<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1996.
REGISTRATION NO. 333-3860
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 11
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
E-NET, INC.
(Name of Small Business Issuer in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 1711 52-1929282
(State or other jurisdiction of (Primary standard industrial (IRS employer
incorporation or organization) classification code number) identification number)
</TABLE>
7-4 METROPOLITAN COURT
GAITHERSBURG, MARYLAND 20878
(301) 548-8880
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
7-4 METROPOLITAN COURT
GAITHERSBURG, MARYLAND 20878
(301) 548-8880
(Address of principal place of business or intended principal place of business)
ROBERT A. VESCHI, PRESIDENT AND CHIEF EXECUTIVE OFFICER
E-NET, INC.
7-4 METROPOLITAN COURT
GAITHERSBURG, MARYLAND 20878
(301) 548-8880
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
THOMAS T. PROUSALIS, JR., ESQ. STEVEN F. WASSERMAN, ESQ.
1919 Pennsylvania Avenue, N.W. Berstein & Wasserman, LLP
Suite 800 950 Third Avenue
Washington, D.C. 20006 New York, NY 10022
(202) 296-9400 (212) 826-0730
(202) 296-9403 Fax (212) 371-4730 Fax
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
IF ANY OF THE SECURITIES BEING REGISTERED ON THIS FORM ARE TO BE OFFERED ON
A DELAYED OR CONTINUING BASIS, PURSUANT TO RULE 415 UNDER THE SECURITIES ACT OF
1933, AS AMENDED, CHECK THE FOLLOWING BOX: /X/
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER SECURITY OFFERING PRICE FEE
<S> <C> <C> <C> <C>
Units........................... 575,000 $14.00 $ 8,050,000 $ 2,776
Common Stock, $.01 Par Value.... 1,150,000 -- -- --
Class A Warrants................ 1,150,000 -- -- --
Common Stock, $.01 Par Value,
Underlying Class A Warrants.... 1,150,000 $ 7.50 $ 8,625,000 $ 2,974
Underwriters' Purchase Option... 50,000 $23.10 $ 1,155,000 $ 398
Common Stock $.01, Par Value, in
Underwriters' Purchase
Option......................... 100,000 -- -- --
Class A Warrants in
Underwriters' Purchase
Option......................... 100,000 -- -- --
Common Stock, $.01 Par Value,
Underlying Class A Warrants in
Underwriters' Purchase
Option......................... 100,000 $ 7.50 $ 750,000 $ 259
Total Registration and Fee.... $18,580,000 $ 6,407
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.
ii
<PAGE>
E-NET, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B)
SHOWING LOCATION IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF FORM SB-2
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM CAPTION IN PROSPECTUS
- --------------------------------------------- ---------------------------------
<C> <S> <C>
1. Front of Registration Statement and
Outside Front Cover of Prospectus...... Facing Page; Cross-Reference
Sheet; Prospectus Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus.................... Prospectus Cover Page; Prospectus
Back Cover Page
3. Summary Information and Risk Factors.... Prospectus Summary; The Company;
Risk Factors
4. Use of Proceeds......................... Use of Proceeds
5. Determination of Offering Price......... Risk Factors; Underwriting
6. Dilution................................ Dilution and Other Comparative
Data
7. Selling Security-holders................ Description of Securities
8. Plan of Distribution.................... Prospectus Cover Page;
Underwriting
9. Legal Proceedings....................... Legal Proceedings
10. Directors, Executive Officers, Promoters
and Control Persons.................... Management; Principal
Shareholders
11. Security Ownership of Certain Beneficial
Owners and Management.................. Principal Shareholders
12. Description of Securities............... Description of Securities
13. Interest of Named Experts and Counsel... Legal Matters; Experts
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................ Certain Transactions
15. Organization Within Five Years.......... Prospectus Summary; Business
16. Description of Business................. Business
17. Management's Discussion and Analysis or
Plan of Operation...................... Management's Discussion and
Analysis or Plan of Operation
18. Description of Property................. Business
19. Certain Relations and Related
Transactions........................... Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters.................... Description of Securities
21. Executive Compensation.................. Management
22. Financial Statements.................... Financial Statements
23. Changes in and Disagreements With
Accountants on Accounting and Financial
Disclosure............................. Not applicable
</TABLE>
iii
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 31, 1996
PROSPECTUS
500,000 UNITS
E-NET, INC.
e-Net, Inc. ("Company"), a Delaware corporation, is offering 500,000 units
("Units") at a price of $14.00 per Unit. Each Unit consists of two shares of
common stock ("Common Stock"), $.01 par value, and two redeemable Class A
warrants ("Class A Warrants"). The Common Stock and Class A Warrants are
detachable and may trade separately immediately upon issuance. See "Risk
Factors" and "Description of Securities."
The Class A Warrants shall be exercisable commencing one year after the date
of this Prospectus ("Effective Date"). Each Class A Warrant entitles the holder
to purchase one share of Common Stock at $7.50 per share during the four year
period commencing one year from the Effective Date hereof. The Class A Warrants
are redeemable by the Company for $.05 per Warrant, at any time after
, 1998, upon thirty (30) days' prior written notice, if the average
closing price or bid price of the Common Stock, as reported by the principal
exchange on which the Common Stock is quoted, the Nasdaq SmallCap Market
("Nasdaq") or the OTC Bulletin Board, as the case may be, equals or exceeds
$10.00 per share, for any twenty (20) consecutive trading days within a period
of thirty (30) days ending within ten (10) days of the notice of redemption.
Upon thirty (30) days' prior written notice to all holders of the Class A
Warrants, the Company shall have the right to reduce the exercise price and/or
extend the term of the Class A Warrants in compliance with the requirements of
Rule 13e-4 to the extent applicable. See "Description of Securities."
The Company has applied for the inclusion of the securities ("Securities")
on the National Association of Securities Dealers, Inc. ("NASD") OTC Bulletin
Board, an unorganized, inter-dealer, over-the-counter market which provides
significantly less liquidity than the Nasdaq SmallCap Market System ("Nasdaq"),
and quotes for stocks included on the OTC Bulletin Board are not listed in the
financial sections of newspapers as are those for the Nasdaq National Market
System. In the event the Securities are not included on the OTC Bulletin Board,
quotes for the Securities may be included in the "pink sheets" for the
over-the-counter market. The Company applied for inclusion of its Securities on
Nasdaq. While the application was granted by the Nasdaq Listing Qualifications
Committee ("Qualifications Committee"), the Company was advised by the Nasdaq
Hearing and Review Committee ("Review Committee") that it determined to reverse
the decision of the Qualifications Committee approving the listing of the
Company's Securities on Nasdaq. The determination of the Review Committee is not
final pending the review and decision of the boards of directors ("Boards of
Directors") of The Nasdaq Stock Market, Inc. and NASD, Inc., which may occur in
a short time frame. In the event the Boards of Directors renders a decision to
affirm the determination of the Review Committee, the Company's securities will
be delisted from Nasdaq and the Company's securities will be traded on the OTC
Bulletin Board, which may materially affect the trading and liquidity of the
Company's securities. See "Risk Factors -- Penny Stock Regulations May Impose
Certain Restrictions on Marketability of Securities."
Prior to this offering, there has been no public market for the Units,
Common Stock and Class A Warrants. The price of the Units, as well as the
exercise price of the Class A Warrants, was arbitrarily determined by
negotiations between the Company and the Underwriter, and do not bear any
relationship to the Company's assets, book value, net worth or results of
operations or any other established criteria of value. For additional
information regarding the factors considered in determining the initial public
offering price of the Units and the exercise price of the Class A Warrants, see
"Risk Factors -- Arbitrary Offering Price," "Description of Securities" and
"Underwriting."
The Underwriter from time to time will become a market maker and otherwise
effect transactions in the securities of this offering. The Underwriter, if it
participates in the market, may become an influence and thereafter a factor of
increasing importance in the market for the securities. However, there is no
assurance that the Underwriter will or will continue to be a dominating
influence. The prices and liquidity of the Units may be significantly affected
by the degree, if any, of the Underwriter's participation in such market as a
market maker. The Underwriter may discontinue such market making activities at
any time or from time to time.
The Company does not presently file reports and other information with the
Securities and Exchange Commission. However, following completion of this
offering, the Company will be subject to the reporting requirements of the
Securities Exchange Act of 1934 and, as such, intends to furnish its
stockholders with annual reports containing audited financial statements and
such interim reports as may be required by law. The Company's fiscal year ends
March 31.
On February 28, 1995, the Underwriter became subject to a court-imposed
permanent injunction to comply with certain procedures recommended by an
independent consultant arising out of the settlement of a Securities and
Exchange Commission ("Commission") proceeding. The failure by the Underwriter to
comply with the permanent injunction may adversely affect the Underwriter's
activities in that the court may issue a further order restricting the ability
of the Underwriter to act as a market maker of the Company's securities. See
"Risk Factors."
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION OF THE BOOK VALUE OF THE COMMON STOCK
INCLUDED IN THE UNITS AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN
AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS,"
PAGE 7, AND "DILUTION."
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>
UNDERWRITING DISCOUNTS PROCEEDS TO THE
PRICE TO PUBLIC AND COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
Per Unit................................. $14.00 $1.40 $12.60
Total(3)................................. $7,000,000 $700,000 $6,300,000
</TABLE>
(SEE "NOTES," NEXT PAGE)
THE SECURITIES ARE OFFERED BY THE UNDERWRITER ON A "FIRM COMMITMENT" BASIS
SUBJECT TO PRIOR SALE WHEN, AS AND IF DELIVERED TO AND ACCEPTED BY THE
UNDERWRITER, AND SUBJECT TO THE UNDERWRITER'S RIGHT TO REJECT ORDERS IN WHOLE OR
IN PART AND TO CERTAIN OTHER CONDITIONS. IT IS EXPECTED THAT DELIVERY OF
CERTIFICATES REPRESENTING THE SECURITIES OF THE OFFERING WILL BE MADE ON OR
ABOUT AUGUST , 1996.
------------------------------
STRATTON OAKMONT, INC.
The date of this Prospectus is August , 1996.
<PAGE>
NOTES
(1) Does not include additional compensation to be received by the Underwriter
in the form of (i) a nonaccountable expense allowance of $210,000 if 500,000
Units are sold (or $241,500 if the Underwriter's Over-allotment Option is
fully exercised); and (ii) an option (exercisable for a period of four years
commencing one year after the date of this Prospectus) entitling the
Underwriter to purchase 50,000 Units at $23.10 per Unit ("Underwriter's
Purchase Option"). In addition, the Company and the Underwriter have agreed
to indemnity and contribution provisions regarding certain civil
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Principal Stockholders" and "Underwriting."
(2) Before deducting expenses of this offering payable by the Company, estimated
at $1,000,000, including the Underwriter's nonaccountable expense allowance.
See "Underwriting."
(3) The Company has granted the Underwriter a 30-day Over-allotment Option from
the date of this Prospectus to purchase up to 75,000 additional Units upon
the same terms and conditions as set forth above, solely to cover
over-allotments, if any. If such Underwriter's Over-allotment Option is
exercised in full, the total Price to the Public, Underwriting Discounts and
Proceeds to the Company will be $8,050,000, $805,000 and $7,245,000,
respectively. See "Underwriting."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALL-CAP MARKET, THE OTC BULLETIN
BOARD OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME. SEE "RISK FACTORS."
THE SECURITIES TO BE SOLD IN THIS OFFERING MAY, IN THE ORDINARY COURSE OF
BUSINESS, BE SOLD ONLY TO CUSTOMERS OF THE UNDERWRITER, AND THE CONCENTRATION OF
SECURITIES IN CUSTOMERS OF THE UNDERWRITER MAY ADVERSELY AFFECT THE MARKET FOR
AND LIQUIDITY OF THE COMPANY'S SECURITIES SINCE THE UNDERWRITER MAY BE THE ONLY
MARKET MAKER. IN THE EVENT THAT ADDITIONAL BROKER-DEALERS DO NOT MAKE A MARKET
IN THE COMPANY'S SECURITIES AND THE UNDERWRITER BECOMES A MARKET MAKER, THE
UNDERWRITER MAY BECOME A DOMINATING INFLUENCE ON THE MARKET. NO OTHER BROKER-
DEALER HAS INDICATED THAT IT WILL MAKE A MARKET IN THE COMPANY'S SECURITIES. THE
UNDERWRITER DOES NOT HAVE ANY CURRENT PLANS OR AGREEMENTS TO OFFER AND/OR SELL
ANY OF THE SECURITIES TO A SPECIFIC CUSTOMER OR CUSTOMERS. SUCH PURCHASERS, AS
CUSTOMERS OF THE UNDERWRITER, SUBSEQUENTLY MAY ENGAGE IN TRANSACTIONS FOR THE
SALE OR PURCHASE OF THE SECURITIES THROUGH AND/OR WITH THE UNDERWRITER, ALTHOUGH
NO AGREEMENTS OR UNDERSTANDINGS, WRITTEN OR ORAL, EXIST FOR SUCH TRANSACTIONS,
AND SUCH TRANSACTIONS MAY FURTHER ENHANCE THE UNDERWRITER'S DOMINATING INFLUENCE
ON THE MARKET. SEE "RISK FACTORS -- LITIGATION INVOLVEMENT OF UNDERWRITER MAY
HAVE ADVERSE CONSEQUENCES -- UNDERWRITER'S INFLUENCE ON THE MARKET MAY HAVE
ADVERSE CONSEQUENCES."
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission
("Commission"), Washington, D.C. 20549, a Registration Statement on Form SB-2,
pursuant to the Securities Act of 1933, as amended, with respect to the
securities offered by this Prospectus. This Prospectus does not contain all of
the information set forth in said Registration Statement, and the exhibits
thereto. For further information with respect to the Company and the securities
offered hereby, reference is made to said Registration Statement and exhibits
which may be inspected without charge at the Commission's principal office at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
The Company does not presently file reports and other information with the
Securities and Exchange Commission. However, following completion of this
offering, the Company will be subject to the reporting requirements of the
Securities Exchange Act of 1934 and, as such, intends to furnish its
stockholders with annual reports containing audited financial statements and
such interim reports as may be required by law. The Company's fiscal year ends
March 31.
The Company will provide without charge to each person who receives this
Prospectus, upon written or oral request of such person, a copy of any of the
information that is incorporated by reference herein (excluding exhibits) by
contacting the Company at 7-4 Metropolitan Court, Gaithersburg, Maryland 20878,
telephone (301) 548-8880, attention: chief financial officer.
SPECIAL STANDARDS FOR SECURITIES SOLD IN CALIFORNIA
Each California investor, and each transferee thereof who also is a
California investor, must have an annual gross income of at least $65,000 and a
net worth, exclusive of home, furnishings and automobiles, of at least $250,000,
or in the alternative, a net worth exclusive of home, furnishings and
automobiles, of at least $500,000. In addition, an investor's total purchase may
not exceed 10% of such investor's net worth.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including notes thereto, appearing
elsewhere in this Prospectus.
THE COMPANY
e-Net, Inc. develops, markets and supports open client, server and
integrated applications software that enables local, national and international
telephone communications, information exchange and commerce over the Internet
and private Internet Protocol ("IP") networks. The Company's software products
are designed to deliver high levels of performance, ease of use and security.
These software products allow individuals and organizations to execute secure,
or private, voice communications across the Internet, through the use of
authentication technology, for local national and international telephone
communications, information exchange and commerce. In addition, through the use
of the Company's software, organizations can extend their internal information
systems and enterprise applications to geographically dispersed facilities,
remote offices and mobile employees.
In March 1996, the Company acquired all rights, title and interest in the
first U.S. patent, U.S. Patent No. 5,526,353, for a system and method for
communicating high fidelity and clear transmission of audio or voice over the
Internet, enabling free worldwide high fidelity and clear transmission of
ordinary telephone communications over the Internet. The Company acquired all
rights, title and interest in the patent from the inventors, Messrs. Arthur
Henley and Scott Grau, who are original stockholders of the Company, in
consideration of a five percent overriding royalty interest against gross
profits involving the use of the patent. The Company has agreed to allocate
$1,000,000 of capital of this offering to develop and exploit the market
opportunities for the patent by December 31, 1996, or the patent will be subject
to repurchase by the inventors of the patent. The Company believes that its
patent is the first patent awarded of its kind, specifically involving the
transmission of audio or voice over the Internet. The Company also believes that
its patent may provide certain strategic and technological advantages in the new
and burgeoning area of audio or voice over the Internet. The Company can make no
assurances, however, as to the extent of the advantages or protection, if any,
that may be granted to the Company as a result of its patent or as to the future
success of the Company in bringing products related to this technology to
market. The Company's first product utilizing its patent is Telecom-2000-TM-, a
hardware and software suite designed for voice over the Internet, which is in
the final testing stage and projected to be available to market by the end of
the Company's third quarter of fiscal 1997.
In March 1996, e-Net entered into an agreement with Sprint Communications
Company, L.P. ("Sprint"), a leading telecommunications company, under which
e-Net will deliver certain software development services known as Sprint
Internet Protocol Dial Services support. Sprint, to date, has been the Company's
largest customer. Under the agreement, e-Net will use highly technical software
development services to provide security and field support to Sprint customers
who use Sprint as a means of accessing the Internet. e-Net's agreement provides
that e-Net will generate all of the revenues associated with the number of
authorized Sprint Internet Protocol Dial Service user identity codes. e-Net
shall also perform password administration, customer service administration and
emergency help desk administration under the terms of the agreement. The
agreement has a duration of one year, with automatic one year renewals, subject
to mutual consent. e-Net intends to seek additional strategic alliances with the
Regional Bell Operating Companies (RBOC's) for the use of its technologies,
products and services. The Company has not entered into any negotiations to
enter into any strategic alliances with the RBOC's. The Company can make no
assurances that it will be able to enter into any agreements with such concerns
for its technologies, products and services.
Also, in June 1996, e-Net entered into a letter of intent with the Product
Management Group of the Advanced Data Services Division of Sprint to enter into
an agreement to provide certain of e-Net's technologies, products and services
to Sprint to enable Sprint's frame relay customers, approximately
3
<PAGE>
1,500 nationwide, to generate network data reports on an automated basis for
their virtual private networks. The Company can make no assurances that it will
be able to enter into an agreement with Sprint for its technologies, products
and services.
In addition to the compensation to be received by the Underwriter in the
form of commissions in the amount of $700,000 if 500,000 Units are sold (or
$805,000 if the Underwriter's Over-allotment Option is fully exercised), the
Underwriter will receive (i) a nonaccountable expense allowance of $210,000 if
500,000 Units are sold (or $241,500 if the Underwriter's Over-allotment Option
is fully exercised); and (ii) an option (exercisable for a period of four years
commencing one year after the date of this Prospectus) entitling the Underwriter
to purchase 50,000 Units at $23.10 per unit ("Underwriter's Purchase Option").
The Company has granted the Underwriter a 30-day Over-allotment Option from the
date of this Prospectus to purchase up to 75,000 additional Units upon the same
terms and conditions as set forth above, solely to cover over-allotments, if
any. If such Over-allotment Option is exercised in full, the total Price to the
Public, Underwriting Discounts and Proceeds to the Company will be $8,050,000,
$805,000 and $7,245,000, respectively. See "Underwriting."
As a result of this offering, certain members of management will
substantially benefit in the amount of remuneration to be paid to them from the
proceeds of this offering in fiscal 1997. See "Management -- Remuneration."
In March and April 1996, the Company borrowed $1,000,000 in a bridge loan
from four persons who are nonaffiliated with the Underwriter and the Company, to
wit: Edward Ratkovich ($500,000), Robert Foise ($250,000), Armstrong Industries
($200,000) and Martin Sumichrast ($50,000), at the rate of eight percent simple
annual interest. General Ratkovich and Mr. Sumichrast are officers, directors
and principal stockholders of Nasdaq listed companies recently underwritten by
the Underwriter. In further consideration of the bridge loan, the Company issued
1,000,000 shares of Common Stock, 1,000,000 Class A Warrants and 1,000,000 Class
B Warrants to such persons. However, in June 1996, such persons converted their
loans to equity in consideration of the prior issuance of the securities. See
"Certain Transactions" and "Description of Securities."
Also, as a result of this offering, after deducting underwriting discounts
of $700,000 and other expenses of the offering estimated to be $1,000,000, which
includes the Underwriter's nonaccountable expense allowance of $210,000,
assuming an offering price of $14.00 per Unit, the Company will receive net
proceeds from the offering of approximately $5,300,000. These proceeds,
excluding the exercise of any of the Warrants, will be utilized by the Company
for approximately 12 months. See "Use of Proceeds."
In July 1996, the Company caused a 2:1 reverse split of its issued and
outstanding shares of common stock, Class A Warrants and Class B Warrants,
resulting in 4,000,000 shares of common stock, 1,000,000 Class A Warrants and
1,000,000 Class B Warrants currently issued and outstanding.
The Company was incorporated in the State of Delaware on January 9, 1995,
and began its operations on June 8, 1995. The principal executive offices of the
Company are located at 7-4 Metropolitan Court, Gaithersburg, Maryland 20878, and
its telephone number is (301) 548-8880. Unless the context otherwise indicates,
the terms "Company" and "e-Net" as used in this Prospectus refer to e-Net, Inc.
SEE "RISK FACTORS," "MANAGEMENT" AND "CERTAIN TRANSACTIONS" FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING THE COMPANY AND ITS
BUSINESS.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered by Company(1)(3)..... 500,000 Units
Shares of Common Stock Outstanding Prior 4,000,000 Shares
to Offering.............................
Shares of Common Stock Outstanding After 5,000,000 Shares
Offering(2).............................
Comparative Share Ownership Upon
Completion of Offering:
Present Stockholders (4,000,000 80.00%
Shares)(4)...........................
Public Stockholders (1,000,000 20.00%
Shares)(4)...........................
Use of Net Proceeds of Sale of Administrative expenses, operating
Securities Offered by Company........... costs and working capital, including
software support and development,
capital equipment, marketing and
sales, mergers and acquisitions and
the repayment of debt. See "Use of
Proceeds."
Proposed Nasdaq SmallCap Market EENTU
Symbols(5).............................. EENT
EENTW
</TABLE>
- ------------------------
(1) The Company is offering 500,000 Units at a price of $14.00 per Unit. Each
Unit consists of two shares of Common Stock and two redeemable Class A
Warrants. The Class A Warrants shall be exercisable commencing one year
after the date of the Prospectus. Each Class A Warrant entitles the holder
to purchase one share of Common Stock at $7.50 per share during the four
year period commencing one year from the Effective Date hereof. The Class A
Warrants are redeemable upon certain conditions. Should the Class A Warrants
be exercised, of which there is no assurance, the Company will receive the
proceeds therefrom aggregating up to an additional $7,500,000. See
"Description of Securities."
(2) Assumes no exercise of (i) the Class A Warrants offered hereby; (ii) the
Underwriter's Over-allotment Option to purchase up to 75,000 Units; and
(iii) the Underwriter's Purchase Option to purchase up to 50,000 Units. See
"Description of Securities" and "Underwriting."
(3) The public offering price of the Units and the exercise price and other
terms of the Class A Warrants were arbitrarily determined by negotiations
between the Company and the Underwriter and does not necessarily relate to
the assets, book value or results of operations of the Company or any other
established criteria of value. See "Underwriting."
(4) See "Dilution."
