 318,105
Prepaid and deferred expenses...................................... 0 49,725
------------ -----------
Total current assets............................................. 151,450 420,098
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net (Note 3)................... 67,603 104,671
RESTRICTED CASH (Note 2)............................................. 0 30,000
OTHER ASSETS......................................................... 4,405 4,405
------------ -----------
Total assets..................................................... $223,458 $ 559,174
------------ -----------
------------ -----------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
- ---------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of debt and capital lease obligations (Note 4)..... $ 45,770 $ 55,708
Accounts payable................................................... 94,940 222,342
Accrued professional fees.......................................... 22,000 23,931
Accrued compensation............................................... 23,952 51,431
Accrued taxes...................................................... 3,727 15,394
Other accrued expenses............................................. 8,210 22,434
Customer advances (Note 2)......................................... 29,857 52,330
------------ -----------
Total current liabilities........................................ 228,456 443,570
LONG-TERM LINE OF CREDIT AND CAPITAL LEASE OBLIGATIONS (Note 4)...... 26,527 46,382
------------ -----------
Total liabilities................................................ 254,983 489,952
------------ -----------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY (DEFICIT) (Note 8):
Preferred stock, $.01 par value, 1,000,000 shares authorized; 0
shares issued and outstanding.................................... 0 0
Common stock, $.01 par value, 9,000,000 shares authorized;
1,895,480 and 2,095,480 shares issued and outstanding,
respectively......................................................... 18,955 20,955
Additional paid-in capital......................................... (62,376) 170,995
Retained earnings (deficit)........................................ 11,896 (122,728)
------------ -----------
Total stockholders' equity (deficit)............................. (31,525) 69,222
------------ -----------
Total liabilities and stockholders' equity (deficit)............. $223,458 $ 559,174
------------ -----------
------------ -----------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-3
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31 MARCH 31
---------------------- ---------------------
1994 1995 1995 1996
-------- ---------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES....................................... $249,379 $1,196,208 $ 33,639 $ 512,434
DIRECT SALARIES AND COSTS...................... 215,865 957,027 68,152 499,109
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES... 73,601 200,931 12,449 125,958
DEPRECIATION................................... 13,013 24,485 4,779 9,113
-------- ---------- -------- ---------
Income (loss) from operations.............. (53,100) 13,765 (51,741) (121,746)
INTEREST EXPENSE, net.......................... 0 869 319 982
-------- ---------- -------- ---------
Income (loss) before provision for income
taxes.......................................... (53,100) 12,896 (52,060) (122,728)
PROVISION FOR INCOME TAXES..................... 0 1,000 0 0
-------- ---------- -------- ---------
Net income (loss)........................ $(53,100) $ 11,896 $(52,060) $(122,728)
-------- ---------- -------- ---------
-------- ---------- -------- ---------
PRO FORMA NET INCOME (LOSS) DATA (UNAUDITED)
(Notes 2 and 6):
Income (loss) before provision for income
taxes, as reported......................... (53,100) 12,896 (52,060) (122,728)
Pro forma income tax provision (actual for
period subsequent to January 16, 1996)......... 0 0 0 0
-------- ---------- -------- ---------
Pro forma net income (loss).............. $(53,100) $ 12,896 $(52,060) $(122,728)
-------- ---------- -------- ---------
-------- ---------- -------- ---------
PRO FORMA NET INCOME (LOSS) PER COMMON SHARE
OUTSTANDING.................................... $ .01 $ (.06)
---------- ---------
---------- ---------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING..... 1,946,373 2,013,040
---------- ---------
---------- ---------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-4
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ADDITIONAL RETAINED
NUMBER PARTNER'S PAID-IN EARNINGS
OF SHARES AMOUNT CAPITAL CAPITAL (DEFICIT) TOTAL