(5) The Company has applied for the inclusion of the securities ("Securities")
on the National Association of Securities Dealers, Inc. ("NASD") OTC
Bulletin Board, an unorganized, inter-dealer, over-the-counter market which
provides significantly less liquidity than the Nasdaq SmallCap Market System
("Nasdaq"), and quotes for stocks included on the OTC Bulletin Board are not
listed in the financial sections of newspapers as are those for the Nasdaq
National Market System. In the event the Securities are not included on the
OTC Bulletin Board, quotes for the Securities may be included in the "pink
sheets" for the over-the-counter market. The Company applied for inclusion
of its Securities on Nasdaq. While the application was granted by the Nasdaq
Listing Qualifications Committee ("Qualifications Committee"), the Company
was advised by the Nasdaq Hearing and Review Committee ("Review Committee")
that it determined to reverse the decision of the Qualifications Committee
approving the listing of the Company's Securities on Nasdaq. The
determination of the Review Committee is not final pending the review and
decision of the boards of directors ("Boards of Directors") of The Nasdaq
Stock Market, Inc. and NASD, Inc., which may occur in a short time frame. In
the event the Boards of Directors renders a decision to affirm the
determination of the Review Committee, the Company's securities will be
delisted from Nasdaq and the Company's securities will be traded on the OTC
Bulletin Board, which may materially affect the trading and liquidity of the
Company's securities. See "Risk Factors -- Penny Stock Regulations May
Impose Certain Restrictions on Marketability of Securities."
5
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATE)
<TABLE>
<CAPTION>
FOR THE PERIOD
JUNE 8, 1995 (BEGINNING OF
OPERATIONS)
TO MARCH 31, 1996
------------------------------------
<S> <C>
Statement of Operations Data:
Revenue.............................................. $ 294
Income from operations............................... 90
Loss before income taxes............................. (537)
Net loss............................................. (537)
Pro forma net loss................................... (775)
Pro forma loss per share............................. (.26)
Average number of common shares outstanding (1)...... 3,017,808
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
-------------------------------------------
HISTORICAL PRO FORMA (2) AS ADJUSTED (3)
----------- ------------- ---------------
<S> <C> <C> <C>
Balance Sheet Data:
Working capital...................................... $ 519 $ 1,019 $ 6,319
Total assets......................................... 746 1,246 6,546
Long-term debt....................................... 500 -- --
Stockholders' equity................................. 153 1,153 6,453
</TABLE>
- ------------------------
(1) All references herein to shares issued and outstanding has been
retroactively adjusted to reflect a 2:1 reverse stock split in July 1996.
(2) Pro forma balance sheet data illustrates the effect of the bridge loans
received in April 1996, the cancellation of a promissory note in exchange
for the return of 250,000 shares of Common Stock in June 1996 and the
conversion of $1,000,000 of debt associated with bridge loans to paid in
capital in June 1996.
(3) Adjusted to reflect the sale of the Units offered hereby, less underwriting
discounts and the payment by the Company of expenses of this offering
estimated at $1,000,000. See "Use of Proceeds."
6
<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK. ONLY THOSE PERSONS ABLE TO LOSE THEIR ENTIRE INVESTMENT SHOULD PURCHASE
THESE SECURITIES. PROSPECTIVE INVESTORS, PRIOR TO MAKING AN INVESTMENT DECISION,
SHOULD CAREFULLY READ THIS PROSPECTUS AND CONSIDER, ALONG WITH OTHER MATTERS
REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS:
DEVELOPMENT STAGE COMPANY
The Company was incorporated in Delaware on January 9, 1995 and, as such,
faces the risks and problems associated with businesses in their early stages of
development and has a limited operating history upon which to base an evaluation
of its prospects. Such prospects should be considered in light of the risks,
expenses and difficulties frequently encountered in the expansion of a business
in an industry characterized by a substantial number of market entrants and
intense competition. As of March 31, 1996, the Company had an accumulated
deficit of $537,056. See "Business."
BRIDGE FINANCING COSTS WILL NEGATIVELY IMPACT EARNINGS
The Company did not report earnings for the year ending March 31, 1996,
principally as a result of the costs attributed to the issuance of 1,000,000
shares of Common Stock, 1,000,000 Class A Warrants and 1,000,000 Class B
Warrants, as additional consideration for a bridge loan of $1,000,000, the
proceeds of which were received in March and April 1996. Interest expense of
$6,000,000 related to the issuance of the securities will be accrued during the
period from March 19, 1996 through the date upon which the bridge loan was
converted to equity (June 24, 1996) and a corresponding credit will be credited
to paid in capital. Consequently, earnings will be negatively impacted by this
cost; however, net stockholders' equity will not be impacted by the
corresponding increase in paid in capital. In addition, there will be no cash
outlay associated with the issuance of such securities. See "Certain
Transactions" and "Financial Statements."
In March and April 1996, the Company borrowed $1,000,000 in a bridge loan
from four persons who are nonaffiliated with the Underwriter and the Company, to
wit: Edward Ratkovich ($500,000), Robert Foise ($250,000), Armstrong Industries
($200,000) and Martin Sumichrast ($50,000) at the rate of eight percent simple
annual interest. General Ratkovich and Mr. Sumichrist are officers, directors
and principal stockholders of Nasdaq listed companies recently underwritten by
the Underwriter. Mr. Foise and Armstrong Industries have previously participated
as investors in companies recently underwritten by the Underwriter. In further
consideration of the bridge loan, the Company issued 1,000,000 shares of Common
Stock, 1,000,000 Class A Warrants and 1,000,000 Class B Warrants to such
persons. However, in June 1996, such persons converted their loans to equity in
consideration of the prior issuance of the securities.
NO ASSURANCE OF FUTURE PROFITABILITY OR PAYMENT OF DIVIDENDS
The Company can make no assurances that the future operations of the Company
will result in additional revenues or will be profitable. Should the operations
of the Company be profitable, it is likely that the Company would retain much or
all of its earnings in order to finance future growth and expansion. Therefore,
the Company does not presently intend to pay dividends, and it is not likely
that any dividends will be paid in the foreseeable future. See "Dividend
Policy."
IMMEDIATE AND SUBSTANTIAL DILUTION
An investor in this offering will experience immediate and substantial
dilution. As of March 31, 1996, the Company had a pro forma net tangible book
value of $1,152,809 or $.29 per share derived from the Company's balance sheet
as of March 31, 1996 and the total common stock outstanding at March 31, 1996
and the issuance in April 1996 related to the bridge financing an certain other
equity transactions in June 1996. After giving effect to the sale of the Units
offered hereby at an assumed offering price of $14.00 per Unit, after deducting
underwriting discounts and estimated offering expenses, pro forma net tangible
book value would have been $6,452,809, or $.1.29 per share. The
7
<PAGE>
result will be an immediate increase in net tangible book value per share of
$1.00 (345%) to existing shareholders and an immediate dilution to new investors
of $5.71 (82%) per share. As a result, public investors will bear most of the
risk of loss since their shares are being purchased at a cost substantially
above the price that existing shareholders acquired their shares. See
"Dilution."
POSSIBLE NEED FOR ADDITIONAL FINANCING
The Company intends to fund its operations and other capital needs for the
next 12 months substantially from the proceeds of this offering, but there can
be no assurance that such funds will be sufficient for these purposes. The
Company may require substantial amounts of the proceeds of this offering for its
future expansion, operating costs and working capital. The Company has made no
arrangements to obtain future additional financing, if required, and there can
be no assurance that such financing will be available, or that it will be
available on acceptable terms. See "Use of Proceeds."
DEPENDENCE ON MAJOR CUSTOMERS
For the period ending March 31, 1996, the Company derived 32% (Sprint), 29%
(Comsat), 16% (First Data Resources) and 13% (Documenta) of its sales from four
customers, respectively. The dependence on major customers subjects the Company
to significant financial risks in the operation of its business should a major
customer terminate, for any reason, its business relationship with the Company.
In such event, the financial condition of the Company may be adversely affected
and the Company may be required to obtain additional financing, of which there
is no assurance. The Company is not aware of any adverse developments with
respect to its major customers. Also, dependence on major customers
significantly increases the Company's costs, E.G., travel, communication and
delivery of products and services, which are reflected in the Company's
financial performance. See "Business" and "Financial Statements."
DEPENDENCE ON MANAGEMENT
The Company's success is principally dependent on its current management
personnel for the operation of its business. In particular, Robert A. Veschi,
the Company's president and chief executive officer, has played a substantial
role in the development and management of the Company, although there is no
assurance that additional managerial assistance will not be required. The
analysis of new business opportunities will be undertaken by or under the
supervision of the management of the Company. The Company has recently entered
into an employment agreement with Mr. Veschi. However, if the employment by the
Company of Mr. Veschi terminates, or he is unable to perform his duties, the
Company may be substantially affected. The agreement also contains non-compete
provisions but are limited in geographical scope, I.E., the Washington, D.C.
metropolitan area. The Company has agreed to purchase key-man life insurance on
Mr. Veschi in the amount of $1 million prior to the closing of this offering.
The Company will be the owner and beneficiary of the term insurance policy. See
"Use of Proceeds," "Business" and "Management."
DEPENDENCE ON HIGHLY QUALIFIED TECHNICAL PERSONNEL
The Company believes that its future success will depend in large part upon
its continued ability to recruit and retain highly qualified technical
personnel. Competition for highly qualified technical personnel is significant,
particularly in the geographic area in which the Company's operations are
located. No assurances can be made that the Company's relationship with its
employees will remain good. See "Management."
PRODUCT SECURITY RISKS
The Company has included in certain of its products an implementation of a
security protocol which operates in conjunction with authentication technology
that it has developed. Despite the existence of this technology, the Company's
products may be vulnerable to break-ins and similar disruptive problems caused
by certain Internet users. Such computer break-ins and other disruptions would
jeopardize the security of information stored in and transmitted through the
computer systems of end users of the Company's products, which may result in
significant liability to the Company and may also deter potential customers.
Persistent security problems continue to plague public and
8
<PAGE>
private data networks. Recent break-ins at major government institutions, banks
and corporations have involved hackers bypassing firewalls and missappropriating
confidential information. Alleviating problems caused by third parties may
require significant expenditures of capital and resources by the Company and may
cause interruptions, delays or cessation of service to the Company's customers;
such expenditures or interruptions may have a material adverse effect on the
Company's business, operating results and financial condition. Moreover, the
security and privacy concerns of existing and potential customers, as well as
concerns related to computer viruses, may inhibit the growth of the Internet
marketplace, generally, and the Company's customer base and revenues,
specifically. The Company intends to limit its liability to customers, including
liability arising from a failure of the security features contained in the
Company's products, through provisions in its future contracts. However, the
Company can make no assurances that such contractual limitations will be
enforceable. The Company currently does not have liability insurance to protect
against these risks and there can be no assurance that such insurance will be
available to the Company on commercially reasonable terms, or available on any
terms.
UNCERTAINTY OF PROPOSED MERGERS AND ACQUISITIONS CAMPAIGN
Following the closing of this offering, the Company intends to engage in a
mergers and acquisitions campaign in order to merge with or acquire companies
engaged in a similar business. The Company has not entered into any negotiations
to merge with or acquire any such target companies, but the Company has
identified several such companies engaged in a complementary business. The
Company can make no assurances that it will be able to merge with or acquire any
companies. Although the Company intends to utilize approximately $500,000 of the
net proceeds of this offering in its mergers and acquisitions activities during
the 12 months following the date of this Prospectus, no assurances can be made
that such funds will enable the Company to expand its base or realize profitable
consolidated operations. In addition, the Company's stockholders may not have
the opportunity to review the financial statements of any of the companies that
may be acquired or have the opportunity to vote on any proposed acquisitions
since Delaware law does not require such review and approval. Should such funds
not be utilized in its mergers and acquisitions activities, the Company intends
to utilize the funds in equal amounts in working capital, capital equipment and
marketing and sales. See "Use of Proceeds."
LITIGATION INVOLVEMENT OF UNDERWRITER MAY HAVE ADVERSE CONSEQUENCES.
RECENT NASD ACTIONS INVOLVING UNDERWRITER
The Company has been advised by the Underwriter that the NASD (District 10)
filed a complaint (No. C10950081) on October 5, 1995 ("Complaint") against the
Underwriter, Steven Sanders, the head trader of the Underwriter, Daniel M.
Porush, the president of the Underwriter, and Paul F. Byrne, formerly the
Underwriter's director of compliance (collectively, the "Respondents"), alleging
various violations of the NASD Rules of Fair Practice. The complaint consisted
of three causes. The first cause alleged that the Underwriter and Sanders
effected principal retail sales of securities at prices that were fraudulently
excessive. The second cause alleged that the Underwriter and Sanders charged
excessive markups. The third cause alleged that the Underwriter, Porush and
Byrne failed to establish, maintain and enforce reasonable supervisory
procedures designed to assure compliance with the NASD's rules and policies.
On April 15, 1996 the NASD in its decision found all of the Respondents
except Paul Byrne in violation of all three causes and imposed the following
sanctions:
-Sanders was censured, fined $25,000 and was suspended from association with
any member of the NASD in any capacity for a period of one year.
-Underwriter was censured, fined $500,000 and was required to disgorge its
excess profits to its customers, totaling $1,876,205, plus prejudgment
interest. In addition, the Underwriter was suspended for a period of one
year from effecting any principal retail transactions.
9
<PAGE>
-Porush was censured, fined $250,000 and barred from association with any
member of the NASD in any capacity.
The Underwriter, Porush and Sanders have appealed the NASD's decision
thereby staying imposition of the sanctions.
If the sanctions imposed on the Underwriter are not reversed on appeal, the
Underwriter's ability to act as a market maker of the Company's securities will
be restricted. The Company cannot ensure that other broker dealers will make a
market in the Company's securities. In the event that other broker dealers fail
to make a market in the Company's securities, the possibility exists that the
market for and the liquidity of the Company's securities may be adversely
affected to such an extent that public security holders may not have anyone to
purchase their securities when offered for sale at any price. In such event, the
market for and liquidity of the Company's securities may not exist. It should be
noted that although the Underwriter may not be the sole market maker in the
Company's securities, it may likely be the dominant market maker in the
Company's securities. See "Underwriting."
In April 1996, the NASD settled an action whereby it fined Stratton Oakmont
$325,000 for fraud and other violations (which were neither admitted or denied)
in connection with its underwriting of an initial public offering. Steven
Sanders was fined $50,000 and was suspended for a period of 45 days from
associating with an NASD member and agreed not to engage in any trading-related
activities for any NASD member for a period of 50 days. The settlement also
required that Stratton Oakmont file certain new supervisory procedures with the
NASD. The Underwriter filed with the NASD on April 11, 1996 procedures relating
to the conduct of associated persons during and preceding an initial public
offering, which were aimed at preventing violations of Section 5 of the
Securities Act of 1933 and Rule 10b-6 promulgated under Section 10(b) of the
Securities Exchange Act of 1934 and aimed at preventing SEC Rule 10b-10
violations and the type of arbitrary pricing which occurred in connection with
the trading of securities underwritten by the Underwriter on January 16, 1991.
These procedures have been in effect since April 11, 1996. See "Underwriting."
The Company has been advised by the Underwriter that the NASD (District 10)
filed a complaint (No. C10960080) on June 6, 1996 ("June 1996 Complaint")
against the Underwriter, Daniel Porush, Steven Sanders, Irving Stitsky, a former
registered representative of the Underwriter, and Jordan Shamah, a vice
president and a director of the Underwriter (collectively, the "Respondents"),
alleging various violations of the Exchange Act and the NASD Rules of Fair
Practice. The June 1996 Complaint consists of seven causes of action. The first
cause alleges that the Underwriter, through Porush and Sanders, engaged in the
use of fraudulent and manipulative devices in the failure to make bona fide
distributions in five public offerings of securities underwritten by the
Underwriter between June 1993 and April 1994. The second cause alleges that the
Underwriter, through Porush, Sanders, Stitsky and Shamah, engaged in the use of
fraudulent and manipulative devices in the failure to make a bona fide
distribution of the common stock of a company whose initial public offering was
underwritten by the Underwriter. The third cause alleges that the Underwriter,
through Porush and Sanders for a period of three days, manipulated the common
stock of such company. The fourth cause alleges that the Underwriter, through
Sanders, charged fraudulently excessive markups in connection with the warrants
of such company. The fifth cause alleges that the Underwriter, through Porush,
violated the NASD's Free-Riding and Withholding Interpretation inasmuch as he
allegedly allocated securities in certain public offerings to persons restricted
from purchasing such securities. The sixth cause alleges that Porush and Stitsky
failed to adequately supervise the Underwriter's activity relating to the
various alleged violations. The seventh cause alleges that the Underwriter and
Porush failed to establish and maintain reasonable supervisory procedures to
prevent the Underwriter's violative conduct. The Respondents intend to file
answers to the June 1996 Complaint denying all material allegations and alleged
violations.
10
<PAGE>
In addition, the Company has been advised by the Underwriter that the NASD
(District 10) filed a complaint (No. C10960068) on June 6, 1996 ("Complaint")
against the Underwriter and Patrick Gerard Hayes, the compliance director of the
Underwriter (collectively, the "Respondents"), alleging violations of the NASD
Rules of Fair Practice. The Complaint consists of two causes of action. The
first cause alleges that the Underwriter failed to report information regarding
at least 59 customer complaints the Underwriter received during the relevant
time periods as required by the NASD Rules of Fair Practice. The second cause
alleges that the Underwriter, through its compliance director, failed to
establish, maintain and enforce written procedures designed to ensure that the
Underwriter complied with the NASD Rules of Fair Practice. The Respondents have
filed answers to the Complaint and are contesting the proceeding.
On or about July 13, 1996, the District Business Conduct Committee for
District No. 10 ("District Committee") of the NASD issued a complaint against
the Underwriter alleging that the Underwriter violated Article III, Section 1
and Article IV, Section 5 of the NASD Rules of Fair Practice by entering into
settlement agreements with former customers which condition customers' ability
to cooperate with NASD investigations. The charges in the complaint were upheld
by the District Committee on this same date as well as the National Business
Conduct Committee of the NASD, and a fine of $20,000 was assessed and the
Underwriter was ordered to get the NASD's agreement on language used in certain
customer settlement agreements. The firm also is required, if asked by the NASD,
to identify customers that should be released from settlement agreements that
impose conditions on a customer's ability to provide information to the NASD.
The sanctions follow an appeal of findings that the firm used certain agreements
when settling customer complaints that precluded, restricted, or conditioned
customers' ability to cooperate with the NASD in connection with its
investigation of customer complaints. The firm also failed to release a customer
from the restrictive provisions of such a settlement. This action had been
appealed to the SEC and the sanctions aren't in effect pending consideration of
the appeal. The Underwriter contests the charges and has perfected an appeal to
the Securities and Exchange Commission.
PERMANENT INJUNCTION GRANTED -- STRATTON OAKMONT ENJOINED TO COMPLY WITH
RECOMMENDATIONS OF AN INDEPENDENT CONSULTANT AND AN INDEPENDENT AUDITOR
APPOINTED PURSUANT TO AN ADMINISTRATION ORDER
The Company has been advised by Stratton Oakmont that the Commission
instituted an action on December 14, 1994 in the United States District Court
for the District of Columbia against Stratton Oakmont. The complaint alleged
that Stratton Oakmont was not complying with the Administrative Order entered by
the Commission on March 17, 1994 ("Administrative Order") by failing to adopt
the recommendations of an independent consultant. The Administrative Order was
previously consented to by Stratton Oakmont, without admitting or denying the
findings contained therein, as settlement of an action commenced against
Stratton Oakmont by the Commission in March 1992, which found willful violations
of the anti-fraud provisions of the securities laws such that Stratton Oakmont:
-engaged in fraudulent sales practices;
-engaged in and/or permitted unauthorized trading in customer accounts;
-knowingly and recklessly manipulated the market price of a company's
securities by dominating and controlling the market for those securities;
-made improper and unsupported price predictions with regard to recommended
over-the-counter securities; and
-made material misrepresentations and omissions regarding certain securities
and its experience in the securities industry.
11
<PAGE>
Pursuant to the Administrative Order, Stratton Oakmont was censured and an
independent consultant ("Stratton Consultant") was chosen by the Commission to
advise and consult with Stratton Oakmont and to review and recommend new
supervisory and compliance procedures. The complaint sought:
-to enjoin Stratton Oakmont from violating the Administrative Order;
-an order commanding Stratton Oakmont to comply with the Administrative
Order; and
-to have a Special Compliance Monitor appointed to ensure compliance with
the Administrative Order. Stratton Oakmont claimed that the Stratton
Consultant exceeded his authority under the Administrative Order and had
violated the terms of the Administrative Order.
On February 28, 1995, the court granted the Commission's motion for a
permanent injunction ("Permanent Injunction") and ordered Stratton Oakmont to
comply with the Administrative Order, which required the appointment of an
independent consultant and a separate independent auditor and required that all
recommendations be complied with, including the taping of all telephone
conversations between Stratton Oakmont's brokers and their customers. In
granting the Commission's motion for a Permanent Injunction, the court
determined that Stratton Oakmont's conduct unequivocally demonstrated that there
is a substantial likelihood that it will continue to evade its responsibilities
under the Administrative Order. On April 20, 1995, Stratton Oakmont filed an
appeal to the United States Court of Appeals for the District of Columbia, and
on April 24, 1995 filed a motion to stay the Permanent Injunction pending the
outcome of the appeal. The motion to stay was denied. Subsequently, Stratton
Oakmont voluntarily dismissed its appeal. The failure by Stratton Oakmont to
comply with the Administrative Order or Permanent Injunction may adversely
effect Stratton Oakmont's activities in that the court may enter a further order
restricting the ability of Stratton Oakmont to act as a market maker of the
Company's securities. The effect of such action may prevent the holders of the
Company's securities from selling such securities since Stratton Oakmont may be
restricted from acting as a market maker of the Company's securities and, in
such event, will not be able to execute a sale of such securities. Also, if
other broker dealers fail to make a market in the Company's securities, the
public security holders may not have anyone to purchase their securities when
offered for sale at any price and the security holders may suffer the loss of
their entire investment.
RECENT STATE ADMINISTRATIVE PROCEEDINGS INVOLVING STRATTON OAKMONT --
POSSIBLE LOSS OF LIQUIDITY
As a result of the Permanent Injunction, the states of Pennsylvania, Indiana
and Illinois have commenced administrative proceedings seeking, among other
things, to revoke Stratton Oakmont's license to do business in such states. In
Indiana, the Commissioner suspended Stratton Oakmont's license for a three year
period. Stratton Oakmont has appealed the decision and has requested a stay
pending appeal. The requested stay would maintain the status quo pending appeal.
In Illinois, Stratton Oakmont intends to file an answer to the administrative
complaint denying the basis for revocation. The District of Columbia suspended
Stratton Oakmont's license pending the outcome of an investigation. The states
of North Carolina and Arkansas also have suspended Stratton Oakmont's license
pending a resolution of the proceedings in those states. The states of
Minnesota, Vermont, and Nevada have served upon Stratton Oakmont notices of
intent to revoke Stratton Oakmont's license in such states. The state of Rhode
Island has served on Stratton Oakmont a Notice of Intent to suspend its license
in that state. The state of Connecticut has served on Stratton Oakmont a notice
of intent to suspend or revoke registration in that state with a notice of right
to hearing. In the state of Mississippi, Stratton Oakmont has agreed to a
suspension of its license pending resolution of certain claims and review of its
procedures and practices by the state authorities. In addition, Stratton Oakmont
withdrew its registration in the state of New Hampshire (with the right of
reapplication) and in the state of Maryland. There may be further administrative
action against the firm in Maryland. The firm withdrew its registration in
Massachusetts with a right to reapply for registration after two years, withdrew
its registration in Delaware with a right to reapply in three years and agreed
to a temporary
12
<PAGE>
cessation of business in Utah pending an on-site inspection and further
administrative proceedings. Stratton Oakmont's license in the state of New
Jersey was revoked by an administrative law judge, which revocation was affirmed
by the New Jersey Bureau of Securities, and an appeal has been filed with the
appellate division of the New Jersey Superior Court. The states of Georgia,
Alabama and South Carolina have lifted their suspensions and have granted
Stratton Oakmont conditional licenses. Such conditional licenses were granted
pursuant to an order, which Stratton Oakmont has proposed to various states,
which provides provisions for: (i) the suspension of revocation, (ii) compliance
with recommendations of the Consultant, (iii) an expedited claims mediation
arbitration process, (iv) resolution of claims seeking compensatory damages, (v)
restrictions on use of operating revenue, (vi) the limitation on selling group
members in offerings underwritten by Stratton Oakmont and the prohibition of
participating as a selling group member in offerings underwritten by certain
other NASD member firms, (vii) the periodic review of Stratton Oakmont's agents,
(viii) the retention of an accounting firm, and (ix) supervision and training,
restrictions on trading, discretionary accounts and other matters. The state of
Oregon, as a result of the Permanent Injunction, has filed a notice of intent to
revoke Stratton Oakmont's license subject to the holding of a hearing to
determine definitively Stratton Oakmont's license status, and Stratton Oakmont,
in this proceeding as well as other proceedings, expects to be able to
demonstrate that the Permanent Injunction is not of a nature as to be a lawful
basis to revoke Stratton Oakmont's license permanently. Finally, Stratton
Oakmont has received an order limiting license in the state of Nebraska. Such
proceedings, if ultimately successful, may adversely affect the market for and
liquidity of the Company's securities if additional broker-dealers do not make a
market in the Company's securities. Moreover, should investors purchase any of
the securities in this offering from Stratton Oakmont prior to a revocation of
Stratton Oakmont's license in their state, such investors will not be able to
resell such securities in such state through Stratton Oakmont but will be
required to retain a new broker-dealer firm for such purpose. The Company cannot
ensure that other broker-dealers will make a market in the Company's securities.
In the event that other broker-dealers fail to make a market in the Company's
securities, the possibility exists that the market for and the liquidity of the
Company's securities may be adversely affected to such an extent that public
security holders may not have anyone to purchase their securities when offered
for sale at any price. In such event, the market for, and liquidity and prices
of the Company's securities may not exist. It should be noted that although
Stratton Oakmont may not be the sole market maker in the Company's securities,
it will most likely be the dominant market maker in the Company's securities. In
addition, in the event that the Underwriter's license to do business is revoked
in the states set forth above, the Underwriter has advised the Company that the
members of the selling syndicate in this offering may be able to make a market
in the Company's securities in such states and that such an event will not have
a materially adverse effect on this offering, although no assurance can be made
that such an event will not have a materially adverse effect on this offering.
The Company has applied to register this offering for the offer and sale of its
securities in the following states: California, Colorado, Connecticut, Delaware,
Florida, Georgia, Hawaii, Illinois, Louisiana, New York, Rhode Island and
Virginia. The offer and sale of the securities of this offering are not
available in any other state, absent an exemption from registration. See
"Underwriting."
FOR ADDITIONAL INFORMATION REGARDING STRATTON OAKMONT, INVESTORS MAY CALL
THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. AT 1-800-289-9999.
PAUL CARMICHAEL V. STRATTON OAKMONT.
The Company has been advised by Stratton Oakmont that Honorable John E.
Sprizzo, United States Judge for the Southern District of New York, on May 6,
1994 denied the class certification motion in PAUL CARMICHAEL V. STRATTON
OAKMONT, INC., ET AL., Civ. 0720 (JES), of the plaintiff Paul Carmichael. The
class action complaint alleges manipulation and fraudulent sales practices in
connection with a number of securities. The allegations were substantially
similar and involve much of the same time period as the Commission's civil
complaint (discussed above). The Company has further been informed that counsel
for the class action plaintiff sought to re-argue the motion for class
certification, which motion for re-argument was denied.
13
<PAGE>
BROAD DISCRETION IN APPLICATION OF PROCEEDS
The management of the Company has broad discretion to adjust the application
and allocation of the net proceeds of this offering, including funds received
upon exercise of the Class A Warrants, of which there is no assurance, in order
to address changed circumstances and opportunities. As a result of the
foregoing, the success of the Company will be substantially dependent upon the
discretion and judgment of the management of the Company with respect to the
application and allocation of the net proceeds hereof. Pending use of such
proceeds, the net proceeds of this offering will be invested by the Company in
temporary, short-term interest-bearing obligations. See "Use of Proceeds."
UNCERTAIN PROTECTION OF PATENT, TRADEMARK, COPYRIGHT AND PROPRIETARY RIGHTS
In March 1996, the Company acquired all rights, title and interest in the
first U.S. patent, U.S. Patent No. 5,526,353, for a system and method for
communicating high fidelity and clear transmission of audio or voice over the
Internet, enabling free worldwide transmission of ordinary telephone
communications over the Internet. The Company acquired all rights, title and
interest in the patent from the inventors, Messrs. Arthur Henley and Scott Grau,
who are original stockholders of the Company, in consideration of a five percent
overriding royalty interest against gross profits involving the use of the
patent. The Company has agreed to allocate $1,000,000 of capital of this
offering to develop and exploit the market opportunities of the patent by
December 31, 1996, or the patent will be subject to repurchase by the inventors
of the patent. The Company believes that its patent is the first patent awarded
of its kind, specifically involving the transmission of audio or voice over the
Internet. The Company also believes that its patent may provide certain
strategic and technological advantages in the new and burgeoning area of audio
or voice over the Internet. The Company can make no assurances, however, as to
the extent of the advantages or protection, if any, that may be granted to the
Company as a result of its patent.
The Company currently does not have any other patent or copyright
applications pending. However, the Company has trademark applications pending
related to certain of its products and technologies. The Company may file
additional patent, trademark and copyright applications relating to certain of
the Company's products and technologies. If patents, trademarks or copyrights
were to be issued, there can be no assurance as to the extent of the protection
that will be granted to the Company as a result of having such patents,
trademarks or copyrights or that the Company will be able to afford the expenses
of any complex litigation which may be necessary to enforce its proprietary
rights. Failure of the Company's patents, trademark and copyright applications
may have a material adverse impact on the Company's business. Except as may be
required by the filing of patent, trademark and copyright applications, the
Company will attempt to keep all other proprietary information secret and to
take such actions as may be necessary to insure the results of its development
activities are not disclosed and are protected under the common law concerning
trade secrets. Such steps will include the execution of nondisclosure agreements
by key Company personnel and may also include the imposition of restrictive
agreements on purchasers of the Company's products and services. There is no
assurance that the execution of such agreements will be effective to protect the
Company, that the Company will be able to enforce the provisions of such
nondisclosure agreements or that technology and other information acquired by
the Company pursuant to its development activities will be deemed to constitute
trade secrets by any court of competent jurisdiction.
SUBSTANTIAL COMPETITION
Businesses in the United States and abroad that are engaged in Internet
technologies, products and services are substantial in number and highly
competitive. Many of the companies with which the Company intends to compete are
substantially larger and have substantially greater resources than the Company.
It is also likely that other competitors will emerge in the future. The Company
will compete with companies that have greater market recognition, greater
resources and broader capabilities than the Company. As a consequence, there is
no assurance that the Company will be able to successfully compete in the
marketplace. See "Business."
14
<PAGE>
LIMITATION ON DIRECTOR LIABILITY
As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation limits the liability of directors to the Company or
its stockholders for monetary damages for breach of a director's fiduciary duty
except for liability in four specific instances. These are for (i) any breach of
the director's duty of loyalty to the Company or its stockholders, (ii) acts or
omissions not in good faith or which involve intentional misconduct or knowing
violation of law, (iii) unlawful payments of dividends or unlawful stock
purchases or redemptions as provided in Section 174 of the Delaware General
Corporation Law, or (iv) any transaction from which the director derived an
improper personal benefit. As a result of the Company's charter provision and
Delaware law, stockholders may have more limited rights to recover against
directors for breach of fiduciary duty. See "Management -- Limitation on
Liability of Directors."
ARBITRARY OFFERING PRICE
There has been no prior public market for the Company's securities. The
price to the public of the Units offered hereby has been arbitrarily determined
by negotiations between the Company and the Underwriter and bears no
relationship to the Company's earnings, book value or any other recognized
criteria of value. The offering price of $14.00 per Unit ($7.00 per share) is
substantially in excess of the net tangible book value of $.04 per share,
derived from the Company's balance sheet as of March 31, 1996, and in excess of
the price received by the Company for shares sold in prior transactions. See
"Prospectus Summary -- Selected Financial Data," "Underwriting," "Dilution and
Other Comparative Data" and "Certain Transactions."
REQUIREMENTS OF CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION IN
CONNECTION WITH THE EXERCISE OF THE WARRANTS
The Company will be able to issue the securities offered hereby, shares of
its Common Stock upon the exercise of the Warrants and the Underwriters' Unit
Purchase Option only if (i) there is a current prospectus relating to the
securities offered hereby under an effective registration statement filed with
the Securities and Exchange Commission, and (ii) such Common Stock is then
qualified for sale or exempt therefrom under applicable state securities laws of
the jurisdictions in which the various holders of Warrants reside. Although the
Company intends to maintain a current registration statement, there can be no
assurance, however, that the Company will be successful in maintaining a current
registration statement. After a registration statement becomes effective, it may
require updating by the filing of a post-effective amendment. A post-effective
amendment is required (i) anytime after nine months subsequent to the Effective
Date when any information contained in the prospectus is over sixteen months
old; (ii) when facts or events have occurred which represent a fundamental
change in the information contained in the registration statement; or (iii) when
any material change occurs in the information relating to the plan or
distribution of the securities registered by such registration statement. The
Company anticipates that this Registration Statement will remain effective for
not more than nine months following the date of this Prospectus or until May ,
1997, assuming a post-effective amendment is not filed by the Company, which may
be required. The Company intends to qualify the sale of the Class A Warrants in
a limited number of states, although certain exemptions under certain state
securities ("Blue Sky") laws may permit the Warrants to be transferred to
purchasers in states other than those in which the Warrants were initially
qualified. Qualification for the exercise or sale of the Class A Warrants in the
states is essential for the establishment of a trading market in the securities.
The Company can make no assurances that it will be able to qualify its
securities in any state. The Company will be prevented, however, from issuing
Common Stock upon exercise of the Warrants in those states where exemptions are
unavailable and the Company has failed to qualify the Common Stock issuable upon
exercise of the Warrants. 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 ultimate purchasers of the Warrants reside. In such a case,
the Warrants of those purchasers will expire and have no value if such Warrants
cannot be exercised or sold. Accordingly, the market for the Warrants may be
limited because of the Company's obligation to fulfill both of the foregoing
requirements. See "Description of Securities," and "Underwriting."
15
<PAGE>
ADDITIONAL AUTHORIZED SHARES AVAILABLE FOR ISSUANCE MAY ADVERSELY AFFECT THE
MARKET
The Company is authorized to issue 50,000,000 shares of its Common Stock,
$.01 par value. If all of the 500,000 Units offered hereby are sold, there will
be a total of 5,000,000 shares of Common Stock issued and outstanding. However,
the total number of shares of Common Stock issued and outstanding does not
include the exercise of up to 1,000,000 Class A Warrants and 1,000,000 Class B
Warrants to purchase up to 2,000,000 shares of the Company's Common Stock.
Moreover, the Underwriters have been granted an option to purchase 50,000 Units
in connection with this offering, which has been authorized by the Company for
issuance. Also, this does not include the exercise of the Underwriters'
Over-allotment Option to purchase up to 75,000 Units in connection with this
offering, which has been authorized by the Company for issuance. After reserving
a total of 2,250,000 shares of Common Stock for issuance upon the exercise of
all the Warrants, if all of the Warrants are exercised, the Company will have at
least 42,500,000 shares of authorized but unissued capital stock available for
issuance without further shareholder approval. As a result, any issuance of
additional shares of Common Stock may cause current shareholders of the Company
to suffer significant dilution which may adversely affect the market. Pursuant
to the terms of the Underwriting Agreement, the Company's restricted
stockholders and the Company have agreed not to sell, transfer, assign or issue
any restricted shares of Common Stock for a period of 36 months following the
date of this Prospectus. The sale of a significant number of these shares in the
public market may adversely affect prevailing market prices of the Company's
securities following this offering. See "Dilution," "Principal Stockholders,"
"Certain Transactions," "Description of Securities" and "Underwriting."
LACK OF PRIOR MARKET FOR SECURITIES OF THE COMPANY
No prior market existed for the securities being offered hereby and no
assurance can be given that a market will develop subsequent to this offering.
The Underwriter may make a market in the securities of the Company upon the
closing of this offering, but there is no assurance that it will be successful
in its efforts. See "Description of Securities" and "Underwriting."
WARRANTS SUBJECT TO REDEMPTION
The Class A Warrants shall be exercisable commencing one year after the date
of this Prospectus ("Effective Date"). Each Class A Warrant entitles the holder
to purchase one share of Common Stock at $7.50 per share during the four year
period commencing one year from the Effective Date hereof. The Class A Warrants
are redeemable by the Company for $.05 per Warrant, at any time after August ,
1998, upon thirty (30) days' prior written notice, if the average closing price
or bid price of the Common Stock, as reported by the principal exchange on which
the Common Stock is quoted, the Nasdaq SmallCap Market, the OTC Bulletin Board
or the National Quotation Bureau, Incorporated, as the case may be, equals or
exceeds $10.00 per share, for any twenty (20) consecutive trading days within a
period of thirty (30) days ending within ten (10) days of the notice of
redemption. Upon thirty (30) days' prior written notice to all holders of the
Class A Warrants, the Company shall have the right to reduce the exercise price
and/or extend the term of the Class A Warrants. Redemption of the Warrants will
force holders thereof to either (i) exercise such Warrants and pay the exercise
price at a time when it may be less than advantageous economically to do so, or
(ii) accept the redemption price, which may be substantially less than the
market value thereof at the time of redemption. See "Certain Transactions,"
"Description of Securities" and "Underwriting."
The Company intends to qualify the sale of the securities in a limited
number of states, although certain exemptions under certain state securities
("Blue Sky") laws may permit the Warrants to be transferred to purchasers in
states other than those in which the Warrants were initially qualified. The
Company will be prevented, however, from issuing Common Stock upon exercise of
the Warrants in those states where exemptions are unavailable and the Company
has failed to qualify the Common Stock issuable upon exercise of the Warrants.
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 ultimate
purchasers of the Warrants reside. In such case, the Warrants of those
purchasers will expire and have no value if such Warrants cannot be exercised or
sold. Accordingly, the market for the Warrants may be limited because of the
Company's obligation to fulfill the foregoing requirements.
16
<PAGE>
UNDERWRITER'S INFLUENCE ON THE MARKET MAY HAVE ADVERSE CONSEQUENCES
A significant number of securities may be sold to customers of the
Underwriter. Such customers of the Underwriter of this offering subsequently may
engage in transactions for the sale or purchase of such securities through or
with the Underwriter. Although they have no legal obligation to do so, the
Underwriter from time to time in the future will make a market in and otherwise
effect transactions in the Company's securities. To the extent the Underwriter
acts as marketmaker in the securities, it may be a dominating influence in that
market. The price and liquidity of such securities may be affected by the
degree, if any, of the Underwriter's participation in the market, inasmuch as a
significant amount of such securities may be sold to customers of the
Underwriter. Such customers, as customers of the Underwriter of this offering,
subsequently may engage in transactions for the sale or purchase of such
securities through or with the Underwriter, although no agreements or
understandings, written or oral, exist for such transactions, and such
transactions may further enhance the Underwriter's dominating influence on the
market. Such market making activities, if commenced, may be discontinued at any
time or from time to time by the Underwriter without obligation or prior notice.
If a dominating influence at such time, the Underwriter's discontinuance may
adversely affect the price and liquidity of the securities.
Further, unless granted an exemption by the Securities and Exchange
Commission to its Rule 10b-6, the Underwriter may be prohibited from engaging in
any market making activities with regard to the Company's securities for the
period from two or nine business days 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 Underwriter may
have to receive a fee for the exercise of Warrants following the solicitation.
As a result, the Underwriter may be unable to continue to provide a market for
the Company's securities during certain periods while the Warrants are
exercisable, which may adversely affect the price and liquidity of the
securities.
CONTRACTUAL OBLIGATIONS TO UNDERWRITER MAY REDUCE PROCEEDS AVAILABLE TO THE
COMPANY
The Company has also agreed to pay fees to the Underwriter, aggregating up
to five percent of the consideration involved in the transaction, if the
Underwriter arranges equity financing, debt financing and assistance with
mergers and acquisitions, for the Company other than this offering during a
period of five years after the date of this Prospectus, or if the Underwriter
obtains or are influential in increasing any lines of credit the Company may
have, provided such financing or increase is accepted by the Company. Such fees
will reduce the amount of proceeds available to the Company from such financing
or line of credit. Further, in addition to an ten percent underwriting discount,
the Company has also agreed to pay the Underwriter a nonaccountable expense
allowance of three percent of the gross proceeds of this offering, as well as a
fee of four percent of the exercise price of the Warrants, if certain conditions
are met. To the extent the foregoing compensation is paid from the proceeds of
this offering, the amounts available to the Company, will be reduced. On the
closing date, the Company will sell to the Underwriter for a purchase price of
$50, an option to purchase 50,000 Units at 165% of the initial offering price of
$14.00 per Unit, or $23.10 per Unit, on the date of this Prospectus. See
"Underwriting."
EXERCISE OF CLASS A WARRANTS MAY HAVE DILUTIVE EFFECT ON MARKET
The Class A Warrants will provide, during their term, an opportunity for the
holder to profit from a rise in the market price, of which there is no
assurance, with resulting dilution in the ownership interest in the Company held
by the then present stockholders. Holders of the Warrants most likely would
exercise the Warrants and purchase the underlying Common Stock at a time when
the Company may be able to obtain capital by a new offering of securities on
terms more favorable than those provided by such Warrants, in which event the
terms on which the Company may be able to obtain additional capital would be
affected adversely. See "Description of Securities" and "Underwriting."
"PENNY STOCK" REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY OF
SECURITIES
The Securities and Exchange Commission ("Commission") has adopted
regulations which generally define "penny stock" to be any equity security that
has a market price (as defined) less than
17
<PAGE>
$5.00 per share or an exercise price of less than $5.00 per share, subject to
certain exceptions. Upon authorization of the securities offered hereby for
quotation on Nasdaq, such securities will initially be exempt from the
definition of "penny stock."
The Company has applied for the inclusion of the securities ("Securities")
on the National Association of Securities Dealers, Inc. ("NASD") OTC Bulletin
Board, an unorganized, inter-dealer, over-the-counter market which provides
significantly less liquidity than the Nasdaq SmallCap Market System ("Nasdaq"),
and quotes for stocks included on the OTC Bulletin Board are not listed in the
financial sections of newspapers as are those for the Nasdaq National Market
System. In the event the Securities are not included on the OTC Bulletin Board,
quotes for the Securities may be included in the "pink sheets" for the
over-the-counter market. The Company applied for inclusion of its Securities on
Nasdaq. While the application was granted by the Nasdaq Listing Qualifications
Committee ("Qualifications Committee"), the Company was advised by the Nasdaq
Hearing and Review Committee ("Review Committee") that it determined to reverse
the decision of the Qualifications Committee approving the listing of the
Company's Securities on Nasdaq. The determination of the Review Committee is not
final pending the review and decision of the boards of directors ("Boards of
Directors") of The Nasdaq Stock Market, Inc. and the NASD, Inc., which may occur
in a short time frame. In the event the Boards of Directors renders a decision
to affirm the determination of the Review Committee, the Company's securities
will be delisted from Nasdaq and the Company's securities will be traded on the
OTC Bulletin Board, which may materially affect the trading and liquidity of the
Company's securities. See "Risk Factors -- Penny Stock Regulations May Impose
Certain Restrictions on Marketability of Securities."
If the securities offered hereby fall within the definition of a "penny
stock" following the Effective Date, the Company's securities may become subject
to rules that impose additional sales practice requirements on broker-dealers
who sell such securities to persons other than established customers and
accredited investors (generally those with assets in excess of $1,000,000 or
annual income exceeding $200,000, or $300,000 together with their spouse). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchaser's written consent to the transaction prior to the purchase.
Additionally, for any transaction involving a penny stock, unless exempt, the
rules require the delivery, prior to the transaction, of a risk disclosure
document mandated by the Commission relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Consequently, the "penny stock" rules may
restrict the ability of broker-dealers to sell the Company's securities and may
affect the ability of purchasers in this Offering to sell the Company's
securities in the secondary market.
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET
All of the Company's currently outstanding shares of Common Stock are
"restricted securities" and, in the future, may be sold upon compliance with
Rule 144, adopted under the Securities Act of 1933, as amended. Rule 144
provides, in essence, that a person holding "restricted securities" for a period
of two years may sell only an amount every three months equal to the greater of
(a) one percent of the Company's issued and outstanding shares, or (b) the
average weekly volume of sales during the four calendar weeks preceding the
sale. The amount of "restricted securities" which a person who is not an
affiliate of the Company may sell is not so limited, since nonaffiliates may
sell without volume limitation their shares held for three years if there is
adequate current public information available concerning the Company. Upon the
sale of the securities, and assuming that there is no exercise of any issued and
outstanding Warrants, the Company will have 5,000,000 shares of its common stock
issued and outstanding, of which 4,000,000 shares will be "restricted
securities." Therefore, during each three month period, beginning January 9,
1997, a holder of restricted securities who has held them for
18
<PAGE>
at least the two year period may sell under Rule 144 a number of shares up to
50,000 shares. Non-affiliated persons who hold for the three-year period
described above may sell unlimited shares once their holding period is met.
Pursuant to the terms of the Underwriting Agreement, the officers, directors and
principal stockholders of the Company and the Company have agreed not to sell,
transfer, assign or issue any securities of the Company for a period of 36
months following the date of this Prospectus. The sale of a significant number
of these shares in the public market may adversely affect prevailing market
prices of the Company's securities following this offering. See "Dilution,"
"Principal Stockholders," "Certain Transactions," "Description of Securities"
and "Underwriting."
Prospective investors should be aware that the possibility of sales may, in
the future, have a depressive effect on the price of the Company's Common Stock
in any market which may develop and, therefore, the ability of any investor to
market his shares may be dependent directly upon the number of shares that are
offered and sold. Affiliates of the Company may sell their shares during a
favorable movement in the market price of the Company's Common Stock which may
have a depressive effect on its price per share. See "Description of
Securities."