--------- ------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993....... 0 $ 0 $ 13,231 $ 0 $ 0 $ 13,231
Partner draws................ 0 0 (38,552) 0 0 (38,552)
Net loss..................... 0 0 (53,100) 0 0 (53,100)
--------- ------- --------- ---------- --------- --------
BALANCE, December 31, 1994....... 0 0 (78,421) 0 0 (78,421)
Termination of partnership
and capital contribution to
S Corporation.................... 75 0 78,421 (78,421) 0 0
Issuance of common stock..... 25 0 0 10,000 0 10,000
Capital contribution
(Note 8)................... 0 0 0 25,000 0 25,000
Corporate recapitalization
(Note 8)................... 1,895,380 18,955 0 (18,955) 0 0
Net income................... 0 0 0 0 11,896 11,896
--------- ------- --------- ---------- --------- --------
BALANCE, December 31, 1995....... 1,895,480 18,955 0 (62,376) 11,896 (31,525)
Termination of S
Corporation...................... 0 0 0 11,896 (11,896) 0
Issuance of common stock..... 200,000 2,000 0 221,475 0 223,475
Net loss..................... 0 0 0 0 (122,728) (122,728)
--------- ------- --------- ---------- --------- --------
BALANCE, March 31, 1996
(unaudited).................... 2,095,480 $20,955 $ 0 $ 170,995 $(122,728) $ 69,222
--------- ------- --------- ---------- --------- --------
--------- ------- --------- ---------- --------- --------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-5
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31 MARCH 31
-------------------- ---------------------
1994 1995 1995 1996
-------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $(53,100) $ 11,896 $(52,060) $(122,728)
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation................................... 13,013 24,485 4,779 9,113
Changes in-
Accounts receivable........................ (18,983) (114,711) (8,905) (184,411)
Prepaid and deferred expenses.............. 0 0 0 (49,725)
Restricted cash............................ 0 0 0 (30,000)
Other assets............................... 0 (2,530) (500) 0
Accounts payable............................. 21,730 73,210 10,300 127,402
Accrued professional fees.................. 2,500 19,500 2,375 1,931
Accrued compensation....................... 80,000 (56,048) 8,095 27,479
Accrued taxes.............................. 0 3,727 0 11,667
Other accrued expenses..................... 0 8,210 0 14,224
Customer advances.......................... 0 29,857 30,360 22,473
-------- -------- -------- ---------
Net cash (used in) provided by operating
activities......................................... 45,160 (2,404) (5,556) (172,575)
-------- -------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES--
Purchase of equipment............................ (1,184) (17,553) (3,185) (7,246)
-------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock......................... 0 10,000 10,000 223,475
Capital contribution............................. 0 25,000 0 0
Partner draws.................................... (38,552) 0 0 0
Principal payments on capital lease
obligations........................................ (4,233) (35,613) (4,585) (8,150)
Proceeds from note payable....................... 0 25,000 0 0
Proceeds from line of credit..................... 0 10,000 0 0
Payments on line of credit....................... 0 0 0 (992)
-------- -------- -------- ---------
Net cash provided by (used in) financing
activities......................................... (42,785) 34,387 5,415 214,333
-------- -------- -------- ---------
Net increase (decrease) in cash.......... 1,191 14,430 (3,326) 34,512
CASH, beginning of period.......................... 2,135 3,326 3,326 17,756
-------- -------- -------- ---------
CASH, end of period................................ $ 3,326 $ 17,756 $ 0 $ 52,268
-------- -------- -------- ---------
-------- -------- -------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest....................................... $ 0 $ 869 $ 319 $ 684
State income taxes............................. 0 1,074 0 10,505
-------- -------- -------- ---------
-------- -------- -------- ---------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Assets acquired under capital lease
obligations........................................ $ 10,767 $ 54,136 $ 16,690 $ 38,935
-------- -------- -------- ---------
-------- -------- -------- ---------
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-6
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BUSINESS:
K2 Design, Inc. and subsidiary ("K2" or the "Company") commenced operations
on March 1, 1993 as a partnership. In January 1995 the Partnership contributed
its capital into a newly formed corporation and elected S Corporation status.
Effective January, 1996, the Company was reorganized as a Delaware holding C
Corporation having a wholly-owned operating subsidiary in New York.
K2 is a full service interactive communications, design and technology
company, engaged primarily in the business of designing and creating Web sites
on the Internet. The Company also provides various other information delivery
services. The Company initially operated a traditional graphic design business
upon its founding in 1993, but shifted its principal business to Web site
creation and design at the beginning of 1995. The Company's customers are
primarily U.S.-based corporations operating in a wide variety of industries.
The accompanying unaudited financial statements as of March 31, 1996 and for
the three months ended March 31, 1996 and 1995 have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission.
Accordingly, certain information and note disclosures normally included in
financial statements prepared in conformity with generally accepted accounting
principles have been condensed or omitted. In the opinion of the Company, all
adjustments, consisting of only normal recurring adjustments, necessary to
present fairly the financial position, results of operations and changes in cash
flows for the periods presented have been made.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates in the Preparation of Financial Statements-
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition-
Web site creation and design contracts are generally completed within six to
eight weeks. Revenue is recognized on the completed contract method on an
individual contract basis. Contract costs include all direct labor costs and
other direct costs related to contract performance, such as freelance labor,
supplies, printing, and equipment costs. Customer advances include billings in
excess of costs on uncompleted contracts. Provisions for any estimated losses on
uncompleted contracts are made in the period in which such losses are
determinable.
A portion of the Company's revenues has been generated on a fixed fee for
service basis.
Equipment and Leasehold Improvements-
Equipment and leasehold improvements are carried at cost and depreciated
using the straight-line method over their estimated useful lives. Leasehold
improvements are amortized over the shorter of their estimated useful lives or
the term of the underlying lease.
F-7
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
Estimated useful lives by class of assets are as follows-
Computers and equipment...................................... 3 years
Furniture and fixtures....................................... 5 years
Leasehold improvements....................................... Life of lease
Assets purchased with capital leases are depreciated over their estimated
useful lives.
Fair Value of Financial Instruments-
The carrying amounts of the Company's cash, accounts receivable, accounts
payable and debt approximate fair market value based upon the relatively
short-term nature of these financial instruments.
Concentration of Credit-
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of trade accounts receivable. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally requires no collateral from its customers. The Company's sales to its
largest customer for the year ended December 31, 1994 constituted 44% of
revenue. The Company's sales to its three largest customers constituted
approximately 18%, 15% and 12% for the year ended December 31, 1995. The
Company's sales to its largest customer constituted approximately $313,000 for
the three months ended March 31, 1996 (unaudited). The Company had accounts
receivable from these customers amounting to $66,571 and $144,582 at December
31, 1995 and March 31, 1996 (unaudited), respectively.
Income Taxes-
As discussed in Note 1, the Company operated as a partnership during the
year ended December 31, 1994. As a result, the partners were individually liable
for federal and state income taxes on the Company's taxable income. Effective
January 1995, the Company elected to be treated as an S Corporation for Federal
income tax purposes. As a result, the shareholders are individually liable for
Federal income tax on the Company's taxable income. The Company was subject to
New York State and City income taxes. Effective January 16, 1996, the Company
was reorganized as a Delaware holding C Corporation having a wholly-owned
subsidiary in New York.
The Company provides federal and state income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS 109). Under the asset and liability method of SFAS 109, deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.
Pro Forma Net Income (Loss) Per Common Share-
Pro forma net income (loss) per common share has been computed by dividing
pro forma net income (loss) by the number of common shares outstanding. As
required by the Securities and Exchange Commission rules, all warrants, options
and shares issued within one year of the public
F-8
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
offering at less than the public offering price (see Note 8) are assumed to be
outstanding for each year presented for purposes of the per share calculation.