19
<PAGE>
USE OF PROCEEDS
After deducting underwriting discounts of $700,000 and other expenses of the
offering estimated to be $1,000,000, which includes the Underwriter's
nonaccountable expense allowance of $210,000, assuming an offering price of
$14.00 per Unit, the Company will receive net proceeds from the offering of
approximately $5,300,000. These proceeds, excluding the exercise of any of the
Warrants, will be utilized in order of priority by the Company as listed below
for approximately 12 months substantially as follows:
<TABLE>
<CAPTION>
APPROXIMATE
AMOUNT OF NET
ADMINISTRATIVE EXPENSES PROCEEDS %
--------------- ---------
<S> <C> <C>
Management Compensation(1)............................. $ 750,000 14.15
Employee Salaries and Overhead(2)...................... 750,000 14.15
OPERATING COSTS AND WORKING CAPITAL
Software Support and Development(3).................... 1,000,000 18.87
Capital Equipment(4)................................... 1,000,000 18.87
Marketing and Sales(5)................................. 1,000,000 18.87
Mergers and Acquisitions(6)............................ 500,000 9.42
Working Capital(7)..................................... 300,000 5.67
--------------- ---------
TOTAL.............................................. $ 5,300,000 100.00
--------------- ---------
--------------- ---------
</TABLE>
- ------------------------
(1) The officers and employees of the Company also intend to receive
remuneration as part of an overall group insurance plan providing health,
life and disability insurance benefits for employees of the Company. The
amount allocable to each individual officer and employee cannot be
specifically or precisely ascertained, but, in any event, will not exceed
$25,000 per annum as to each individual. The officers and directors of the
Company also will receive significant compensation in the form of salaries
and director fees, respectively. See "Management -- Remuneration."
(2) Includes annual general and administrative employee salaries, exclusive of
management salaries, associated benefits, related office rent and
miscellaneous office expenses.
(3) Includes annual salaries for software and engineering support personnel.
Also, includes approximately $500,000 for product development related to the
Company's commitment to allocate $1,000,000 of capital by December 31, 1996
to develop and exploit the market opportunities of the patent acquired in
March 1996.
(4) The Company intends to purchase and/or lease certain additional capital
equipment including, but not limited to, engineering and manufacturing
equipment, computer hardware/software and systems, telephone and facsimile
systems, security systems and office equipment and furniture.
(5) The amount allocated by the Company for marketing and sales includes
marketing materials, advertising, business travel and a significant
expansion of its marketing and sales staff. Also, includes approximately
$500,000 for marketing and sales related to the Company's commitment to
allocate $1,000,000 of capital by December 31, 1996 to develop and exploit
the market opportunities of the patent acquired in March 1996.
(6) Following the closing of this offering, the Company intends to engage in a
mergers and acquisitions campaign in order to merge with or acquire
complementary companies in the $10 million to $25 million revenue range. The
Company has not entered into any negotiations, agreements, arrangements or
understandings with respect to the merger with or acquisition of any such
target companies, or has any such agreement or understandings with any
brokers or finders regarding same. The Company can make no assurances that
it will be able to merge with or acquire any companies. Although the Company
intends to utilize not more than $500,000 in its mergers and acquisitions
activities during the 12 months following the date of this Prospectus, no
assurances can be made that such funds will enable the Company to expand its
base or realize profitable consolidated operations. Whenever possible, the
Company intends to issue its securities rather
20
<PAGE>
than use such cash funds to consummate a merger or acquisition. The ability
of the Company to engage in a mergers and acquisitions campaign in view of
the Company's resources is uncertain. Should such funds not be utilized in
its mergers and acquisitions activities, the Company intends to utilize the
funds in equal amounts in capital equipment and marketing and sales.
(7) Working capital will be utilized by the Company to enhance and, otherwise,
stabilize cash flow during the initial 12 months of operations following the
closing of this offering, such that any shortfalls between cash generated by
operating revenues and costs will be covered by working capital. Although
the Company prefers to retain its working capital in reserve, the Company
may be required to expend part or all of these proceeds as financial demands
dictate.
Although it is uncertain that the Company's shares of Common Stock will rise
to a level at which the Warrants would be exercised, in the event subscribers in
this offering elect to exercise all of the Warrants herein (not including the
Underwriter's Over-allotment Option or the Underwriter's Purchase Option), the
Company will realize gross proceeds of approximately $7,500,000. Management
anticipates that the proceeds from the exercise of the Warrants would be
contributed to working capital of the Company. Nonetheless, the Company may at
the time of exercise allocate a portion of the proceeds to any other corporate
purposes. Accordingly, investors who exercise their Warrants will entrust their
funds to management, whose specific intentions regarding the use of such funds
are not presently and specifically known.
The Company is unable to predict the precise period for which this offering
will provide financing, although management believes that the Company should
have sufficient working capital to meet its cash requirements for the 12 months
period following the date of this offering. Accordingly, the Company may need to
seek additional funds through loans or other financing arrangements during this
period of time. No such arrangements exist or are currently contemplated and
there can be no assurance that they may be obtained in the future should the
need arise.
Pending utilization, management intends to make temporary investment of the
proceeds in bank certificates of deposit, interest-bearing savings accounts,
prime commercial paper or federal government securities.
21
<PAGE>
DILUTION
As of March 31, 1996, the Company had a pro forma net tangible book value of
$1,152,809 or $.29 per share, derived from the Company's balance sheet as of
March 31, 1996 and the total common stock outstanding at March 31, 1996 and the
issuances in April 1996 related to the bridge financing and certain other equity
transactions in June 1996. Net tangible book value per share means the tangible
assets of the Company, less all liabilities, divided by the number of shares of
Common Stock outstanding. After giving effect to the sale of the Units offered
hereby at an assumed price of $14.00 per Unit, or $7.00 per share of Common
Stock after deducting underwriting discounts and estimated offering expenses,
pro forma net tangible book value would have been $6,452,809 or $1.29 per share.
The result will be an immediate increase in net tangible book value per share of
$1.00 (345%) to existing shareholders and an immediate dilution to new investors
of $5.71 (82%) per share. As a result, public investors will bear most of the
risk of loss since their shares are being purchased at a cost substantially
above the price that existing shareholders acquired their shares. "Dilution" is
determined by subtracting net tangible book value per share after the offering
from the offering price to investors. The following table illustrates this
dilution assuming no exercise of the over-allotment option:
<TABLE>
<S> <C> <C>
Public offering price of the Common Stock offered hereby............. $ 7.00
Pro forma net tangible book value per share, before the offering... $ .29
Increase per share attributable to the sale by the Company of the
Units offered hereby.............................................. $ 1.00
---------
Pro forma net tangible book value per share, after the offering...... $ 1.29
---------
Dilution per share to new investors.................................. $ 5.71
---------
---------
</TABLE>
The above table assumes no exercise of the Class A Warrants, the
Over-allotment Option or the Underwriter's Purchase Option. See "Description of
Securities."
The following table summarizes the investments of all existing stockholders
and new investors after giving effect to the sale of the Units offered hereby
assuming no exercise of the Over-allotment Option:
<TABLE>
<CAPTION>
PERCENTAGE PERCENT OF AVERAGE
SHARES OF TOTAL AGGREGATE TOTAL PRICE PER
PURCHASED SHARES CONSIDERATION INVESTED SHARE
----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Present Stockholders............................. 4,000,000 80.00% $ 1,060,000 13.15% $ .27
-----
-----
Public Stockholders.............................. 1,000,000 20.00% $ 7,000,000 86.85% $ 7.00
----------- ----------- ------------- ----------- -----
-----
Total........................................ 5,000,000 100.00% $ 8,060,000 100.00% $ 1.61
----------- ----------- ------------- ----------- -----
----------- ----------- ------------- ----------- -----
</TABLE>
If the Over-allotment Option is exercised in full, the public stockholders
will have paid $8,050,000 and will hold 1,150,000 shares of Common Stock,
representing 88.36 percent of the total consideration and 22.33 percent of the
total number of outstanding shares of Common Stock. See "Description of
Securities" and "Underwriting."
22
<PAGE>
CAPITALIZATION
(DOLLARS IN THOUSANDS)
The following table sets forth the capitalization of the Company as of March
31, 1996, and as adjusted to reflect the sale of the Units offered hereby. The
table should be read in conjunction with the Financial Statements, and the notes
thereto.
<TABLE>
<CAPTION>
MARCH 31,
1996 PRO FORMA(2) AS ADJUSTED(1)
----------- ------------- --------------
<S> <C> <C> <C>
Long-term debt......................................... $ 500 $ -- $ --
----------- -------------
Stockholders' equity
Common Stock, $.01 par value, 50,000,000 shares
authorized, 3,750,000 shares outstanding; pro forma
4,000,000 shares outstanding reflecting the issuance
of units in connection with the April 1996 bridge
loan; 5,000,000 shares outstanding, as adjusted..... $ 38 $ 40 $ 50
Stock subscriptions and notes receivable............... (280) (30) (30)
Unamortized cost of bridge financing................... (2,885) (5,385) (5,385)
Additional paid-in capital............................. 3,817 7,065 12,355
Retained deficit....................................... (537) (537) (537)
----------- ------------- --------------
Total stockholders' equity......................... $ 153 $ 1,153 $ 6,453
----------- ------------- --------------
Total capitalization............................... $ 653 $ 1,153 $ 6,453
----------- ------------- --------------
----------- ------------- --------------
</TABLE>
- ------------------------
(1) As adjusted to reflect this offering. Assumes no exercise of (i) the Class A
Warrants; (ii) the Underwriter's Over-allotment Option to purchase up to
75,000 Units; or (iii) the Underwriter's Purchase Option to purchase up to
50,000 Units. See "Description of Securities" and "Underwriting."
(2) The pro forma capitalization illustrates the effect of the bridge loan
received in April 1996, the cancellation of a promissory note in exchange
for the return of 250,000 shares of Common Stock in June 1996, and the
conversion of $1,000,000 of debt associated with bridge loans to paid in
capital in June 1996.
DIVIDEND POLICY
Holders of the Company's Common Stock are entitled to dividends when, as and
if declared by the Board of Directors out of funds legally available therefor.
The Company does not anticipate the declaration or payment of any dividends in
the foreseeable future. The Company intends to retain earnings, if any, to
finance the development and expansion of its business. Future dividend policy
will be subject to the discretion of the Board of Directors and will be
contingent upon future earnings, if any, the Company's financial condition,
capital requirements, general business conditions and other factors. Therefore,
there can be no assurance that any dividends of any kind will ever be paid by
the Company.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PLAN OF OPERATION
e-Net, Inc. ("Company"), develops, markets and supports open client, server
and integrated applications software that enables local, national and
international telephone communications, information exchange and commerce over
the Internet and private Internet Protocol ("IP") networks. The Company's
software products allow individuals and organizations to execute secure, or
private, voice communications across the Internet, through the use of
authentication technology, for local, national and international telephone
communications, information exchange and commerce. In addition, through the use
of the Company's software, organizations can extend their internal information
systems and enterprise applications to geographically dispersed facilities,
remote offices and mobile employees. A number of companies, some with greater
resources than the Company, manufacture similar system products which may
compete with the Company's products. See "Risk Factors" and "Business --
Competition."
In March 1996, the Company acquired all rights title and interest in the
first U.S. patent, U.S. Patent No. 5,526,353, for a system and method for
communicating high fidelity and clear transmission of audio or voice over the
Internet, enabling free worldwide high fidelity and clear transmission of
ordinary telephone communications over the Internet. The Company acquired all
rights, title and interest in the patent from the inventors, Messrs. Arthur
Henley and Scott Grau, who are original stockholders of the Company, in
consideration of a five percent overriding royalty interest against gross profit
involving the use of the patent. The Company has agreed to allocate $1,000,000
of capital of this offering to develop and exploit the market opportunities of
the patent by December 31, 1996, or the patent will be subject to repurchase by
the inventors of the patent. The Company believes that its patent is the first
patent awarded of its kind, specifically involving the transmission of audio or
voice over the Internet. The Company also believes that its patent may provide
certain strategic and technological advantages in the new and burgeoning area of
audio or voice over the Internet. The Company can make no assurances, however,
as to the extent of the advantages or protection, if any, that may be granted to
the Company as a result of its patent. See "Business," "Management" and
"Financial Statements."
The Company's operations to date have concentrated on continuing development
of its technologies, products and services, establishing acceptance of its
software products in the telecommunications industry, providing services to its
existing customer base, and securing financing necessary to fund development,
operations, and expansion of its business. The Company's products include:
TELECOM-2000-TM-
e-Net's Telecom-2000 product is based on the patent rights acquisition
described above and consists of voice/data integration and authentication
protocol, voice packetization software, prototype interfaces to Ethernet
telephony hardware, address resolution and call handling software, and
interfaces to the traditional telephone network through a PC, or personal
computer. The Telecom-2000 is designed to allow individuals and organizations to
execute secure, or private, voice communications across the Internet, such as
local, national and international telephone communications. Due to the
economical and highly scalable architecture that e-Net has developed,
Telecom-2000 can be utilized for integrated data and telephony communications in
very small offices, enterprise networks, national reseller networks and for the
consumer. The product is in the final test stages of its initial development,
and the Company believes the product will be ready for release by the end of the
Company's third quarter of fiscal 1997. Depending on the precise configuration
and volume, the Company intends to offer the Telecom-2000 at a price of
approximately $750 per unit, which includes a one year warranty and technical
service, training and support.
INTELLICD-TM-
The IntelliCD product was developed by e-Net to meet a strategic need of
Sprint. Sprint's larger customers have reported a critical need to receive
monthly billing information (call detail reports) in an easily accessible,
computer acceptable input format, which would allow direct access, search and
24
<PAGE>
retrieval to meet a wide variety of requirements. The CD-ROM medium provides
rapid access to data, uses ubiquitous PC equipment for access, and requires
minimal storage requirements. The e-Net approach includes the design and
development of an ergonomic, SQL-based search and retrieval software engine that
permits users with little knowledge of data processing to easily define and
generate a wide variety of searches and reports. Since e-Net's software design
is highly generalized, the IntelliCD process is readily adapted to any
requirement involving repeated use of large volume, non-volatile data sets.
Depending on precise configuration and volume, the Company offers the IntelliCD
at a price of approximately $300 per unit, which includes a one year warranty
and technical service, training and support. At March 31, 1996, the Company
realized $74,500 in sales of the IntelliCD product, representing approximately
25 percent of its total sales.
E-NET NMS-TM-
The e-Net Network Management System ("e-Net NMS") is a proprietary expert
systems-based, user friendly, object-oriented network and system management
product that is offered by the Company. Through the introduction of automated
problem, configuration, accounting, performance and security management, the
Company's e-Net NMS product provides corporate and government enterprises with
flexibility for the management of global telephone and data networks, including
networks connected by the Internet. The e-Net NMS product also provides network
traffic optimization and re-routing, real-time configuration and database
management, generation of all needed reports, and system failure detection and
prediction. Depending on precise configuration and volume, the Company offers
the e-Net NMS product at a price of approximately $60,000 per unit, which
includes a one year warranty and technical service, training and support. At
March 31, 1996, the Company realized $43,000 in sales of the e-Net NMS product,
representing approximately 15 percent of its total sales.
DEBITBILL-TM-
The telephone debit card business has experienced strong growth in response
to customer acceptance and increasing demand. e-Net's experience with its own
proprietary debit billing card product, called DebitBill-TM-, has indicated that
there may be significant market demand for this technology, although the Company
can make no assurances of the extent of any demand. The Company intends to use
its current market position to sell its debit card product to the Internet
service delivery market. DebitBill-TM- interfaces with standard telephone
switches and related accounting management software to identify the customer and
to record and manage amounts owed. The Company believes that DebitBill-TM- may
be a significant product in its suite of products because of the ease-of-use and
cash flow implications of this technology. e-Net has specifically designed
DebitBill-TM- for the Internet and private IP networks. Depending on precise
configuration and volume, the Company has recently begun to offer the DebitBill
product at a price of approximately $60,000 per unit, which includes a one year
warranty and technical service, training and support. At March 31, 1996, the
Company has not realized any sales of this product.
SERVICES
In addition to the products listed above, e-Net provides technology services
to its customers in a number of other areas. The Company has made a commitment
to provide timely, high quality technical support to meet the diverse needs of
its customers and partners and to facilitate the adoption and use of its
technologies, products and services. These services include e-Net Helpdesk
support, consulting on software programming and network management systems and
training. At March 31, 1996, the Company realized $176,376 in sales related to
its technology support services, representing approximately 60 percent of its
total sales.
The Company's plans for the next fiscal year center around continuing
efforts to complete the first phase development and test marketing of
Telecom-2000. Management believes that the market for such a product is only now
being defined and customers are waiting for a product which can deliver voice
quality equivalent to existing telephony at a reduced cost. While no assurances
can be made of Telecom-2000's success, management believes this product's
potential in the marketplace may be significant. To date, no installations of
Telecom-2000 have been sold. As a result, the Company's operating results may
fluctuate significantly based upon future sales.
25
<PAGE>
The Company also intends to continue internal development of additional
versions of Telecom-2000, as well as, other software products. Management
believes that, as the market matures, different market segments will require
slightly modified versions of its Telecom-2000. Management also believes that
additional software product requirements will be recognized while working with
its customers and installing its existing products or providing its existing
expert services.
Following the closing of this offering, the Company intends to engage in a
mergers and acquisitions campaign in order to merge with or acquire
complementary companies in the $10 million to $25 million revenue range. The
Company has not entered into any negotiations, agreements, arrangements or
understandings with respect to the merger with or acquisition of any such target
companies, or has any such agreement or understandings with any brokers or
finders regarding same. The Company can make no assurances that it will be able
to merge with or acquire any companies. Although the Company intends to utilize
not more than $500,000 in its mergers and acquisitions activities during the 12
months following the date of this Prospectus, no assurances can be made that
such funds will enable the Company to expand its base or realize profitable
consolidated operations. Whenever possible, the Company intends to issue its
securities rather than use such cash funds to consummate a merger or
acquisition. The ability of the Company to engage in a mergers and acquisitions
campaign in view of the Company's resources is uncertain. Should such funds not
be utilized in its mergers and acquisitions activities, the Company intends to
utilize the funds in equal amounts in capital equipment and marketing and sales.
The Company's objective is to market and distribute its products worldwide,
in part by disseminating its products through multiple national and
international distribution channels. However, there can be no assurances that
the Company will be able to meet this objective. The Company has designed its
distribution strategy to address the particular requirements of its diverse
institutional and individual target customers. The Company's direct distribution
efforts will consist of a direct sales force and telesales as well as marketing
directly VIA the e-Net home page on the Internet. The Company's products are
currently distributed indirectly through OEMs, systems integrators, VARs and
software retailers.
As described in Note B to the Financial Statements, the Company issued
500,000 bridge units, comprising 1,000,000 shares of Common Stock, 1,000,000
Class A Warrants, and 1,000,000 Class B Warrants as additional consideration for
a bridge loan of $1,000,000, the proceeds of which were received in March and
April 1996. In June 1996, however, the bridge loan principal was converted to
paid in capital and accounted for as consideration paid for the 500,000 bridge
units. In addition to the payment of interest of 8% per annum on the bridge
loan, interest expense of $6,000,000 related to the issuance of the bridge units
will be accrued during the period from the date of each loan through the
effective date of this offering and a corresponding credit will be credited to
paid in capital; of this amount $614,865 has been accrued as of March 31, 1996.
In addition, operating results for the year ended March 31, 1997 and
thereafter, will be negatively impacted by the expenditure of funds for
continuing development of the Company's technologies, products and services.
In July 1996, the Company caused a 2:1 reverse split of its issued and
outstanding shares of common stock, Class A Warrants and Class B Warrants,
resulting in 4,000,000 shares of common stock, 1,000,000 Class A Warrants and
1,000,000 Class B Warrants currently issued and outstanding.
RESULTS OF OPERATIONS
PERIOD FROM BEGINNING OF OPERATIONS (JUNE 8, 1995) TO MARCH 31, 1996
The Company reported sales for the period of $293,876. For the period ending
March 31, 1996, the Company derived 32% (Sprint), 29% (Comsat), 16% (First Data
Resources) and 13% (Documenta) of its sales from four customers, respectively.
The sales is attributable to its three main business areas: sales of software
products, integration and support of software products, integration and support
of
26
<PAGE>
enterprise computer networks. The cost of product sales and service consists of
salaries and wages, support costs and other expenses. The gross margin for its
products and services was approximately 70% of sales.
The Company reported selling, general and administrative expenses of
$115,171 which consisted of salaries of officer and employees, support costs,
legal fees, the cost of product development charged to expense during the
period, and other administrative expenses.
Interest and financing charges were $621,749 including an interest charge of
$614,865 associated with the issuance of bridge units as additional
consideration for a $500,000 bridge loan originating in March 1996, as well as
interest on loans from the president of the Company.
INCOME TAXES
As a result of operating losses generated during the period from beginning
of operations (June 8, 1995) to March 31, 1996, the Company has no income taxes
due. Currently, the Company maintains a tax year ending on December 31, while
its fiscal year ends on March 31. The Company is also able to file its returns
using the cash basis method of accounting.
CAPITAL RESOURCES, LIQUIDITY AND BACKLOG
The Company has a cash balance available to fund operations as of March 31,
1996, since $500,000 of the $1,000,000 in bridge financing had already been
received at that time. The Company believes that these funds are sufficient to
continue operations until the closing of this offering. The Company is also in
the process of establishing a credit facility to provide additional financing
for equipment purchases and for service and support contract operations funding.
The Underwriter is playing no role in the Company's efforts to establish a
credit facility. No assurance can be given as the ultimate success of the
Company in establishing such a facility.
The Company received $500,000 in March 1996 and $500,000 in April 1996 under
bridge loan transactions wherein the Company issued 500,000 units (each unit
consisting of two shares of Common Stock, two Class A Warrants and two Class B
Warrants) as additional financing costs in consideration for making the loans.
However, such loans were converted to paid in capital in June 1996 and accounted
for as consideration paid for the bridge units. See "Certain Transactions,"
"Description of Securities" and "Selling Security-holders."
In addition to the loan proceeds received in March and April 1996, it is
anticipated that the Company will raise approximately $5,300,000 through its
proposed initial public offering of securities. These funds are intended to fund
continuing operations, including its administrative expenses and management
compensation, as well as retire the bridge loan debt. The Company believes that
the proceeds from the bridge loans and this offering will be sufficient to meet
its cash flow needs for the 12-month period following the closing of this
offering.
The Company's commitments currently include an agreement to allocate
$1,000,000 of capital by December 31, 1996 to develop and exploit the market
opportunities of the patent acquired in March 1996, or the patent will be
subject to repurchase by the inventors of the patent. In addition, the Company
is also committed under an employment agreement effective April 1, 1996 with an
officer which calls for an annual salary and bonus of $262,500. Other than the
lease commitment described below, the Company has no other significant firm
commitments.
The Company leases approximately 1,500 square feet for its principal
executive offices located at 7-4 Metropolitan Court, Gaithersburg, Maryland
20878. The Company also leases approximately 1,500 square feet for additional
operational facilities located at 12325 Hymeadow Drive, Austin, Texas 78750. The
Company intends to expand its facilities to 3,000 square feet at each facility
following the closing of this offering. Base rental for the current premises are
approximately $1,900 and $1,200 per month, respectively. The lease requires the
Company to pay certain property taxes and certain operating expenses. The
Company believes that its current and anticipated facilities are suitable and
adequate for its operations.
27
<PAGE>
IMPACT OF INFLATION
The Company does not believe that inflation has had a material adverse
effect on sales or income since its inception. Increases in supplies or other
operating costs may adversely affect the Company's operations; however, the
Company believes it may increase prices of its technologies, products and
services to offset increases in costs of goods sold or other operating costs.
TECHNOLOGY CHANGES
Based on its limited experience to date, the Company believes that its
future operating results may be subject to quarterly variations based on a
variety of factors, including technology changes and advances, especially in the
Internet. Such effects may not be apparent in the Company's operating results
during a period of expansion. However, the Company can make no assurances that
its business can be significantly expanded under any circumstances.
28
<PAGE>
BUSINESS
OVERVIEW
e-Net, Inc. develops, markets and supports open client, server and
integrated applications software that enables local, national and international
telephone communications, information exchange and commerce over the Internet
and private Internet Protocol ("IP") networks. The Company's software products
are designed to deliver high levels of performance, ease of use and security.