Stock Based Compensation-
The Financial Accounting Standards Board has issued a new standard,
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 requires that
an entity account for employee stock compensation under a fair value based
method. However, SFAS 123 also allows an entity to continue to measure
compensation cost for employee stock-based compensation using the intrinsic
value based method of accounting prescribed by APB Opinion No. 25, "Accounting
for Stock Issued to Employees" ("Opinion 25"). Entities electing to remain with
the accounting under Opinion 25 are required to make pro forma disclosures of
net income and earnings per share as if the fair value based method of
accounting under SFAS 123 had been applied. The Company will adopt the
disclosure requirements of SFAS 123 during 1996.
Restricted Cash-
Restricted cash represents a certificate of deposit, which matures in April
1997, assigned as a security deposit for the Company's new office space.
(3) EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements, at cost, including capital leases
(Note 5), summarized by major categories, consist of the following-
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Computers and equipment............................. $ 86,588 $ 125,523
Furniture and fixtures.............................. 6,098 6,098
Leasehold improvements.............................. 6,193 13,439
------------ -----------
98,879 145,060
Less--Accumulated depreciation...................... 31,276 40,389
------------ -----------
Equipment and leasehold improvements, net..... $ 67,603 $ 104,671
------------ -----------
------------ -----------
</TABLE>
F-9
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) NOTE PAYABLE, LINE OF CREDIT AND CAPITAL LEASE OBLIGATIONS:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Note payable to Republic National Bank dated October 10, 1995,
bearing interest at prime + 2%, due October 10, 1996............... $ 25,000 $25,000
Chemical Bank $10,000 line of credit dated November 1, 1995, bearing
interest at prime + 3% payable in 36 equal monthly installments...... 10,000 9,008
Capital lease obligations (Note 5)................................... 37,297 68,082
------------ -----------
72,297 102,090
Less--Current maturities............................................. 45,770 55,708
------------ -----------
$ 26,527 $46,382
------------ -----------
------------ -----------
</TABLE>
The note payable to Republic National Bank is personally guaranteed by the
stockholders of the Company. The interest rates on the note payable and line of
credit at December 31, 1995 were 10.75% and 11.75%, respectively.
Future principal payments on debt at December 31, 1995 are as follows-
<TABLE>
<CAPTION>
<S> <C>
1996............................................................. $45,770
1997............................................................. 14,531
1998............................................................. 9,990
1999............................................................. 1,719
2000............................................................. 287
-------
$72,297
-------
-------
</TABLE>
Interest expense for the years ended December 31, 1994 and 1995 and the
three months ended March 31, 1995 and 1996 (unaudited) amounted to $0 and $939,
$319 and $982, respectively.
(5) CAPITAL LEASE OBLIGATIONS:
The Company is a lessee in noncancelable leasing agreements for certain
computers and equipment. Future minimum lease payments are as follows-
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
1996................................................ $ 22,972 $ 28,118
1997................................................ 15,284 31,457
1998................................................ 9,174 25,347
1999................................................ 2,493 5,426
2000................................................ 415 415
------------ -----------
Total minimum lease payments.................... 50,338 90,763
Less--Imputed interest.............................. (13,041) (22,681)
------------ -----------
Capital lease obligation...................... $ 37,297 $ 68,082
------------ -----------
------------ -----------
</TABLE>
F-10
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) PRO FORMA INCOME TAXES (UNAUDITED):
As described in Note 2, the Company previously elected "S" corporation
status under the provisions of the Internal Revenue Code. In January, 1996 the
Company reorganized as a Delaware Holding C Corporation in contemplation of the
initial public offering.
The following unaudited pro forma information has been determined based upon
the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). This information reflects income tax
expense that the Company would have incurred had it been subject to Federal and
state income taxes. The Company would not have a Federal and state income tax
provision because of net operating loss carryforwards for all periods presented.