These software products allow individuals and organizations to execute secure,
private, voice communications across the Internet, through the use of
authentication technology, for local, national and international telephone
communications, information exchange and commerce. In addition, through the use
of the Company's software, organizations can extend their internal information
systems and enterprise applications to geographically dispersed facilities,
remote offices and mobile employees.
In March 1996, the Company acquired all rights, title and interest in the
first U.S. patent, U.S. Patent No. 5,526,353 for a system and method for
communicating high fidelity and clear transmission of audio or voice over the
Internet, enabling free worldwide high fidelity and clear transmission of
ordinary telephone communications over the Internet. The Company acquired all
rights, title and interest in the patent from the inventors, Messrs. Arthur
Henley and Scott Grau, who are original stockholders of the Company, in
consideration of a five percent overriding royalty interest against gross
profits involving the use of the patent. The Company has agreed to allocate
$1,000,000 of capital of this offering to develop and exploit the market
opportunities for the patent by December 31, 1996, or the patent will be subject
to repurchase by the inventors of the patent. The Company believes that its
patent is the first patent awarded of its kind, specifically involving the
transmission of audio or voice over the Internet. The Company also believes that
its patent may provide certain strategic and technological advantages in the new
and burgeoning area of audio or voice over the Internet. The Company can make no
assurances, however, as to the extent of the advantages or protection, if any,
that may be granted to the Company as a result of its patent. The Company's
first product utilizing its patent is Telecom-2000-TM-, a hardware and software
suite designed for voice over the Internet, which is in the final testing stage
and projected to be available to market by the end of the Company's third
quarter of fiscal 1997.
In March 1996, e-Net entered into an agreement with Sprint Communications
Company, L.P. ("Sprint"), a leading telecommunications company, under which
e-Net will deliver certain software development services known as Sprint
Internet Protocol Dial Services support. Sprint, to date, has been the Company's
largest customer. Under the agreement, e-Net will use highly technical software
development services to provide security and field support to Sprint customers
who use Sprint as a means of accessing the Internet. e-Net's agreement provides
that e-Net will generate all of the revenues associated with the number of
authorized Sprint Internet Protocol Dial Service user identity codes. e-Net
shall also perform password administration, customer service administration and
emergency help desk administration under the terms of the agreement. The
agreement has a duration of one year, with automatic one year renewals, subject
to mutual consent. e-Net intends to seek additional strategic alliances with the
Regional Bell Operating Companies (RBOC's) for the use of its technologies,
products and services. The Company has not entered into any negotiations to
enter into any strategic alliances with the RBOC's. The Company can make no
assurances that it will be able to enter into any agreements with such concerns
for its technologies, products and services.
Also, in June 1996, e-Net entered into a letter of intent with the Product
Management Group of the Advanced Data Services Division of Sprint to enter into
an agreement to provide certain of e-Net's technologies, products and services
to Sprint to enable Sprint's frame relay customers, approximately 1,500
nationwide, to generate network data reports on an automated basis for their
virtual private networks. The Company can make no assurances that it will be
able to enter into an agreement with Sprint for its technologies, products and
services.
29
<PAGE>
INDUSTRY BACKGROUND
INTERNET
The Internet is a global web of computer networks. Developed over 25 years
ago, this "network of networks" allows any computer attached to the Internet to
talk to any other using the Internet Protocol. The Internet has traditionally
been subsidized by the U.S. federal government. As the number of commercial
entities that rely on the Internet for business communications and commerce has
increased, the level of federal subsidies has significantly diminished, and
funding for the Internet infrastructure and backbone operations has shifted
primarily to the private sector. Further, the Internet has historically been
used by academic institutions, defense contractors and government agencies
primarily for remote access to host computers and for sending and receiving
e-mail.
Further, individuals are connecting directly to the Internet through
Internet access services such as those provided by MCI, NETCOM, Performance
Systems International, Inc. ("PSI"), and UUNET Technologies, Inc. ("UUNET").
These services are growing as easy-to-use software packages make accessing the
Internet as easy as getting onto the popular online services. To compete with
these direct Internet access providers, consumer online services including
America Online, Inc. ("AOL"), CompuServe, Inc. ("CompuServe"), and Prodigy
Services Co. ("Prodigy"), have also introduced Internet access gateways for
their existing subscribers. With these gateways, the online services effectively
become large Internet "on-ramps," bringing large numbers of subscribers onto the
Internet.
WORLD WIDE WEB
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 ("Web"). The Web, based on a
client/server model and a set of standards for information access and
navigation, can be accessed using software that allows non-technical users to
exploit the capabilities of the Internet. The Web enables users to find,
retrieve and link information on the Internet in a consistent way that makes the
underlying complexities transparent to the user. Electronic documents are
published on Web servers in a common format described by the Hypertext Markup
Language ("HTML"). Web client software can retrieve these documents across the
Internet by making requests using a standard protocol called Hypertext Transfer
Protocol ("HTTP"). The first Web client (or "browser") with a graphical user
interface to utilize these protocols was NCSA Mosaic, first released in April
1993 by the National Center for Supercomputing Applications at the University of
Illinois ("NCSA").
The proliferation of Web clients has created significant demand for software
to enable Internet servers and private servers on corporate networks to function
as Web servers. These servers are used by organizations to offer their products
and services on the Internet and to publish confidential company information to
employees inside the enterprise. Web usage is expected to be further fueled by
advances in Web client, server and application software, in concert with
technological developments that drive cost reductions and performance
enhancements.
INTERNET COMMERCE
The Internet provides organizations and individuals with new means to
conduct business. Commercial uses of the Internet include business-to-business
and business-to-consumer transactions, product marketing, advertising,
entertainment, electronic publishing, electronic services and customer support.
The Internet offers a new and powerful medium for traditional retail and mail
order businesses to target and manage a wider customer base more rapidly,
economically and productively. The Company believes that only a small fraction
of this retail business is currently conducted electronically. Another important
application for Internet commerce is electronic publishing through advertiser
supported and fee-based Internet services. Electronic publishing offers
substantial savings as compared to publishing on paper or computer discs. In
addition, Web software permits the publishing of audio files and video clips as
well as text and graphical data.
30
<PAGE>
In addition to retailers and publishers, other new businesses are appearing
on the Web as it provides access to a growing base of home, business and
education customers. Business information providers such as Dow Jones & Company,
Inc., Individual, Inc. and Reuters Ltd. have started customizing news services
on the Web. Financial service institutions are providing online banking
information, stock information and trading services. Examples of popular
consumer information services recently introduced include ESPNet,
Knight-Ridder's Mercury Center and Sportsline U.S.A. Companies from many
industries are publishing product and company information to their channel
partners and customers, providing customer support via the Web, allowing
customers to immediately buy products online, and collecting customer feedback
and demographic information interactively.
APPLICATIONS
As an increasing number of organizations provide their employees with Web
access from their desktops, an opportunity is emerging for internal information
systems and enterprise applications hosted on internal Web servers. The Internet
enables organizations to extend their internal information systems and
enterprise applications to geographically dispersed facilities, remote offices,
and mobile employees using Web client and server software.
e-Net develops, markets and supports open client, server and integrated
applications software that enables local, national and international telephone
communications, information exchange and commerce over the Internet and private
IP networks. The Company's software products are designed to deliver high levels
of performance, ease of use and security. These software products allow
individuals and organizations to execute secure voice transactions across the
Internet, through the use of authentication technology, for local, national and
international telephone communications, information and commerce. In addition,
through the use of the Company's software, organizations can extend their
internal information systems and enterprise applications to geographically
dispersed facilities, remote offices and mobile employees.
The Company believes that one of its key competitive advantages is its
technical experience and expertise. The Company's core development group
includes individuals who have developed and implemented telecommunications
network management software and other Internet and network related products and
services as they have emerged as a recognized application continuously for the
last 12 years.
PRODUCTS
The Company provides a comprehensive line of telecommunications
science-based products for business and consumers for use in the transmission,
management and billing of network telephone and computer usage, including the
Internet. These products enable the improved usage, recording, monitoring and
accounting of network operations. The following material sets forth certain
information with respect to the Company's line of products:
TELECOM-2000-TM-
The Company's most sophisticated technology is a software and hardware
product suite known as Telecom-2000. Telecom-2000 on the Internet, as well as on
private wide area networks, is designed to deliver basic telephone service, in a
technically different and improved way, without lag time, in terms of voice
quality compared to product offerings in the market today. The Company's product
is based on Ethernet switching and Virtual LAN technology completed with low
cost voice packetization technology. The proliferation of affordable ATM
adapters, switch nodes and Wide Area Network ATM services by the Local Exchange
Carriers (LEC's) and Interexchange Carriers (IXC's) has provided a significant
cost incentive to utilize ATM for voice transport on the Internet and other wide
area networks.
Telecom-2000 consists of voice/data integration and authentication protocol,
voice packetization software, prototype interfaces to Ethernet telephony
hardware, address resolution and call handling software, and interfaces to the
traditional telephone network through a PC, or personal computer. Due to the
economical and highly scaleable architecture developed by the Company,
Telecom-2000 can be utilized for secure, or private, data and telephony
communications in very small offices, enterprise
31
<PAGE>
networks, national reseller networks and for the individual consumer. The
technological basis for the Telecom-2000 is the Company's patent, U.S. Patent
No. 5,526,353, which provides for a system and method for communicating high
fidelity and clear transmission of audio or voice over the Internet, enabling
free worldwide high fidelity and clear transmission of ordinary telephone
communications over the Internet. The Company is not aware of any other company
that possesses the technological ability for communicating high fidelity and
clear transmissions of audio or voice over the Internet. Although the Company is
aware of other companies providing a suite of hardware and software products
that enable audio or voice over the Internet, the quality of the audio or voice
is regarded by the Company as poor to fair in comparison to its suite of
hardware and software (Telecom-2000) that provides for communicating high
fidelity and clear transmission of audio or voice over the Internet. However,
the Company is well aware that this technology is rapidly advancing and although
the Company believes that its patent may provide certain strategic and
technological advantages in the new and burgeoning area of audio or voice over
the Internet, the Company can make no assurances as to the extent of the
advantages or protection, if any, that may be granted to the Company as a result
of its patented technology. See "Business -- Patent, Trademark, Copyright and
Proprietary Rights."
Telecom-2000 elements include an integrated Ethernet adapter and desktop
telephone, a PC ISA plug in card to provide desktop telephone access via a
standard Ethernet interface, a PC ISA plug-in card to terminate four standard
telephone lines or a PC ISA plug-in card to provide four telephone station lines
for desktop computers not equipped with a PC or LAN connection.
The use of Microsoft's TAPI assures maximum flexibility in providing the
latest CTI features both in hardware and software. The provision of the hardware
assures a unique product with traditional telephone system reliability. The TAPI
compliance assures use of Telecom-2000 for unique applications, as well as third
party software for specialty requirements and ease of value added reseller
software products to quickly open up new markets. All of the hardware, software
and protocols being developed and utilized comply with both international
telephony and ATM standards. This flexibility allows e-Net to compete in both
hardware and software markets. Depending on the precise configuration and
volume, the Company offers the Telecom-2000 at a price of approximately $750 per
unit, which includes a one year warranty and technical service, training and
support.
INTELLICD-TM-
e-Net has recently developed IntelliCD, a product to provide the market a
simpler and less expensive network usage and billing capability. IntelliCD has
been designed to utilize state-of-the-art imaging technology. e-Net has designed
and developed a standards compliant, general purpose search and retrieval engine
which can be used unaltered in a wide variety of user applications in any
industry. This product is distributed by e-Net clients under their own trade
names. One of e-Net's clients, Sprint, uses IntelliCD to provide its clients
with database access to their monthly Call Detail Record (CDR) data. Based upon
the strong market position of Sprint, and that e-Net is not contractually
prohibited from selling this product to the other long distance carriers or the
regional telephone operating companies, the Company believes that this unique
product may have wide utilization in the telecommunications industry, but the
Company can make no assurances of its utilization. Depending on precise
configuration and volume, the Company offers the IntelliCD as a price of
approximately $300 per unit, which includes a one year warranty and technical
service, training and support. At March 31, 1996, the Company realized $74,500
in sales of the IntelliCD product, representing approximately 25 percent of its
total sales.
E-NET NMS-TM-
The e-Net Network Management System ("e-Net NMS") is a proprietary expert
systems-based, user friendly, object-oriented network and system management
product that is offered by the Company. Through the introduction of automated
problem, configuration, accounting, performance and security management, the
Company's e-Net NMS product provides corporate and government enterprises with
flexibility for the management of global telephone and data networks, including
networks connected by the Internet. The e-Net NMS product also provides network
traffic optimization and re-
32
<PAGE>
routing, real-time configuration and database management, generation of all
needed reports, and system failure detection and prediction. Depending on
precise configuration and volume, the Company offers the e-Net NMS product in a
price range of approximately $40,000 to $80,000 per unit, which includes a
one-year warranty and technical service, training and support. At March 31,
1996, the Company realized $43,000 in sales of the e-Net NMS product,
representing approximately 15 percent of its total sales.
DEBITBILL-TM-
The telephone debit card business has experienced strong growth in response
to customer acceptance and increasing demand. e-Net's experience with its own
proprietary debit billing card product, called DebitBill, has indicated that
there may be significant market demand for this technology, although the Company
can make no assurances of the extent of any demand. The Company intends to use
its current market position to sell its debit card product to the Internet
service delivery market. DebitBill interfaces with standard telephone switches
and related accounting management software to identify the customer and to
record and manage amounts owed. The Company believes that DebitBill may be a
significant product in its suite of products because of the ease-of-use and cash
flow implications of this technology. e-Net has specifically designed DebitBill
for the Internet and private IP networks. Depending on precise configuration and
volume, the Company has recently begun to offer the DebitBill product at a price
of approximately $60,000 per unit, which includes a one year warranty and
technical service, training and support. At March 31, 1996, the Company has not
realized any sales of this product.
SERVICES
The Company has made a commitment to provide timely, high quality technical
support to meet the diverse needs of its customers and partners and to
facilitate the adoption and use of its products, systems and services. The
Company offers the following technical services:
E-NET HELPDESK SUPPORT. The Company offers an annual support program
intended for organizations who need to internally support large-scale deployment
of e-Net's products and for authorized VARs and systems integrators providing
direct support to their customers. This program offers a full spectrum of
support, including access to technical experts, support and training materials,
support tools, call histories, maintenance releases and software updates.
E-NET CONSULTATION SUPPORT. For individuals and for small groups using
e-Net's products, the Company offers support through a toll-free telephone
number on a time and materials payment basis. This service provides on-line
technical support and bug fixes or software releases as required. e-Net
consultation support is particularly economical for self-supporting departments
that consolidate questions through a department system administrator. The
Company also offers consulting services for particularly complex application
design, integration and installation. Consulting services are provided at
negotiated rates, and typically include on-site support during the installation
process by Company engineers.
TRAINING
e-Net offers hands-on training courses and materials to resellers and end
users covering installation configuration and troubleshooting. In addition,
courses and materials cover user support, data loading and content creation,
user interface design, template scripting and integration with the data base.
At March 31, 1996, the Company realized $176,376 in sales related to its
technology support services, representing approximately 60 percent of its total
sales.
MARKETING AND DISTRIBUTION
The Company's marketing and distribution strategy targets markets such as
Internet commerce, enterprise-wide private IP wide area networks, enterprise
local area networks, individual PC users and the individual telephone consumer.
33
<PAGE>
INTERNET COMMERCE MARKET. The Company believes that many major corporations
may begin to communicate data and manage information on the Internet or on
private IP wide area networks. Corporations likely to use such products and
services include telecommunications companies, information service providers,
mail order and traditional retailers, publishers, and financial service
providers. Any or all of these corporations may wish to utilize the advantages
of telephone usage on the Internet or their private IP networks.
ENTERPRISE MARKET. Medium and large-sized enterprises, particularly those
with geographically disbursed employee bases, are expected to increasingly use
the Internet in conjunction with private IP networks to facilitate internal
communications. Many Fortune 500 companies already maintain extensive private
communication networks, which can be enhanced and extended through use of the
Internet.
INDIVIDUAL PC BUSINESS AND HOME USERS. While the number of business desktop
computer users accessing the Internet is increasing rapidly, the Company
believes that only a small fraction of business computer uses currently use the
Internet. The corporate employer, even for small proprietorships will give due
consideration to the cost and other advantages of the Company's products. Demand
can be measured by the growth in usage of Prodigy, CompuServe and America Online
("AOL"), as well as home shopping services, such as QVC and Home Shopping
Network, which suggests that the home market for commercial applications on the
Internet will be substantial. The accessibility and ease of use of the Company's
systems and products are designed to address the demands of this marketplace.
The market for the Company's software and services has only recently begun
to develop, is rapidly evolving and is characterized by an increasing number of
market entrants who have introduced or developed products and services for
communication and commerce over the Internet and private IP networks. As is
typical in the case of a new and rapidly evolving industry, demand and market
acceptance for recently introduced products and services are subject to a high
level of uncertainty. The industry is young and has few proven products.
Moreover, 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. While the
Company believes that its software products offer significant advantages for
commerce and communication over the Internet and private IP networks, there can
be no assurance that Internet commerce and communication will become widespread,
or that the Company's systems and products for commerce and communication over
the Internet and private IP networks will become adopted for these purposes.
MARKETING
The Company uses direct marketing of its technologies, products and
services, and intends to use a variety of other marketing programs to stimulate
demand for its technologies, products and services. These programs are focused
on the target markets mentioned above and are designed to leverage the Internet
itself as a powerful marketing vehicle. In addition, the Company intends to
develop co-marketing programs with strategic corporate partners designed to take
advantage of complementary marketing capabilities. Due to a lack of resources,
the Company has only recently begun to implement its marketing strategy. The
Company can make no assurances as to the success of its marketing strategy. The
key elements of the Company's marketing strategy include:
MARKETING ON THE INTERNET. e-Net will be accessible with its own Web
site. This Web site will provide directories to a variety of product and
technical support information. The Company will make its products available for
evaluation and purchase through Web site.
TARGET MARKETING. The Company will focus direct marketing efforts on
enterprise network users, companies now publishing on the Web and decision
makers using the Internet for internal use in medium and large-sized
enterprises, and vertically targeted small offers. Outbound telemarketing,
direct response advertising and seminar programs. The goal of these efforts is
to identify potential buyers of the Company's products, create awareness of the
Company's product offerings and generate leads for follow-on sales.
34
<PAGE>
MARKETING TO PC USERS. Client products will be marketed widely to PC
users in both the business and home PC market segments. Distribution through
national resellers, reseller agreements with Internet access providers, and
bundling arrangements with PC hardware and software OEMs will be used to make
Company's products rapidly available to a large number of potential customers.
In order to stimulate demand for its products, the Company will advertise in PC
industry publications and engage in sales promotions with distribution partners,
with particular emphasis on trade shows and technology expositions at convention
centers.
DISTRIBUTION
The Company's objective is to market and distribute its products worldwide,
in part by disseminating its products through multiple national and
international distribution channels. However, the Company has only recently
begun to implement its distribution strategy and has not yet entered into any
distribution agreements for its products. The Company can make no assurances as
to the success of its distribution strategy. Furthermore, the Company has
limited resources to achieve the distribution of its products and no assurances
can be made that the Company will not require additional financing, which may
not be available, to achieve such objective. The Company has designed its
distribution strategy to address the particular requirements of its diverse
institutional and individual target customers. The Company's direct distribution
efforts will consist of a direct sales force and telesales as well as marketing
directly VIA the e-Net home page on the Internet. The Company's products are
currently distributed indirectly through OEMs, systems integrators, VARs and
software retailers.
DIRECT SALES. The Company's direct sales force targets primarily medium to
large-sized enterprises, including telecommunications companies and public
sector network users. The Company currently has only three employees in
marketing and sales, but intends to add three more employees in marketing and
sales following the closing of this offering. The Company believes that these
organizations are most likely to become large network users interconnected to
the Internet. In addition, these organizations have a substantial installed base
of private IP networks and are expected to employ Web servers for internal
enterprise applications.
TELESALES. The Company's telesales organization, based in the Washington,
D.C. metropolitan area, receives customer orders as well as contacts potential
customers. The organization comprises three telesales representatives, who also
are employed in marketing and sales, on behalf of the Company. Following the
closing of this offering, the Company intends to add three employees to its
telesales force.
INTERNET SALES. The Company will offer its products and services
electronically VIA the Internet. Internet sales and distribution is particularly
well suited to address the large base of Internet users who may choose the
Company's products and services for many of their telephone needs.
OEMS, VARS AND SYSTEMS INTEGRATORS. OEMs, VARs and systems integrators may
customize, configure and install the Company's products with complementary
hardware, software and services. In combining these products and services, these
resellers are able to deliver more complete solutions to address specific
customer needs, deriving maximum benefit from the Company's products while
tailoring system solutions, which allows e-Net to avoid customization costs and
invest in focused product improvement.
The Company has historically sold its products only through direct sales.
The Company intends to increasingly utilize the Internet, OEMs, systems
integrators and VARs. The Company expects that any material increase in sales
through resellers as a percentage of total revenues, especially in the
percentage of sales through OEMs and VARs, will adversely affect the Company's
average selling prices and gross margins due to the discounts that are typically
extended when selling through indirect channels. Moreover, there can be no
assurance that the Company will be able to attract resellers that will be able
to market the Company's products effectively and will be qualified to provide
timely and cost-effective customer support and service or that the Company will
be able to manage
35
<PAGE>
conflicts among its resellers. In addition, the agreements with resellers in
Company's industry typically do not restrict resellers from distributing
competing products, and in many cases will be terminable by either party without
cause. It is ordinary in the Company's industry to grant exclusive distribution
rights which are limited by territory and in duration. Consequently, the Company
may be adversely affected should any reseller fail to adequately penetrate its
market segment. The inability to recruit, manage and retain important resellers,
or their inability to penetrate their respective market segments, may materially
adversely affect the Company's business, operating results or financial
condition.
The Company intends to expand its field sales force and its telesales
organization. There can be no assurance that such internal expansion will be
successfully completed, that the cost of such expansion will not exceed the
revenues generated, or that the Company's sales and marketing organization will
be able to successfully compete against the significantly more extensive and
well-funded sales and marketing operations of many of the Company's current or
potential competitors. The Company's inability to effectively manage its
internal expansion may have a material adverse effect on the Company's business,
operating results or financial condition.
In addition to expanding its direct sales channels, the Company will
distribute its products electronically through the Internet. Distributing the
Company's products through the Internet makes the Company's software more
susceptible than other software to unauthorized copying and use. The Company
intends to continue to allow potential customers to electronically download its
software for a free evaluation period. There can be no assurance that, upon
expiration of the evaluation period, the Company will be able to collect payment
from users that retain a copy of the Company's software. In addition, by
distributing its products for free evaluation over the Internet, the Company may
have reduced the future demand for its products. If, as a result of changing
legal interpretations of liability for unauthorized use of the Company's
software or otherwise, users were to become less sensitive to avoiding copyright
infringement, the Company's business, operating results and financial condition
may be materially adversely affected. Any such export restrictions, new
legislation or regulation or unlawful exportation may have a material adverse
impact on the Company's business, operating results or financial condition.
PRODUCT DEVELOPMENT
The Company's current development efforts are focused on new products,
product enhancements and implementing existing products into new enterprise
networks. In particular, e-Net is in the final testing stages of Telecom-2000.