On a pro forma basis, the Company would have net operating loss
carryforwards of approximately $40,000 as of December 31, 1995. On a pro forma
basis, the Company would have recorded a deferred tax asset and related
valuation allowance associated with these carryforwards of approximately
$16,000. The valuation allowance would have been recorded due to the uncertainty
of the realization of the asset.
At March 31, 1996, the Company had net operating loss carryforwards of
approximately $120,000 which expire in 2011. The Company has recorded a deferred
tax asset of approximately $45,000 related to the loss carryforward and a
corresponding valuation allowance due to the uncertainty of the realization of
the asset.
The pro forma income tax provision (benefit) differs from the amounts
computed by applying the Federal statutory rate of 34% to (loss) income before
taxes as follows-
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
------------------- --------------------
1994 1995 1995 1996
-------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Tax provision (benefit) at the statutory rate...... $(18,054) $ 4,385 $(17,700) $(41,728)
State income taxes, net of Federal benefit......... (3,186) 774 (3,124) (7,364)
Operating loss carryforward........................ 21,240 (5,159) 20,824 49,092
-------- ------- -------- --------
$ 0 $ 0 $ 0 $ 0
-------- ------- -------- --------
-------- ------- -------- --------
</TABLE>
(7) COMMITMENTS AND CONTINGENCIES:
The Company is located at 80 East 11th Street, New York, New York. The
Company's lease expires on February 29, 1996, after which time the Company plans
to renew its lease from month to month at the present rate until such time as
the Company moves to its new space, expected to occur by June 30, 1996. At
December 31, 1995, future minimum rental payments for the year ending December
31, 1996 is $6,450.
Rental expense charged to selling, general and administrative expenses for
the years ended December 31, 1994 and 1995 and the three months ended March 31,
1995 and 1996 (unaudited) amounted to $8,859, $29,150, $4,800 and $10,150,
respectively.
F-11
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES:--(CONTINUED)
Lease Agreement-
The Company has entered into a five year lease agreement to expire on April
30, 2001, for new office space at 55 Broad Street, New York, New York. At
December 31, 1995, future minimum rental payments anticipated under this lease
are as follows-
1996................................................................. $63,381
1997................................................................. 95,071
1998................................................................. 95,071
1999................................................................. 95,071
2000................................................................. 95,071
2001................................................................. 31,690
(8) STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock-
In July 1995, the stockholders contributed 25% of their common stock to the
Company. These shares were then reissued to an officer of the Company in
settlement of a $25,000 payable due to the officer for services rendered to the
Company prior to his employment with the Company.
Corporate Reorganization-
Effective January, 1996, the Company was reorganized as a Delaware holding C
corporation having a wholly owned operating subsidiary incorporated in New York.
The reorganized corporation is authorized to issue 9,000,000 shares of common
stock, par value $.01 per share, and 1,000,000 shares of Preferred Stock, par
value $.01 per share. The 100 shares of common stock of the predecessor
corporation that were issued and outstanding at the date of reorganization were
exchanged for 1,895,480 shares of common stock in the reorganized corporation.
The accompanying financial statements have been adjusted to reflect the above
reorganization.
In addition, as a result of termination of the S Corporation in January
1996, the retained earnings as of that date were transferred to additional paid
in capital. At March 31, 1996 the accompanying consolidated balance sheet and
consolidated statements of stockholders' equity (deficit) has been adjusted to
reflect this termination.
1996 Stock Option Plan-
Effective January 16, 1996, the Company adopted the 1996 Stock Option Plan
(the "Plan"), pursuant to which designated employees, including officers and
directors of the Company and certain outside consultants, will be entitled to
receive nonqualified stock options and qualified stock incentive compensation.
An aggregate of 225,000 shares of common stock are available for grant under the
Plan and have been reserved for this purpose.
The Plan expires on January 1, 2006. Under the terms of the Plan, the
minimum exercise price of options granted cannot be less than 100% of the fair
market value of the common stock of the Company on the option grant date.