This testing is currently on schedule and it is estimated by the Company to be
successfully concluded, resulting in product market readiness, by the end of the
Company's third quarter of fiscal 1997. There can be no assurance, however, that
any Company products will be made commercially available as expected or
otherwise on a timely and cost-effective basis, or that if introduced, that
these products will achieve market acceptance.
The Company's ability to attract and retain highly qualified technical
employees will be the principal determinant of its success in maintaining
technological leadership. e-Net intends to develop a policy of using
equity-based compensation programs, which have not yet been instituted, to
reward and motivate significant contributors among its employees.
To date, all product development costs have been expensed as incurred. The
Company believes that significant investments in research and development are
required to remain competitive. As a consequence, the Company intends to
increase the amount of its research and development expenditures in the future.
Substantially all of the Company's revenues have been derived, and
substantially all of the Company's future revenues are expected to be derived,
from the license of its software and sale of its associated services.
Accordingly, broad acceptance of the Company's products and services by
customers is critical to the Company's future success, as is the Company's
ability to design, develop, test and support new software products and
enhancements on a timely basis that meet changing customer
36
<PAGE>
needs and respond to technological developments and emerging industry standards.
There can be no assurance that the Company will be successful in developing and
marketing new products and enhancements that meet changing customer needs.
Current products are designed around certain standards, and current and future
sales of the Company's products will be dependent, in part, on industry
acceptance of such standards. In addition, there can be no assurance that the
Company will not experience difficulties that may delay or prevent the
successful development, introduction and marketing of new products and
enhancements, or that its new products and enhancements will adequately meet the
requirements of the marketplace and achieve market acceptance. Further, because
the Company has only recently commenced shipment of its products, there can be
no assurance that, despite testing by the Company and by current and potential
customers, errors will not be found in the Company's products, or, if
discovered, successfully corrected in a timely manner. If the Company is unable
to develop on a timely basis new software products, enhancements to existing
products or error corrections, or if such new products or enhancements do not
achieve market acceptance, the Company's business, operating results and
financial condition will be materially adversely affected.
PATENT, TRADEMARK, COPYRIGHT AND PROPRIETARY RIGHTS
In March 1996, the Company acquired all rights, title and interest in the
first U.S. patent, U.S. Patent No. 5,526,353, for a system and method for
communicating high fidelity and clear transmission of audio or voice over the
Internet, enabling free worldwide high fidelity and clear transmission of
ordinary telephone communications over the Internet. The Company acquired all
rights, title and interest in the patent from the inventors, Messrs. Arthur
Henley and Scott Grau, who are original stockholders of the Company, in
consideration of a five percent overriding royalty interest against gross sales
involving the use of the patent. The Company has agreed to allocate $1,000,000
of capital of this offering to develop and exploit the market opportunities for
the patent by December 31, 1996, or the patent will be subject to repurchase by
the inventors of the patent. The Company believes that its patent is the first
patent awarded of its kind, specifically involving the transmission of audio or
voice over the Internet. The Company also believes that its patent may provide
certain strategic and technological advantages in the new and burgeoning area of
audio or voice over the Internet. The Company can make no assurances, however,
as to the extent of the advantages or protection, if any, that may be granted to
the Company as a result of its patent.
The Company currently does not have any other patent or copyright
applications pending. However, the Company has trademark applications pending
related to certain of its products and technologies. The Company may file
additional patent, trademark and copyright applications relating to certain of
the Company's products and technologies. If patents, registered trademarks or
copyrights were to be issued, there can be no assurance as to the extent of the
protection that will be granted to the Company as a result of having such
patents, trademarks or copyrights or that the Company will be able to afford the
expenses of any complex litigation which may be necessary to enforce its
proprietary rights. Failure of the Company's patents, trademark and copyright
applications may have a material adverse impact on the Company's business.
Except as may be required by the filing of patent, trademark and copyright
applications, the Company will attempt to keep all other proprietary information
secret and to take such actions as may be necessary to insure the results of its
development activities are not disclosed and are protected under the common law
concerning trade secrets. Such steps will include the execution of nondisclosure
agreements by key Company personnel and may also include the imposition of
restrictive agreements on purchasers of the Company's products and services.
There is no assurance that the execution of such agreements will be effective to
protect the Company, that the Company will be able to enforce the provisions of
such nondisclosure agreements or that technology and other information acquired
by the Company pursuant to its development activities will be deemed to
constitute trade secrets by any court of competent jurisdiction.
SECURITY RISKS
The Company has included in certain of its products an implementation of a
security protocol which operates in conjunction with authentication technology
that it has developed. Despite the
37
<PAGE>
existence of this technology, the Company's products may be vulnerable to
break-ins and similar disruptive problems caused by certain Internet users. Such
computer break-ins and other disruptions would jeopardize the security of
information stored in and transmitted through the computer systems of end users
of the Company's products, which may result in significant liability to the
Company and may also deter potential customers. Persistent security problems
continue to plague public and private data networks. Recent break-ins at major
government institutions, banks and corporations have involved hackers bypassing
firewalls and missappropriating confidential information. Alleviating problems
caused by third parties may require significant expenditures of capital and
resources by the Company and may cause interruptions, delays or cessation of
service to the Company's customers; such expenditures or interruptions may have
a material adverse effect on the Company's business, operating results and
financial condition. Moreover, the security and privacy concerns of existing and
potential customers, as well as concerns related to computer viruses, may
inhibit the growth of the Internet marketplace, generally, and the Company's
customer base and revenues, specifically. The Company intends to limit its
liability to customers, including liability arising from a failure of the
security features contained in the Company's products, through provisions in its
future contracts. However, the Company can make no assurances that such
contractual limitations will be enforceable. The Company currently does not have
liability insurance to protect against these risks and there can be no assurance
that such insurance will be available to the Company on commercially reasonable
terms, or available on any terms.
GOVERNMENT REGULATION
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to or commerce
on the Internet. However, due to the increasing popularity and use of the
Internet, it is possible that a number of laws and regulations may be adopted
with respect to the Internet, covering issues such as user privacy, pricing and
characteristics and quality of products and services. For example, the Exon Bill
(which was recently approved by the Senate) would prohibit distribution of
obscene, lascivious or indecent communications on the Internet. The adoption of
any such laws or regulations may decrease the growth of the Internet, which may
in turn decrease the demand for the Company's products and increase the
Company's cost of doing business 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's success and ability to compete is dependent in part upon its
proprietary technology. While the Company relies on patent, trademark, trade
secret and copyright law to protect its technology, the Company believes that
factors such as the technological and creative skills of its personnel, new
product developments, frequent product enhancements, name recognition and
reliable product maintenance are more essential to establishing and maintaining
a technology position. The source code for the Company's proprietary software is
protected both as a trade secret and as a copyrighted work. The Company
generally enters into confidentiality or license agreements with its employees,
consultants and vendors, and generally controls access to an distribution of its
software, documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use the Company's products or technology without authorization, or to
develop similar technology independently. In addition, effective copyright and
trade secret protection may be unavailable or limited in certain foreign
countries, and the global nature of the Internet makes it virtually impossible
to control the ultimate designation of the Company's products. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products to "reverse engineer" the
Company's designs, or to obtain and use information that the Company regards as
proprietary. In addition, litigation may be necessary in the future to enforce
the Company's intellectual property rights, to protect the Company's trade
secrets, to determine the validity and scope of the proprietary rights of
others, or to
38
<PAGE>
defend against claims of infringement or invalidity. Such litigation may result
in substantial costs and diversion of resources and may have a material adverse
effect on the Company's business, operating results or financial condition.
The Company also relies on certain technology which it licenses from third
parties, including software which is integrated with internally developed
software and used in the Company's products to perform key functions. There can
be no assurance that these third party technology licenses will continue to be
available to the Company on commercially reasonable terms. The loss of or
inability to maintain any of these technology licenses may result in delays or
reductions in product shipments until equivalent technology may be identified,
licensed and integrated. Any such delays or reductions in product shipments may
materially adversely affect the Company's business, operating results and
financial condition.
COMPETITION
The market for Internet-based software and services is new, intensely
competitive, rapidly evolving and subject to rapid technological change. The
Company expects competition to persist, intensify and increase in the future,
from start-up companies to major technology companies. Almost all of the
Company's current and potential competitors have longer operating histories,
greater name recognition, larger installed customer bases and significantly
greater financial, technical and marketing resources than the Company. Such
competition may materially adversely affect the Company's business, operating
results or financial condition. The Company's current and potential competitors
can be divided into several groups: Microsoft, browser software vendors, Web
server software and service vendors, PC and Unix software vendors and online
service providers.
MICROSOFT CORPORATION. Microsoft has licensed browser software from
Spyglass and has announced its intention to improve and bundle the browser with
its Windows 95 operating system. Microsoft's browser will access the Microsoft
Network, its announced online service, and will also offer Internet access.
While the anticipated penetration of this software into Microsoft's installed
base of PC users will increase the size and usefulness of the Internet, it may
have a material adverse impact on e-Net's ability to sell client software. In
addition, because the Company's client software products will not be able to
access Microsoft Network, the Company's client software products may be at a
competitive disadvantage VERSUS Microsoft's browser. Further, Microsoft may
choose to develop Web server, applications software and software products
specifically designed to deliver high levels of performance that enables local,
material and international telephone communications, information exchange and
commerce over the Internet as a complement to its product line and to support
the Microsoft Network, which may materially adversely affect e-Net's ability to
sell its technologies, products and services. To the extent that Microsoft's
browser gains market acceptance, Microsoft will be better positioned than the
Company to sell Web server and applications products. Microsoft has a longer
operating history, a much larger installed base and number of employees, and
substantially greater financial, technical and marketing resources, access to
distribution channels and name recognition than the Company.
BROWSER SOFTWARE VENDORS. Several companies are currently offering
client-based Web browser products, including Netscape Communications
Corporation, Spry, Inc. (a subsidiary of CompuServe), Spyglass, Booklink
Technologies, Inc. ("Booklink," a subsidiary of AOL), NetManage Inc., Network
Computing Devices, Inc. and Quarterdeck Office Systems, Inc. In addition, the
NCSA at the University of Illinois distributes its product, NCSA Mosaic, for
free for noncommercial use. Further, Spyglass has an exclusive license for NCSA
Mosaic and is actively sublicensing it to other commercial vendors. These
sublicensees are expected to offer derivative products that will compete with
the Company's product line.
SERVER SOFTWARE AND SERVICE VENDORS. Some companies are offering Web server
software that they install and operate on behalf of their customers, and other
companies are offering services using Web serves. Companies offering Web server
software include Open Market, Inc. ("Open Market"),
39
<PAGE>
which has a Web server for various Unix platforms, Process Software Corp. and
O'Reilly & Associates, Inc., which have Windows NT Web server products,
Spyglass, which has announced a Web server for Windows NT and various Unix
platforms, and Terisa, which offers a toolkit for adding security functions to
the existing NCSA and CERN Web servers. Service companies include Open Market
and Internet Media Services, which publish content from third parties on their
own Web servers. In the future, software companies which have server products in
other product categories may choose to enhance the functionality of existing
products or develop new products which are competitive with the Company's Web
server and integrated applications products. These companies include Lotus
(which IBM recently acquired), which may extend Notes in this manner, and
Novell, which may choose to provide add-ons to Netware for Web publishing. In
addition, Oracle, Sybase and Informix may incorporate Web server functionality
into their database products. Oracle has recently announced a technology
licensing agreement with Spyglass and its intention to introduce Web-based
software that enables electronic commerce and communication.
PC AND UNIX SOFTWARE VENDORS. The Company believes that PC software vendors
may become particularly formidable competitors. In addition to Microsoft, IBM
has incorporated client software in its OS/2 operating system, and the Company
believes that other PC operating system vendors, including Apple, will also
eventually incorporate some Web client functionality into their operating
systems as standard features. This may also be true of Unix operating systems
vendors, such as Sun, HP, IBM, Digital, SCO and SGI. If these companies
incorporate Web browser functionality into their software products, they could
subsequently offer this functionality at little or no additional cost to
customers. Further, in the event that client products incorporated into
operating systems by Microsoft or other PC or Unix software vendors gain market
acceptance, these organizations will be better positioned than the Company to
sell Web server and applications software products.
ONLINE SERVICE PROVIDERS. Although the online services provided by
companies such as Prodigy, CompuServe and AOL are not Internet-based services,
these services currently present an alternative medium to organizations
considering Internet-based publishing. In addition, due to the appeal of the
Internet to content publishers and end users, these companies are adapting their
service offerings to provide Internet access. At least two of these companies
compete directly with the Company in the Internet-based software and services
market: AOL, which acquired Booklink, and CompuServe, which acquired Spry. The
Company's client software products do not offer access to any online services,
including Microsoft Network, and are at a competitive disadvantage VERSUS
browser products which offer both access to the Internet and to an online
service.
Additional competition could come from client/server applications and tools
vendors, other database companies, multimedia companies, document management
companies, networking software companies, network management companies and
educational software companies. Further, the Company's current products are
designed around certain standards, and industry acceptance of competing
standards could decrease the demand for the Company's products. For example,
Microsoft and IBM are each proposing an alternative security standard, and
widespread adoption of either standard may have a material adverse effect on the
Company's business, operating results or financial condition.
Competitive factors in the Internet-based software and services market
include core technology, breadth of product features, product quality, marketing
and distribution resources, and customer service and support. However, the
market and competition are still new and rapidly emerging, and there can be no
assurance that the Company will be able to compete successfully against current
or future competitors, or that this competition will not adversely affect the
Company's business, operating results or financial condition.
EMPLOYEES
As of the date of this prospectus, the Company has a total of eight
employees, all of whom are full time employees. Of the total number of
employees, three are engaged in software development, three are engaged in
marketing, sales and customer support and three are engaged in administration
and finance. Four of these employees were hired in May 1996. Certain software
development activities and
40
<PAGE>
additional financial and administrative support required to date have been
purchased on an as needed basis from independent consultants. Following the
closing of this offering, the Company intends to hire approximately ten
additional employees, including five in software development, three in marketing
and sales and two in administration and finance. The Company's future success
depends in significant part upon the continued service of its key technical and
senior management personnel and its continuing ability to attract and retain
highly qualified technical and managerial personnel. Competition for highly
qualified technical personnel is intense and there can be no assurance that the
Company will be able to retain its key managerial and technical employees or
that it will be able to attract and retain additional highly qualified technical
and managerial personnel in the future. None of the Company's employees is
represented by labor union. The Company has not experienced any work stoppages
and considers its relations with its employees to be good.
The rapid execution necessary for the Company to fully exploit the market
window for its products and services requires an effective planning and
management process. The Company's growth has placed, and is expected to continue
to place, a significant strain on the Company's managerial, operational and
financial resources. In addition, most of the Company's management, development
and engineering staff was only recently hired. To manage its growth, the Company
must continue to implement and improve its operational and financial systems and
to expand, train and manage its employee base. For example, the Company is
currently in the process of building its internal maintenance and support
organization. Although the Company believes that it has made adequate allowances
for the costs and risks associated with this expansion, there can be no
assurance that the Company's systems, procedures or controls will be adequate to
support the Company's operations or that Company management will be able to
achieve the rapid execution necessary to fully exploit the market window for the
Company's products and services. If the Company is unable to manage growth
effectively, the Company's business, operating results and financial condition
will be materially adversely affected.
FACILITIES
The Company leases approximately 1,500 square feet for its principal
executive offices located at 7-4 Metropolitan Court, Gaithersburg, Maryland
20878. The Company also leases approximately 1,500 square feet for additional
operational facilities located at 12325 Hymeadow Drive, Austin, Texas 78750. The
Company intends to expand its facilities to 3,000 square feet at each facility
following the closing of this offering. Base rental for the current premises are
approximately $1,900 and $1,200 per month, respectively, and will be
approximately $3,800 and $2,400 per month, respectively, in the expanded
facilities. The lease requires the Company to pay certain property taxes and
certain operating expenses. The Company believes that its current and
anticipated facilities are suitable and adequate for its operations.
41
<PAGE>
MANAGEMENT
The officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME TITLE
- ---------------------------------- ----------------------------------------
<S> <C>
Alonzo E. Short, Jr., Chairman of the Board
Lt. Gen., USA (ret.)
Robert A. Veschi President, Chief Executive Officer,
Secretary, Director
George Porta Vice President, Operations
William L. Hooton Director
Edward Ratkovich, Director
Maj. Gen., USAF (ret.)
Clive Whittenbury, Ph.D. Director
</TABLE>
Each of the directors of the Company hold office for a one-year period
expiring December 31, 1996. At present, the Company's By-laws provide for not
less than one director nor more than nine directors. Currently, there are five
directors in the Company. The By-laws permit the Board of Directors to fill any
vacancy and such director may serve until the next annual meeting of
shareholders or until his successor is elected and qualified. Officers serve at
the discretion of the Board of Directors. There are no family relationships
among any officers or directors of the Company. Mr. Veschi has served as a
promoter of the Company and the consideration received for such services has
been limited to the compensation disclosed under "Remuneration." The officers of
the Company devote full time to the business of the Company. See "Certain
Transactions."
The principal occupation and business experience for each officer and
director of the Company for at least the last five years are as follows:
ALONZO E. SHORT, JR., LT. GEN., USA (RET.), 57, has been chairman of the
board of the Company since January 1996. General Short has more than 30 years
experience in executive management, operations and the engineering, design and
development of large scale telecommunications and data systems. General Short
retired from the service in 1994 following a career that included serving as
deputy commanding general (1988-1990) and commanding general (1990-1991) of the
U.S. Army Information Systems Command, a major information technology
organization, which was responsible for all telecommunications during the Desert
Shield/Desert Storm operation, among other responsibilities. From 1991 to 1994,
General Short was director of the Defense Information Systems Agency, a major
information technology organization which is responsible for telecommunications
and related services to the President of the United States, Secret Service,
Joint Chiefs of Staff, Secretary of Defense, among other high level federal
entities. Since 1994, General Short has been president and chief executive
officer of MICAH Systems, Inc., a Washington, D.C. metropolitan area based
information, technologies management and consulting firm. Since January 1996,
General Short has been instrumental in the organization and development of the
business of the Company.
ROBERT A. VESCHI, 34, has been president, chief executive officer, secretary
and a director of the Company since January 1995. Mr. Veschi is the founder of
the Company, which began its operations in June 1995. Mr. Veschi has significant
experience in executive management, operations and the engineering, design and
development of telecommunications and computer products and systems. From 1986
to 1990, Mr. Veschi was manager of systems engineering for International
Telemanagement, Inc., a Washington, D.C. metropolitan area based information,
data and network systems firm. From 1990 to 1994, Mr. Veschi was a group
president of I-Net, Inc., a Washington, D.C. metropolitan area based
information, data and network systems firm. From December 1994 to May 1995, for
approximately six months, Mr. Veschi was president and chief executive officer
of Octacom, Inc., a Washington, D.C. metropolitan area based information, data
and network systems firm, and a wholly-
42
<PAGE>
owned subsidiary of Octagon, Inc., an Orlando, Florida metropolitan area based
publicly held technical services firm. From July 1994 to May 1995, for
approximately nine months, Mr. Veschi was a vice president of telecommunications
for Octagon, Inc., and from January 1995 to May 1995, for approximately four
months, Mr. Veschi was a member of the board of directors of such company. Since
June 1995, Mr. Veschi has been instrumental in the organization, development and
promotion of the Company.
GEORGE PORTA, 35, has been vice president of operations of the Company since
May 1996. Mr. Porta has significant experience in management, operations and the
engineering, design and development of telecommunications and computer products
and systems. From 1987 to 1994, Mr. Porta was a senior network planner and
manager, sales engineering for Sprint Corp., a major telecommunications company.
From 1994 to 1996, Mr. Porta was senior director, network operations and vice
president, global networks of I-Net, Inc., a Washington, D.C. metropolitan area
based information, data and network systems firm. Since May 1996, Mr. Porta has
been vice president of operations of the Company and has been instrumental in
the organization and development of the Company. Mr. Porta holds B.S. degrees in
electrical engineering and computer science from Washington University.
WILLIAM L. HOOTON, 45, has been a director of the Company since January
1996. Mr. Hooton has substantial experience in the management, design,
operation, marketing and sales of image conversion systems, electronic imaging
system integration, data automation and high performance data storage
subsystems. From 1990 to 1993, Mr. Hooton was vice president of operations and
technical and business development of the Electronic Information Systems Group
of I-Net, Inc., a Washington, D.C. metropolitan area based information, data and
network systems firm. Since 1993, Mr. Hooton has been president and chief
executive officer of Q Corp., a Washington, D.C. metropolitan area high
technology consulting firm specializing in digital imaging systems and other
complex imagery in media. Since January 1996, Mr. Hooton has been a director of
the Company and has been instrumental in the organization and development of the
Company. Mr. Hooton holds a B.B.A. degree from the University of Texas.
EDWARD RATKOVICH, MAJ. GEN., USAF (RET.), 71, has been a director of the
Company since June 1996. General Ratkovich is a highly decorated air combat
command pilot veteran of World War II (European Theater) and has substantial
senior management, operations and consulting experience. General Ratkovich
retired from the U.S. Air Force in 1975 after 33 years of active duty service as
a senior intelligence staff officer, operations staff officer and command pilot,
ultimately serving as Deputy Assistant Chief of Staff for Intelligence, U.S. Air
Force, Pentagon, Washington, D.C. and also Director of Intelligence,
Headquarters, U.S. European Command, a major operations command of the U.S.
Joint Chiefs of Staff. In this latter assignment, General Ratkovich was
responsible for all military, political and economic intelligence for the U.S.
European Command. Since 1975, General Ratkovich has served as a technical and
operations consultant to numerous major systems engineering and technical firms
in the United States. From 1981 to 1986, General Ratkovich was a founder and
served as a director of Verdix Corporation (now, Rational Corporation), a
publicly held (Nasdaq National Market System -- "RATL") software development
company. From 1987 to 1994, General Ratkovich was an officer and director of
Continual Technology Corporation, a McLean, Virginia based computer hardware and
software company. Since 1994, General Ratkovich has been chairman of the board
and chief executive officer of MVSI, Inc., a publicly held (Nasdaq -- "MVSI")
McLean, Virginia based laser vision robotics company. Since June 1996, General
Ratkovich has been instrumental in the organization and development of the
business of the Company.
CLIVE G. WHITTENBURY, PH.D., 61, has been a director of the Company since
June 1996. Dr. Whittenbury has substantial senior management, operations and
technical advisory experience. From 1972 to 1979, Dr. Whittenbury was a senior
vice president and, from 1976 to 1986, a director of Science Applications
International Corporation ("SAIC"), a La Jolla, California based major
international systems engineering firm with current annual revenues of
approximately $2 billion. Since 1979, Dr. Whittenbury has been executive vice
president and a director of the Erickson Group, Inc., a major
43
<PAGE>
international diversified products firm. Since 1994, Dr. Whittenbury has been a
director of MVSI, Inc., a publicly held (Nasdaq -- "MVSI") McLean, Virginia
based laser vision robotics company. Dr. Whittenbury is a member of the
International Advisory Board for the British Columbia Advanced Systems
Institute, which manages commercialization programs in technology at the three
major Vancouver/Victoria universities, a member of the Advisory Board of Compass
Technology Partners, an investment fund, and is chairman of the Advisory Board
(Laser Directorate) for the Lawrence Livermore National Laboratory. Dr.
Whittenbury has also served as a technical advisor to three U.S. Congressional
Committees, the Grace Commission and numerous major U.S. and foreign companies.