Options granted under the Plan expire ten years after the option grant date. For
incentive stock options granted to such persons who would be deemed to have in
excess of a 10% ownership interest in the Company, the option price shall not be
less than 110% of such fair market
F-12
<PAGE>
K2 DESIGN, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
value for all options granted, and the options expire five years after the
option grant date. Options granted are exercisable in five equal annual
installments commencing on the option grant date.
Options to purchase an aggregate of 75,000 shares of Common Stock were
granted to the four executive officers of the Company. Specifically, each were
granted options to acquire (i) 6,250 shares of Common Stock at an exercise price
of $1.75 per share, (ii) 6,250 shares of Common Stock at an exercise price of
$3.50 per share and (iii) 6,250 shares of Common Stock at an exercise price of
$6.75 per share.
In January, 1996, the Company issued an option to purchase an aggregate of
25,000 shares of common stock at an exercise price of $1.75 per share to a
consultant to the Company for services to be rendered during 1996.
Private Placements-
Effective February 29, 1996, the Company consummated a private placement
offering in which it sold 200,000 shares of its common stock at $1.25 per share.
Effective May 9, 1996, the Company consummated a second private placement
offering in which it sold 400,002 shares of its common stock at $1.75 per share.
The Company intends to utilize the net proceeds from these offerings of
approximately $845,000 for the payment of expenses in connection with the
Proposed Public Offering, and for working capital and general corporate
purposes.
Proposed Public Offering-
The Company has entered into a letter of intent (the "Letter of Intent")
with the representative of the underwriters relating to the Proposed Public
Offering, pursuant to which the underwriters would offer 1,000,000 units of the
Company's securities to the public (the Public Units), each consisting of one
share of common stock and one warrant. Two warrants will entitle the holder to
purchase one share of Common Stock at an expected exercise price equal to 125%
of the public offering price of the Common Stock included in the Public Units.
As of March 31, 1996, the Company had deferred certain direct costs totaling
approximately $22,500 incurred in connection with its anticipated offering. Such
costs will be netted against the proceeds of the offering. See "Risk Factors" in
the registration statement.
F-13
<PAGE>
[PHOTOGRAPHS]
www.prusec.com
MCI
Expert Business Solutions
K2 designed and created this page for an MCI Intranet.
National Association Of
Printers & Lithographers
K2 designed and created this site that includes a database application utility
that enables users to input certain sales and operating data and instantly
generate a bar chart of statistical information comparing their data to the rest
of the industry.
Pipeline New York
K2 designed and created point-of-purchase displays, diskette covers and
packaging along with thematic advertising and marketing campaigns.
<PAGE>
- ---------------------------------------- --------------------------------------
- ---------------------------------------- --------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON
HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, AND, IF 1,000,000 UNITS
GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITER. THIS PROSPECTUS DOES CONSISTING OF
NOT CONSTITUTE AN OFFER TO SELL OR A 1,000,000 SHARES OF
SOLICITATION OF AN OFFER TO BUY ANY COMMON STOCK AND
SECURITIES OFFERED HEREBY BY ANYONE IN 1,000,000 REDEEMABLE COMMON
ANY JURISDICTION IN WHICH SUCH OFFER OR STOCK PURCHASE WARRANTS
SOLICITATION IS NOT AUTHORIZED OR IN
WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO
OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE K2 DESIGN, INC.
SUBSEQUENT TO THE DATE HEREOF.
-------------------
TABLE OF CONTENTS
PAGE
----
----------------
Prospectus Summary.................... 3
Risk Factors.......................... 9 PROSPECTUS
Use of Proceeds....................... 18
Dilution.............................. 19 ----------------
Capitalization........................ 20
Dividend Policy....................... 20
Selected Financial Data............... 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 27
Management............................ 36
Principal Stockholders................ 39
Selling Stockholders and Plan of DONALD & CO.