Since June 1996, Dr. Whittenbury has been instrumental in the organization and
development of the Company. Dr. Whittenbury holds a B.S. degree (physics) from
Manchester University (England) and a Ph.D. degree (aeronautical engineering)
from the University of Illinois.
44
<PAGE>
REMUNERATION
EXECUTIVE COMPENSATION
The following table sets forth remuneration paid for the fiscal year ended
March 31, 1996 and proposed to be paid for the fiscal year ended March 31, 1997
to the officers and directors of the Company:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE (1)(2)
------------------------------------------------
OTHER
NAME OF INDIVIDUAL OR NUMBER ANNUAL
OF PERSONS IN GROUP POSITION WITH COMPANY YEAR SALARY BONUS COMPENSATION
- ----------------------------- ------------------------------- --------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C>
Alonzo E. Short, Jr., Chairman of the Board 1997 $ -- $ -- $ 42,000
Lt. Gen., USA (ret.) 1996 $ -- $ -- $ --
Robert A. Veschi President, Chief Executive 1997 $ 175,000 $ 87,500 $ --
Officer, Secretary, Director 1996 $ 25,000 $ -- $ --
George Porta Vice President, Operations 1997 $ 100,000 $ 50,000 $ --
1996 $ -- $ -- $ --
William L. Hooton Director 1997 $ -- $ -- $ 42,000
1996 $ -- $ -- $ --
Edward Ratkovich, Director 1997 $ -- $ -- $ 42,000
Maj. Gen., USAF (ret.) 1996 $ -- $ -- $ --
Clive Whittenbury, Ph.D. Director 1997 $ -- $ -- $ 42,000
1996 $ -- $ -- $ --
</TABLE>
- ------------------------
(1) The persons named in the table immediately above reflect the management of
the Company as of the date hereof. The directors of the Company, with the
exception of Mr. Veschi, are entitled to annual remuneration of $42,000
pursuant to oral agreements between such directors and the Company. The
Company has agreed to purchase key-man term life insurance on Mr. Veschi in
the amount of $1 million following the closing of this offering. The Company
will be the owner and beneficiary of such life insurance policy.
(2) The officers of the Company may receive remuneration as part of an overall
group insurance plan providing health, life and disability insurance
benefits for employees of the Company. The amount allocable to each
individual officer cannot be specifically ascertained, but, in any event,
will not exceed $25,000 as to each individual.
(3) Each outside director of the Company is entitled to receive reasonable
expenses incurred in attending meetings of the Board of Directors of the
Company. The members of the Board of Directors intend to meet at least
quarterly during the Company's fiscal year, and at such other times duly
called. The Company presently has two outside directors.
EMPLOYMENT AGREEMENT
The Company has entered into an employment agreement ("Agreement") with
Robert A. Veschi, the president and chief executive officer of the Company,
dated as of April 1, 1996. The Agreement will expire on March 31, 2001. The
current annual salary under the Agreement is $175,000. The salary under the
Agreement may be increased to reflect annual cost of living increases and may be
supplemented by discretionary merit and performance increases as determined by
the Board of Directors of the Company, except that during the first three years
following the date of the Prospectus with respect to the offering, no
executive's salary may exceed $200,000. Mr. Veschi is entitled to an annual
bonus equal to 50 percent of the salary provided under his Agreement, which is
not subject to any performance criteria.
The Agreement provides, among other things, for participation in an
equitable manner in any profit-sharing or retirement plan for employees or
executives and for participation in other employee
45
<PAGE>
benefits applicable to employees and executives of the Company. The Agreement
provides for the use of an automobile, payment of club dues and other fringe
benefits commensurate with his duties and responsibilities. The Agreement also
provides for benefits in the event of disability. The Agreement also contains
non-compete provisions but are limited in geographical scope, I.E., the
Washington, D.C. metropolitan area.
Pursuant to the Agreement, employment may be terminated by the Company with
cause or by the executive with or without good reason. Termination by the
Company without cause, or by the executive for good reason, would subject the
Company to liability for liquidated damages in an amount equal to the terminated
executive's current salary and a PRO RATA portion of their bonus for the
remaining term of the Agreement, payable in a lump sum cash payment, without any
set-off for compensation received from any new employment. In addition, the
terminated executive would be entitled to continue to participate in and accrue
benefits under all employee benefit plans and to receive supplemental retirement
benefits to replace benefits under any qualified plan for the remaining term of
the Agreement to the extent permitted by law.
LIMITATION ON LIABILITY OF DIRECTORS
As permitted by Delaware law, the Company's Certificate of Incorporation
includes a provision which provides that a director of the Company shall not be
personally liable to the Company or its stockholders for monetary damages for a
breach of fiduciary duty as a director, except (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 that involve intentional misconduct or a knowing
violation of the law, (iii) under Section 174 of the General Corporation Law of
the State of Delaware, which prohibits the unlawful payment of dividends or the
unlawful repurchase or redemption of stock, or (iv) for any transaction from
which the director derives an improper personal benefit. This provision is
intended to afford directors protection against, and to limit their potential
liability for monetary damages resulting from, suits alleging a breach of the
duty of care by a director. As a consequence of this provision, stockholders of
the Company will be unable to recover monetary damages against directors for
action taken by them that may constitute negligence or gross negligence in
performance of their duties unless such conduct falls within one of the
foregoing exceptions. The provision, however, does not alter the applicable
standards governing a director's fiduciary duty and does not eliminate or limit
the right of the Company or any stockholder to obtain an injunction or any other
type of nonmonetary relief in the event of a breach of fiduciary duty.
Management of the Company believes this provision will assist the Company in
securing and retaining qualified persons to serve as directors. The Company is
unaware of any pending or threatened litigation against the Company or its
directors that would result in any liability for which such director would seek
indemnification or similar protection.
Such indemnification provisions are intended to increase the protection
provided directors and, thus, increase the Company's ability to attract and
retain qualified persons to serve as directors. Because directors liability
insurance is only available at considerable cost and with low dollar limits of
coverage and broad policy exclusions, the Company does not currently maintain a
liability insurance policy for the benefit of its directors although the Company
may attempt to acquire such insurance in the future. The Company believes that
the substantial increase in the number of lawsuits being threatened or filed
against corporations and their directors and the general unavailability of
directors liability insurance to provide protection against the increased risk
of personal liability resulting from such lawsuits have combined to result in a
growing reluctance on the part of capable persons to serve as members of boards
of directors of public companies. The Company also believes that the increased
risk of personal liability without adequate insurance or other indemnity
protection for its directors could result in overcautious and less effective
direction and management of the Company. Although no directors have resigned or
have threatened to resign as a result of the Company's failure to provide
insurance or other indemnity protection from liability, it is uncertain whether
the Company's directors would continue to serve in such capacities if improved
protection from liability were not provided.
46
<PAGE>
The provisions affecting personal liability do not abrogate a director's
fiduciary duty to the Company and its shareholders, but eliminate personal
liability for monetary damages for breach of that duty. The provisions do not,
however, eliminate or limit the liability of a director for failing to act in
good faith, for engaging in intentional misconduct or knowingly violating a law,
for authorizing the illegal payment of a dividend or repurchase of stock, for
obtaining an improper personal benefit, for breaching a director's duty of
loyalty (which is generally described as the duty not to engage in any
transaction which involves a conflict between the interest of the Company and
those of the director) or for violations of the federal securities laws. The
provisions also limit or indemnify against liability resulting from grossly
negligent decisions including grossly negligent business decisions relating to
attempts to change control of the Company.
The provisions regarding indemnification provide, in essence, that the
Company will indemnify its directors against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with any action, suit or proceeding arising out of the
director's status as a director of the Company, including actions brought by or
on behalf of the Company (shareholder derivative actions). The provisions do not
require a showing of good faith. Moreover, they do not provide indemnification
for liability arising out of willful misconduct, fraud, or dishonesty, for
"short-swing" profits violations under the federal securities laws, or for the
receipt of illegal remuneration. The provisions also do not provide
indemnification for any liability to the extent such liability is covered by
insurance. One purpose of the provisions is to supplement the coverage provided
by such insurance. However, as mentioned above, the Company does not currently
provide such insurance to its directors, and there is no guarantee that the
Company will provide such insurance to its directors in the near future although
the Company may attempt to obtain such insurance.
The provisions diminish the potential rights of action which might otherwise
be available to shareholders by limiting the liability of officers and directors
to the maximum extent allowable under Delaware law and by affording
indemnification against most damages and settlement amounts paid by a director
of the Company in connection with any shareholders derivative action. However,
the provisions do not have the effect of limiting the right of a shareholder to
enjoin a director from taking actions in breach of his fiduciary duty, or to
cause the Company to rescind actions already taken, although as a practical
matter courts may be unwilling to grant such equitable remedies in circumstances
in which such actions have already been taken. Although the Company has procured
directors liability insurance coverage, there is no assurance that it will
provide coverage to the extent directors would be indemnified and, in such
event, the Company may be forced to bear a portion or all of the cost of the
director's claims for indemnification. If the Company is forced to bear the
costs for indemnification, the value of the Company stock may be adversely
affected. In the opinion of the Securities and Exchange Commission,
indemnification for liabilities arising under the Securities Act of 1933 is
contrary to public policy and, therefore, is unenforceable.
47
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the Company's
Common Stock owned on the date of this Prospectus and, as adjusted, to reflect
the sale of shares offered by this Prospectus, by (i) each person who is known
by the Company to own beneficially more than five percent of the Company's
Common Stock; (ii) each of the Company's officers and directors; and (iii) all
officers and directors as a group:
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
--------------------------
NUMBER BEFORE AFTER
NAME AND ADDRESS (1) POSITION WITH COMPANY OF SHARES OFFERING OFFERING (2)
- ------------------------------------------------------- ------------------------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Alonzo E. Short, Jr., Lt. Gen., USA (ret.) Chairman of the Board 90,000 2.25 1.80
Robert A. Veschi President, Chief Executive 1,300,000 32.50 26.00
Officer, Secretary, Director
George Porta Vice President, Operations 50,000 1.25 1.00
William L. Hooton Director 50,000 1.25 1.00
Edward Ratkovich, Maj. Gen., USAF (ret.) (3) Director 500,000 12.50 10.00
Clive Whittenbury, Ph.D. (4) Director 50,000 1.25 1.00
Arthur Henley (5) Stockholder 475,000 11.88 9.50
Thomas T. Prousalis, Jr., Esq. (6) Stockholder 450,000 11.25 9.00
Robert Foise (7) Stockholder 250,000 6.25 5.00
All Officers and Directors as a Group (6 persons) 2,040,000 51.00 40.80
</TABLE>
- ------------------------
(1) c/o e-Net, Inc., 7-4 Metropolitan Court, Gaithersburg, Maryland 20878.
(2) Does not include the exercise of up to 1,000,000 Class A Warrants offered
herein. The Company is offering 500,000 Units at a price of $14.00 per Unit.
Each Unit consists of two shares of Common Stock and two redeemable Class A
Warrants. The Class A Warrants shall be exercisable commencing one year
after the Effective Date of this Prospectus. Each Class A Warrant entitles
the holder to purchase one share of Common Stock at $7.50 per share during
the four year period commencing one year from the Effective Date. The Class
A Warrants are redeemable upon certain conditions. Should the Class A
Warrants be exercised, of which there is no assurance, the Company will
receive the proceeds therefrom, aggregating up to an additional $7,500,000.
See "Description of Securities."
(3) 1030 Delf Drive, McLean, Virginia 22101. General Ratkovich also owns 500,000
Class A Warrants and 500,000 Class B Warrants. See "Certain Transactions."
(4) 511 Trinity Avenue, Yuba City, California 95991.
(5) 10705 Bay Laurel Trail, Austin, Texas 78750.
(6) 1919 Pennsylvania Avenue, N.W., Suite 800, Washington, D.C. 20006. See
"Legal Matters."
(7) Executive Air Center, Brainard Airport, Hartford, Connecticut 06114. Mr.
Foise also owns 250,000 Class A Warrants and 250,000 Class B Warrants. See
"Certain Transactions."
48
<PAGE>
CERTAIN TRANSACTIONS
The Company was incorporated in the State of Delaware on January 9, 1995,
and began its operations on June 8, 1995. The Company has authorized capital of
50,000,000 shares of Common Stock, $.01 par value. The Company currently has
4,000,000 shares of Common Stock issued and outstanding. See "Principal
Stockholders" and "Description of Securities."
In January 1995, the Company issued 3,000,000 shares of its Common Stock
(which includes a 600:1 stock split in January 1996 and a 2:1 reverse split in
July 1996) to 16 persons, including the officers and directors of the Company,
in a private placement transaction in consideration of $100, or its par value at
the time of issuance.
In March 1996, the Company issued 250,000 shares of its Common Stock to ATG
Group, Inc., a Brookville, New York based investment firm, in a private
placement transaction for aggregate consideration of $250,000, represented by a
full recourse promissory note for the entire purchase price. The promissory note
is due in full in March 2001 and bears interest, payable upon maturity at 8% per
annum. Andrew T. Greene, a former officer and director of the Underwriter, is
the officer, director and stockholder of ATG Group, Inc. At the time of the
acquisition of the shares of Common Stock of the Company by ATG Group, Inc.,
neither ATG Group, Inc. nor Mr. Greene had an association or affiliation, in any
manner whatsoever, with the Underwriter or any other member firm of the National
Association of Securities Dealers, Inc. However, in June 1996, ATG Group, Inc.
agreed to cancel its 250,000 shares of the Company's Common Stock in
consideration of the cancellation of its $250,000 full recourse promissory note.
Also, in March and April 1996, the Company borrowed $1,000,000 in a bridge
loan from four persons who are nonaffiliated with the Underwriter and the
Company, to wit: Edward Ratkovich ($500,000), Robert Foise ($250,000), Armstrong
Industries ($200,000) and Martin Sumichrast ($50,000), at the rate of eight
percent simple annual interest. General Ratkovich and Mr. Sumichrast are
officers, directors and principal stockholders of Nasdaq listed companies
recently underwritten by the Underwriter. Mr. Foise and Armstrong Industries
have previously participated as investors in companies recently underwritten by
the Underwriter. In further consideration of the bridge loan, the Company issued
1,000,000 shares of Common Stock, 1,000,000 Class A Warrants and 1,000,000 Class
B Warrants to such persons. However, in June 1996, such persons converted their
loans to equity in consideration of the prior issuance of the securities. See
"Description of Securities."
In July 1996, the Company caused a 2:1 reverse split of its issued and
outstanding shares of common stock, Class A Warrants and Class B Warrants,
resulting in 4,000,000 shares of common stock, 1,000,000 Class A Warrants and
1,000,000 Class B Warrants currently issued and outstanding.
All unregistered securities issued by the Company prior to this offering are
deemed "restricted securities" within the meaning of that term as defined in
Rule 144 and have been issued pursuant to certain "private placement" exemptions
under Section 4(2) of the Securities Act of 1933, as amended, and the rules and
regulations as promulgated by the Securities and Exchange Commission,
Washington, D.C. 20549, such that the sales of the securities were transactions
by an issuer not involving any public offering. See "Description of Securities."
In March 1996, the Company acquired all rights, title and interest in the
first U.S. patent for a system and method for communicating high fidelity and
clear transmission of audio or voice over the Internet, enabling free worldwide
transmission of ordinary telephone communications over the Internet. The Company
acquired all rights, title and interest in the patent from the inventors,
Messrs. Arthur Henley and Scott Grau, who are original stockholders of the
Company, in consideration of a five percent overriding royalty interest against
gross profits involving the use of the patent. The Company believes that its
patent is the first patent awarded of its kind, specifically involving the
transmission of audio or voice over the Internet. The Company also believes that
its patent may
49
<PAGE>
provide certain strategic and technological advantages in the new and burgeoning
area of audio or voice over the Internet. The Company can make no assurances,
however, as to the extent of the advantages or protection, if any, that may be
granted to the Company as a result of its patent.
The Company intends to indemnify its officers and directors to the full
extent permitted by Delaware law. Under Delaware law, a corporation may
indemnify its agents for expenses and amounts paid in third party actions and,
upon court approval in derivative actions, if the agents acted in good faith and
with reasonable care. A majority vote of the Board of Directors, approval of the
shareholders or court approval is required to effectuate indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to officers, directors or persons
controlling the Company, the Company has been advised that, in the opinion of
the Securities and Exchange Commission, Washington, D.C. 20549, such
indemnification is against public policy as expressed in such Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Company of expenses incurred or
paid by an officer, director or controlling person of the Company in the
successful defense of any action, suit or proceeding) is asserted by such
officer, director or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in such Act and will be governed by the final adjudication
of such issue.
Any future transactions with affiliates will be on terms no less favorable
than could be obtained from nonaffiliated parties and will be approved by a
majority of the independent and disinterested directors, as required by a
resolution of the Board of Directors. Any future loans to Company officers,
directors, affiliates and/or shareholders will be approved by a majority of the
independent and disinterested directors, as required by a resolution of the
Board of Directors.
50
<PAGE>
DESCRIPTION OF SECURITIES
UNITS
Each of the 500,000 Units offered hereby at $14.00 per Unit consists of two
shares of the Company's Common Stock, $.01 par value, and two redeemable Class A
Warrants. The Common Stock and Class A Warrants are detachable and may trade
separately immediately upon issuance. Should the Class A Warrants be exercised,
of which there is no assurance, the Company will receive the proceeds therefrom,
aggregating up to an additional $7,500,000.
COMMON STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, $.01 par value. There are presently 4,000,000 issued and
outstanding shares of Common Stock. Holders of the Common Stock do not have
preemptive rights to purchase additional shares of Common Stock or other
subscription rights. The Common Stock carries no conversion rights and is not
subject to redemption or to any sinking fund provisions. All shares of Common
Stock are entitled to share equally in dividends from sources legally available
therefor when, as and if declared by the Board of Directors and, upon
liquidation or dissolution of the Company, whether voluntary or involuntary, to
share equally in the assets of the Company available for distribution to
stockholders. All outstanding shares of Common Stock are validly authorized and
issued, fully paid and nonassessable, and all shares to be sold and issued as
contemplated hereby, will be validly authorized and issued, fully paid and
nonassessable. The Board of Directors is authorized to issue additional shares
of Common Stock, not to exceed the amount authorized by the Company's
Certificate of Incorporation, and to issue options and warrants for the purchase
of such shares, on such terms and conditions and for such consideration as the
Board may deem appropriate without further stockholder action. The above
description concerning the Common Stock of the Company does not purport to be
complete. Reference is made to the Company's Certificate of Incorporation and
By-laws which are available for inspection upon proper notice at the Company's
offices, as well as to the applicable statutes of the State of Delaware for a
more complete description concerning the rights and liabilities of stockholders.
Prior to this offering, there has been no market for the Common Stock of the
Company, 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 significant amounts of the
Common Stock of the Company in the public market may adversely affect prevailing
market prices, and may impair the Company's ability to raise capital at that
time through the sale of its equity securities.
Each holder of Common Stock is entitled to one vote per share on all matters
on which such stockholders are entitled to vote. Since the shares of Common
Stock do not have cumulative voting rights, the holders of more than 50 percent
of the shares voting for the election of directors can elect all the directors
if they choose to do so and, in such event, the holders of the remaining shares
will not be able to elect any person to the Board of Directors.
CLASS A AND CLASS B WARRANTS
The Company is offering 500,000 Units at a price of $14.00 per Unit. Each
Unit consists of two shares of Common Stock, $.01 par value, and two redeemable
Class A Warrants. The Common Stock and Class A Warrants are detachable and may
trade separately immediately upon issuance.
The Class A Warrants shall be exercisable commencing one year after the date
of this Prospectus ("Effective Date"). Each Class A Warrant entitles the holder
to purchase one share of Common Stock at $7.50 per share during the four year
period commencing one year from the Effective Date. The Class A Warrants are
redeemable by the Company for $.05 per Warrant, at any time after August ,
1998, upon thirty (30) days' prior written notice, if the average closing price
or bid price of the Common Stock, as reported by the principal exchange on which
the Common Stock is traded, the Nasdaq National Market System, OTC Bulletin
Board or the National Quotation Bureau, Incorporated, as the case may be, equals
or exceeds $10.00 per share, for any twenty (20) consecutive trading
51
<PAGE>
days within a period of thirty (30) days ending within ten (10) days of the
notice of redemption. Upon thirty (30) days' written notice to all holders of
the Class A Warrants, the Company shall have the right to reduce the exercise
price and/or extend the term of the Class A Warrants.
In March and April 1996, the Company borrowed $1,000,000 in a bridge loan
from four persons who are nonaffiliated with the Underwriter and the Company, to
wit: Edward Ratkovich ($500,000), Robert Foise ($250,000), Armstrong Industries
($200,000) and Martin Sumichrast ($50,000), at the rate of eight percent simple
annual interest. General Ratkovich and Mr. Sumichrast are officers, directors
and principal stockholders of Nasdaq listed companies recently underwritten by
the Underwriter. Mr. Foise and Armstrong Industries have previously participated
as investors in companies recently underwritten by the Underwriter. In further
consideration of the bridge loan, the Company issued 1,000,000 shares of Common
Stock, 1,000,000 Class A Warrants and 1,000,000 Class B Warrants to such
persons. However, in June 1996, such persons converted their loans to equity in
consideration of the prior issuance of the securities.
The Class B Warrants owned by the four investors above are identical to the
Class A Warrants except that the exercise price is $8.00.
The Warrants can only be exercised when there is a current effective
registration statement covering the shares of common stock underlying the
Warrants. If the Company does not or is unable to maintain a current effective
registration statement the Warrant holders will be unable to exercise the
Warrants and the Warrants may become valueless. Moreover, if the shares of
common stock underlying the Warrants are not registered or qualified for sale in
the state in which a Warrant holder resides, such holder might not be permitted
to exercise the Warrants.
The Company will deliver Warrant certificates to the purchasers of Units
representing two Warrants for each Unit purchased. Thereafter, Warrant
certificates may be exchanged for new certificates of different denominations,
and may be exercised or transferred by presenting them at the offices of the
Transfer Agent. Holders of the Warrants may sell the Warrants if a market exists
rather than exercise them. However, there can be no assurance that a market will
develop or continue as to such Warrants. If the Company is unable to qualify its
common stock underlying such Warrants for sale in certain states, holders of the
Company's Warrants in those states will have no choice but to either sell such
Warrants or allow them to expire.
Each Warrant may be exercised by surrendering the Warrant certificate, with
the form of election to purchase on the reverse side of the Warrant certificate
properly completed and executed, together with payment of the exercise price to
the Warrant Agent. The Warrants may be exercised in whole or from time to time
in part. If less than all of the Warrants evidenced by a Warrant certificate are
exercised, a new Warrant certificate will be issued for the remaining number of
Warrants. Upon the exercise of the Warrants, the shares of Common Stock when
issued will be fully paid and nonassessable.
Holders of the Warrants are protected against dilution of the equity
interest represented by the underlying shares of common stock upon the
occurrence of certain events, including, but not limited to, issuance of stock
dividends. If the Company merges, reorganizes or is acquired in such a way as to
terminate the Warrants, the Warrants may be exercised immediately prior to such
action. In the event of liquidation, dissolution or winding up of the Company,
holders of the Warrants are not entitled to participate in the Company's assets.
For the life of the Warrants, the holders thereof are given the opportunity,
at nominal cost, to profit from a rise in the market price of the common stock
of the Company. The exercise of the Warrants will result in the dilution of the
then book value of the Common Stock of the Company held by the public investors
and would result in a dilution of their percentage ownership of the Company. The
terms upon which the Company may obtain additional capital may be adversely
affected through the period that the Warrants remain exercisable. The holders of
these Warrants may be expected to exercise them at a time when the Company
would, in all likelihood, be able to obtain equity capital on terms more
favorable than those provided for by the Warrants.