Distribution.......................... 40 SECURITIES INC.
Certain Transactions.................. 42
Description of Securities............. 43
Shares Eligible for Future Sale....... 48
Underwriting.......................... 50
Legal Matters......................... 51
Experts............................... 52
Available Information................. 52
Glossary.............................. 53
Index to Financial Statements......... F-1
-------------------
UNTIL AUGUST 20, 1996 (25 DAYS AFTER
THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT JULY 26, 1996
PARTICIPATING IN THIS DISTRIBUTION, MAY
BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ---------------------------------------- --------------------------------------
- ---------------------------------------- --------------------------------------
<PAGE>
FILED PURSUANT TO RULE 424(b)(1)
REGISTRATION NO. 333-4319
[ALTERNATE PAGE FOR STOCKHOLDER PROSPECTUS]
DATED JULY 26, 1996
PROSPECTUS
K2 DESIGN, INC.
-------------------
600,002 SHARES OF COMMON STOCK
This Prospectus relates to the sale of 600,002 shares of Common Stock of K2
Design, Inc., (the "Company") by certain Selling Stockholders who either
purchased these shares in connection with private placements by the Company on
who purchased such shares directly from private placement investors. The Selling
Stockholders may offer a total of up to 600,002 shares of Common Stock owned by
them for sale as principals for their own accounts at any time, and from time to
time, in the over-the-counter market, negotiated transactions through the
writing of options on the Common Stock, or a combination of such methods of
sale, at fixed prices which may be changed, at market prices prevailing at the
time of sale or at negotiated prices, commencing one year from the date of this
Prospectus. The Company will not receive any of the proceeds from the sale of
the Common Stock offered hereby. The registration statement of which this
Prospectus forms a part must be current at any time during which a Selling
Stockholder sells shares of Common Stock, and a current Prospectus must be
delivered to a purchaser of the Common Stock when a Selling Stockholder sells
such securities. See "Selling Stockholders and Plan of Distribution" and
"Description of Securities."
A Prospectus substantially the same as this Prospectus was also used in
connection with an underwritten public offering by the Company of 1,000,000
Units which became effective on July 26, 1996. Each of such Units consisted of
one share of Common Stock and one redeemable common stock purchase warrant
(each, a "Warrant"). Two Warrants entitle the holder to purchase one share of
Common Stock at a price of $7.50. References in this Prospectus to the offering,
unless otherwise noted, are with respect to the underwritten offering. The
Representative may receive commissions in connection with the sale of Common
Stock by the Selling Stockholders effected through the Representative, but will
receive no other compensation in connection with sales by the Selling
Stockholders.
-------------------
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL
DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 9 HEREOF.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
[ALTERNATIVE PAGE FOR STOCKHOLDER PROSPECTUS]
=========================================== ==================================
- ------------------------------------------- ----------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS
BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS 600,002 SHARES
MUST NOT BE RELIED UPON AS HAVING BEEN OF COMMON STOCK
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OFFERED HEREBY IN ANY JURISDICTION
TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
SUCH DATE.
--------------------- K2 DESIGN, INC.
TABLE OF CONTENTS
PAGE
---- -------------------
Prospectus Summary.................... 3 PROSPECTUS
Risk Factors.......................... 9 -------------------
Dilution.............................. 19
Capitalization........................ 20
Dividend Policy....................... 20
Selected Financial Data............... 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 27
Management............................ 36
Principal Stockholders................ 39
Selling Stockholders and Plan of
Distribution......................... 40
Certain Transactions.................. 42
Description of Securities............. 43
Shares Eligible for Future Sale....... 48
Legal Matters......................... 51
Experts............................... 52
Available Information................. 52
Glossary.............................. 53
Index to Consolidated Financial
Statements........................... F-1
-------------------
UNTIL AUGUST 20, 1996, ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN JULY 26, 1996
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
=========================================== ==================================
- ------------------------------------------- ----------------------------------