52
<PAGE>
Because the Warrants included in the Units being offered hereby may be
transferred, it is possible that the Warrants may be acquired by persons
residing in states where the Company has not registered, or is not exempt from
registration such that the shares of common stock underlying the Warrants may
not be sold or transferred upon exercise of the Warrants. Warrantholders
residing in those states would have no choice but to attempt to sell their
Warrants or to let them expire unexercised. Also, it is possible that the
Company may be unable, for unforeseen reasons, to cause a registration statement
covering the shares underlying the Warrants to be in effect when the Warrants
are exercisable. In that event, the Warrants may expire unless extended by the
Company as permitted by the Warrant because a registration statement must be in
effect, including audited financial statements for companies acquired, in order
for warrantholders to exercise their Warrants.
The Company will be able to issue the securities offered hereby, shares of
its Common Stock upon the exercise of the Warrants and the Underwriter's
Purchase Option only if (i) there is a current prospectus relating to the
securities offered hereby under an effective registration statement filed with
the Securities and Exchange Commission, and (ii) such Common Stock is then
qualified for sale or exempt therefrom under applicable state securities laws of
the jurisdictions in which the various holders of Warrants reside. Although the
Company intends to maintain a current registration statement, there can be no
assurance, however, that the Company will be successful in maintaining a current
registration statement. After a registration statement becomes effective, it may
require updating by the filing of a post-effective amendment. A post-effective
amendment is required (i) anytime after nine months subsequent to the Effective
Date when any information contained in the prospectus is over sixteen months
old; (ii) when facts or events have occurred which represent a fundamental
change in the information contained in the registration statement; or (iii) when
any material change occurs in the information relating to the plan or
distribution of the securities registered by such registration statement. The
Company anticipates that this Registration Statement will remain effective for
not more than nine months following the date of this Prospectus or until May ,
1997, assuming a post-effective amendment is not filed by the Company, which may
be required. The Company intends to qualify the sale of the Units in a limited
number of states, although certain exemptions under certain state securities
("Blue Sky") laws may permit the Warrants to be transferred to purchasers in
states other than those in which the Warrants were initially qualified. The
Company will be prevented, however, from issuing Common Stock upon exercise of
the Warrants in those states where exemptions are unavailable and the Company
has failed to qualify the Common Stock issuable upon exercise of the Warrants.
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 ultimate
purchasers of the Warrants reside. In such case, the Warrants of those
purchasers will expire and have no value if such Warrants cannot be exercised or
sold. Accordingly, the market for the Warrants may be limited because of the
Company's obligation to fulfill both of the foregoing requirements.
As a result of the Permanent Injunction, the states of Pennsylvania, Indiana
and Illinois have commenced administrative proceedings seeking, among other
things, to revoke Stratton Oakmont's license to do business in such states. In
Indiana, the Commissioner suspended Stratton Oakmont's license for a three year
period. Stratton Oakmont has appealed the decision and has requested a stay
pending appeal. The requested stay would maintain the status quo pending appeal.
In Illinois, Stratton Oakmont intends to file an answer to the administrative
complaint denying the basis for revocation. The District of Columbia suspended
Stratton Oakmont's license pending the outcome of an investigation. The states
of North Carolina and Arkansas also have suspended Stratton Oakmont's license
pending a resolution of the proceedings in those states. The states of
Minnesota, Vermont, and Nevada have served upon Stratton Oakmont notices of
intent to revoke Stratton Oakmont's license in such states. The state of Rhode
Island has served on Stratton Oakmont a Notice of Intent to suspend its license
in that state. The state of Connecticut has served on Stratton Oakmont a notice
of intent to suspend or revoke registration in that state with a notice of right
to hearing. In the state of Mississippi, Stratton Oakmont has agreed to a
suspension of its license pending resolution of certain claims and review of its
procedures and practices by the state authorities. In addition, Stratton Oakmont
withdrew its registration in the state of New Hampshire (with the right of
reapplication) and in the
53
<PAGE>
state of Maryland. There may be further administrative action against the firm
in Maryland. The firm withdrew its registration in Massachusetts with a right to
reapply for registration after two years, withdrew its registration in Delaware
with a right to reapply in three years and agreed to a temporary cessation of
business in Utah pending an on-site inspection and further administrative
proceedings. Stratton Oakmont's license in the state of New Jersey was revoked
by an administrative law judge, which revocation was affirmed by the New Jersey
Bureau of Securities, and an appeal has been filed with the appellate division
of the New Jersey Superior Court. The states of Georgia, Alabama and South
Carolina have lifted their suspensions and have granted Stratton Oakmont
conditional licenses. Such conditional licenses were granted pursuant to an
order, which Stratton Oakmont has proposed to various states, which provides
provisions for: (i) the suspension of revocation, (ii) compliance with
recommendations of the Consultant, (iii) an expedited claims mediation
arbitration process, (iv) resolution of claims seeking compensatory damages, (v)
restrictions on use of operating revenue, (vi) the limitation on selling group
members in offerings underwritten by Stratton Oakmont and the prohibition of
participating as a selling group member in offerings underwritten by certain
other NASD member firms, (vii) the periodic review of Stratton Oakmont's agents,
(viii) the retention of an accounting firm, and (ix) supervision and training,
restrictions on trading, discretionary accounts and other matters. The state of
Oregon, as a result of the Permanent Injunction, has filed a notice of intent to
revoke Stratton Oakmont's license subject to the holding of a hearing to
determine definitively Stratton Oakmont's license status, and Stratton Oakmont,
in this proceeding as well as other proceedings, expects to be able to
demonstrate that the Permanent Injunction is not of a nature as to be a lawful
basis to revoke Stratton Oakmont's license permanently. Finally, Stratton
Oakmont has received an order limiting license in the state of Nebraska. Such
proceedings, if ultimately successful, may adversely affect the market for and
liquidity of the Company's securities if additional broker-dealers do not make a
market in the Company's securities. Moreover, should investors purchase any of
the securities in this offering from Stratton Oakmont prior to a revocation of
Stratton Oakmont's license in their state, such investors will not be able to
resell such securities in such state through Stratton Oakmont but will be
required to retain a new broker-dealer firm for such purpose. The Company cannot
ensure that other broker-dealers will make a market in the Company's securities.
In the event that other broker-dealers fail to make a market in the Company's
securities, the possibility exists that the market for and the liquidity of the
Company's securities may be adversely affected to such an extent that public
security holders may not have anyone to purchase their securities when offered
for sale at any price. In such event, the market for, and liquidity and prices
of the Company's securities may not exist. It should be noted that although
Stratton Oakmont may not be the sole market maker in the Company's securities,
it will most likely be the dominant market maker in the Company's securities. In
addition, in the event that the Underwriter's license to do business is revoked
in the states set forth above, the Underwriter has advised the Company that the
members of the selling syndicate in this offering may be able to make a market
in the Company's securities in such states and that such an event will not have
a materially adverse effect on this offering, although no assurance can be made
that such an event will not have a materially adverse effect on this offering.
The Company has applied to register this offering for the offer and sale of its
securities in the following states: California, Colorado, Connecticut, Delaware,
Florida, Georgia, Hawaii, Illinois, Louisiana, New York, Rhode Island and
Virginia. The offer and sale of the securities of this offering are not
available in any other state, absent an exemption from registration. See
"Underwriting."
RESTRICTED SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 5,000,000 shares of
Common Stock issued and outstanding. Of these shares of Common Stock, 1,000,000
shares are being sold in this offering. Of the remaining shares, 4,000,000
shares ("Restricted Shares") were issued and sold by the Company in private
transactions in reliance upon certain private placement exemptions as
promulgated by the Securities and Exchange Commission, Washington, D.C. 20549.
See "Certain Transactions."
54
<PAGE>
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned his or her Restricted
Shares for at least two years, including persons who may be deemed "affiliates"
of the Company, as that term is defined under the Act, would be entitled to sell
in broker's transactions within any three month period a number of shares that
does not exceed the greater of one percent of the then outstanding shares of the
Company's common stock, or the average weekly trading volume in the
over-the-counter market in the Company's common stock during the four calendar
weeks preceding such sale. Therefore, during each three month period, beginning
January 9, 1997, a holder of restricted securities who has held them for at
least the two year period may sell under Rule 144 a number of shares at least
equal to 50,000 shares. A person who is not deemed to have been an affiliate of
the Company at any time during the 90 days preceding a sale, and who has
beneficially owned his or her Restricted Shares for at least three years, would
be entitled to sell such shares under Rule 144 without regard to the volume
limitations described above, provided that certain public information concerning
the Company as required by the Rule is available.
Prior to this offering, there has been no market for the Common Stock of the
Company, and no precise 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 of the Company in the public market may adversely
affect prevailing market prices and may impair the Company's ability to raise
capital at the time through the sale of its equity securities.
Pursuant to the terms of the Underwriting Agreement, the Company's
restricted stockholders and the Company have agreed not to sell, transfer,
assign or issue any restricted shares of Common Stock for a period of 36 months
following the date of this Prospectus. The sale of a significant number of these
shares in the public market in the future may adversely affect prevailing market
prices of the Company's securities following this offering. See "Principal
Stockholders" and "Certain Transactions."
No predictions can be made as to the effect, if any, that sales of shares
under Rule 144 or otherwise or the availability of shares for sale will have on
the market, if any, prevailing from time to time. Sales of significant amounts
of the Company's shares of Common Stock pursuant to Rule 144 or otherwise may
adversely affect the market price of the securities offered hereby.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the securities of the Company is
American Stock Transfer & Trust Company located at 40 Wall Street, New York, New
York 10005.
REPORTS TO SECURITY-HOLDERS
The Company will furnish to holders of its securities annual reports
containing audited financial statements. The Company may issue other unaudited
interim reports to its security-holders as it deems appropriate.
Contemporaneously, with this offering, the Company intends to register its
securities with the Securities and Exchange Commission, Washington, D.C. 20549,
under the provisions of Section 12(g) of the Securities Exchange Act of 1934, as
amended ("Exchange Act"), and, in accordance therewith, the Company will be
required to comply with certain reporting, proxy solicitation and other
requirements of the Exchange Act.
55
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement
("Underwriting Agreement") by and between the Company and the Underwriter, the
Company has agreed to sell to the Underwriter 500,000 Units on a "firm
commitment" basis. The Underwriter has advised the Company that it proposes to
offer the Units to the public at $14.00 per Unit as set forth on the cover page
of this Prospectus and that it may allow to certain dealers who are NASD members
concessions not to exceed $. per Unit. After the initial public offering, the
public offering price, concession and reallowance may be changed by the
Underwriter. The Underwriter has informed the Company that it does not intend to
confirm sales to any accounts over which it exercises discretionary authority.
In addition to underwriting discounts and commissions of ten percent of the
entire offering, the Underwriter will receive additional compensation in the
form of (i) a nonaccountable expense allowance of $210,000 if 1,000,000 Units
are sold (or $241,500 if the Underwriter's Over-allotment Option is fully
exercised); and (ii) an option (exercisable for a period of four years
commencing one year after the date of this Prospectus) entitling the Underwriter
to purchase 50,000 Units at $23.10 per Unit ("Underwriter's Purchase Option").
The public offering price of the Units and the exercise price and other
terms of the Warrants were arbitrarily determined by negotiations between the
Company and the Underwriter and do not necessarily relate to the assets, book
value or results of operations of the Company or any other established criteria
of value.
The Company has granted an option to the Underwriter, exercisable during the
30-day period from the date of this Prospectus, to purchase up to a maximum of
75,000 additional Units at the offering price, less the underwriting discount,
to cover over-allotments, if any.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriter against certain liabilities in connection with
the Registration Statement, including liabilities under the Securities Act of
1933, as amended ("1933 Act"). Insofar as indemnification for liabilities
arising under the 1933 Act may be provided to officers, directors or persons
controlling the Company, the Company has been informed that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy and is therefore unenforceable.
The Company will also pay a warrant solicitation fee to the Underwriter
equal to four percent of the exercise price of the Warrants, beginning one year
from the date of this Prospectus, if the Underwriter solicits the exercise of
such Warrants prior to the expiration thereof as set forth in the Warrant
Agreement, subject to the Underwriter's compliance with the rules and
regulations of the NASD. In accordance with NASD Notice to Members 81-38, no
warrant solicitation 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 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; and (iv) upon the exercise of warrants in unsolicited
transactions. The broker-dealer to receive the warrant solicitation fee will be
designated, in writing, as the soliciting broker. See "Risk Factors -- Exercise
of Class A Warrants May Have Dilutive Effect on Market and Underwriter's
Influence on the Market May Have Adverse Consequences."
The Company has agreed to sell to the Underwriter, or its designees, for an
aggregate purchase price of $50, an option ("Underwriter's Purchase Option") to
purchase up to an aggregate of 50,000 Units. The Underwriter's Purchase Option
shall be exercisable during the four-year period commencing one year after the
effective date of this offering. The Underwriter's Purchase Option may not be
assigned, transferred, sold or hypothecated by the Underwriter until 12 months
after the effective date of this Prospectus, except to officers or partners of
the Underwriter and selling group members in this offering. Any profits realized
by the Underwriter upon the sale of the Units issuable upon exercise of the
Underwriter's Purchase Option may be deemed to be additional underwriting
56
<PAGE>
compensation. The exercise price of the Units issuable upon exercise of the
Underwriter's Purchase Option during the period of exercisability shall be 165
percent of the initial public offering price of the Units. The exercise price of
the warrants underlying the Units in the Underwriter's Purchase Option is $7.50.
The exercise price of the Underwriter's Purchase Option and the number of shares
covered thereby are subject to adjustment in certain events to prevent dilution.
For the life of the Underwriter's Purchase Option, the holders thereof are
given, at a nominal cost, the opportunity to profit from a rise in the market
price of the Company's securities with a resulting dilution in the interest of
other stockholders. The Company may find it more difficult to raise capital for
its business if the need should arise while the Underwriter's Purchase Option is
outstanding. At any time when the holders of the Underwriter's Purchase Option
might be expected to exercise it, the Company would probably be able to obtain
additional capital on more favorable terms.
If the Company enters into a transaction (including a merger, joint venture
or the acquisition of another entity) introduced to the Company by the
Underwriter, the Company has agreed to pay the Underwriter a maximum finder's
fee equal to five percent of the first $3,000,000 of consideration involved in
the transaction, four percent of the next $3,000,000, three percent of the next
$2,000,000, two percent of the next $2,000,000 and one percent of the excess, if
any, over $10,000,000.
The Underwriter has the right to designate a non-director observer to attend
meetings of the Company's Board of Directors for three years from the date of
this offering. The Underwriter does not have a right to designate or nominate a
director to the Company's Board of Directors. The observer, which has not been
chosen, will be reimbursed for reasonable expenses incurred by him in connection
with his activities.
Pursuant to the terms of the Underwriting Agreement, the Company's
restricted stockholders and the Company have agreed not to sell, transfer,
assign or issue any restricted shares of Common Stock for a period of 36 months
following the date of this Prospectus. The sale of a significant number of these
shares in the public market may adversely affect prevailing market prices of the
Company's securities following this offering. See "Principal Stockholders" and
"Certain Transactions."
The foregoing is a summary of certain provisions of the Underwriting
Agreement and the Underwriter's Purchase Option which has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
The Company has been advised by the Underwriter that the NASD (Direct 10)
filed a complaint (No. C10950081) on October 5, 1995 ("Complaint") against the
Underwriter, Steven Sanders, the head trader of the Underwriter, Daniel M.
Porush, the president of the Underwriter, and Paul F. Byrne, formerly the
Underwriter's director of compliance (collectively, the "Respondents"), alleging
various violations of the NASD Rules of Fair Practice. The complaint consisted
of three causes. The first cause alleged that the Underwriter and Sanders
effected principal retail sales of securities at prices that were fraudulently
excessive. The second cause alleged that the Underwriter and Sanders charged
excessive markups. The third cause alleged that the Underwriter, Porush and
Byrne failed to establish, maintain and enforce reasonable supervisory
procedures designed to assure compliance with the NASD's rules and policies.
On April 15, 1996 the NASD in its decision found all of the Respondents
except Paul Byrne in violation of all three causes and imposed the following
sanctions:
- Sanders was censured, fined $25,000 and was suspended from association
with any member of the NASD in any capacity for a period of one year.
- The Underwriter was censured, fined $500,000 and was required to disgorge
its excess profits to its customers, totaling $1,876,205, plus prejudgment
interest. In addition, the Underwriter was suspended for a period of one
year from effecting any principal retail transactions.
- Porush was censured, fined $250,000 and barred from association with any
member of the NASD in any capacity.
57
<PAGE>
The Underwriter, Porush and Sanders have appealed the NASD's decision
thereby staying imposition of the sanctions.
If the sanctions imposed on the Underwriter are not reversed on appeal, the
Underwriter's ability to act as a market maker of the Company's securities will
be restricted. The Company cannot ensure that other broker dealers will make a
market in the Company's securities. In the event that other broker dealers fail
to make a market in the Company's securities, the possibility exists that the
market for and the liquidity of the Company's securities may be adversely
affected to such an extent that public security holders may not have anyone to
purchase their securities when offered for sale at any price. In such event, the
market for and liquidity of the Company's securities may not exist. It should be
noted that although the Underwriter may not be the sole market maker in the
Company's securities, it may likely be the dominant market maker in the
Company's securities.
In April 1996, the NASD settled an action whereby it fined Stratton Oakmont
$325,000 for fraud and other violations (which were neither admitted or denied)
in connection with its underwriting of an initial public offering. Steven
Sanders was fined $50,000 and was suspended for a period of 45 days from
associating with an NASD member and agreed not to engage in any trading-related
activities for any NASD member for a period of 50 days. The settlement also
required that Stratton Oakmont file certain new supervisory procedures with the
NASD. The Underwriter filed with the NASD on April 11, 1996 procedures relating
to the conduct of associated persons during and preceding an initial public
offering, which were aimed at preventing violations of Section 5 of the
Securities Act of 1933 and Rule 10b-6 promulgated under Section 10(b) of the
Securities Exchange Act of 1934 and aimed at preventing SEC Rule 10b-10
violations and the type of arbitrary pricing which occurred in connection with
the trading of securities underwritten by the Underwriter on January 16, 1991.
These procedures have been in effect since April 11, 1996.
The Company has been advised by the Underwriter that the NASD (District 10)
filed a complaint (No. C10960080) on June 6, 1996 ("June 1996 Complaint")
against the Underwriter, Daniel Porush, Steven Sanders, Irving Stitsky, a former
registered representative of the Underwriter, and Jordan Shamah, a vice
president and a director of the Underwriter (collectively, the "Respondents"),
alleging various violations of the Exchange Act and the NASD Rules of Fair
Practice. The June 1996 Complaint consists of seven causes of action. The first
cause alleges that the Underwriter, through Porush and Sanders, engaged in the
use of fraudulent and manipulative devices in the failure to make bona fide
distributions in five public offerings of securities underwritten by the
Underwriter between June 1993 and April 1994. The second cause alleges that the
Underwriter, through Porush, Sanders, Stitsky and Shamah, engaged in the use of
fraudulent and manipulative devices in the failure to make a bona fide
distribution of the common stock of a company whose initial public offering was
underwritten by the Underwriter. The third cause alleges that the Underwriter,
through Porush and Sanders for a period of three days, manipulated the common
stock of such company. The fourth cause alleges that the Underwriter, through
Sanders, charged fraudulently excessive markups in connection with the warrants
of such company. The fifth cause alleges that the Underwriter, through Porush,
violated the NASD's Free-Riding and Withholding Interpretation inasmuch as he
allegedly allocated securities in certain public offerings to persons restricted
from purchasing such securities. The sixth cause alleges that Porush and Stitsky
failed to adequately supervise the Underwriter's activity relating to the
various alleged violations. The seventh cause alleges that the Underwriter and
Porush failed to establish and maintain reasonable supervisory procedures to
prevent the Underwriter's violative conduct. The Respondents intend to file
answers to the June 1996 Complaint denying all material allegations and alleged
violations.
In addition, the Company has been advised by the Underwriter that the NASD
(District 10) filed a complaint (No. C10960068) on June 6, 1996 ("Complaint")
against the Underwriter and Patrick Gerard Hayes, the compliance director of the
Underwriter (collectively, the "Respondents"), alleging violations of the NASD
Rules of Fair Practice. The Complaint consists of two causes of action. The
first cause alleges that the Underwriter failed to report information regarding
at least 59 customer complaints the Underwriter received during the relevant
time periods as required by the NASD Rules
58
<PAGE>
of Fair Practice. The second cause alleges that the Underwriter, through its
compliance director, failed to establish, maintain and enforce written
procedures designed to ensure that the Underwriter complied with the NASD Rules
of Fair Practice. The Respondents have filed answers to the Complaint contesting
the proceeding.
On or about July 13, 1996, the District Business Conduct Committee for
District No. 10 ("District Committee") of the NASD issued a complaint against
the Underwriter alleging that the Underwriter violated Article III, Section 1
and Article IV, Section 5 of the NASD Rules of Fair Practice by entering into
settlement agreements with former customers which condition customers' ability
to cooperate with NASD investigations. The charges in the complaint were upheld
by the District Committee on this same date as well as the National Business
Conduct Committee of the NASD, and a fine of $20,000 was assessed and the
Underwriter was ordered to get the NASD's agreement on language used in certain
customer settlement agreements. The firm also is required, if asked by the NASD,
to identify customers that should be released from settlement agreements that
impose conditions on a customer's ability to provide information to the NASD.
The sanctions follow an appeal of findings that the firm used certain agreements
when settling customer complaints that precluded, restricted, or conditioned
customers' ability to cooperate with the NASD in connection with its
investigation of customer complaints. The firm also failed to release a customer
from the restrictive provisions of such a settlement. This action had been
appealed to the SEC and the sanctions aren't in effect pending consideration of
the appeal. The Underwriter contests the charges and has perfected an appeal to
the Securities and Exchange Commission.
The Company has been advised by Stratton Oakmont, Inc. that the Commission
instituted an action on December 14, 1994 in the United States District Court
for the District of Columbia against Stratton Oakmont. The complaint alleged
that Stratton Oakmont was not complying with the March 17, 1994 Administrative
Order by failing to adopt the recommendations of an independent consultant. The
Administrative Order was previously consented to by Stratton Oakmont, without
admitting or denying the findings contained therein, as settlement of an action
commenced against Stratton Oakmont by the Commission in March 1992, which found
willful violations of the anti-fraud provisions of the securities laws such that
Stratton Oakmont:
-engaged in fraudulent sales practices;
-engaged in and/or permitted unauthorized trading in customer accounts;
-knowingly and recklessly manipulated the market price of a company's
securities by dominating and controlling the market for those securities;
-made improper and unsupported price predictions with regard to recommended
over-the-counter securities; and
-made material misrepresentations and omissions regarding certain securities
and its experience in the securities industry.
Pursuant to the Administrative Order, Stratton Oakmont was censured and the
Stratton Consultant was chosen by the Commission to advise and consult with
Stratton Oakmont and to review and recommend new supervisory and compliance
procedures. The complaint sought:
-a to enjoin Stratton Oakmont from violating the Administrative Order;
-an order commanding Stratton Oakmont to comply with the Administrative
Order; and
-to have a Special Compliance Monitor appointed to ensure compliance with
the Administrative Order. Stratton Oakmont claimed that the Stratton
Consultant exceeded his authority under the Administrative Order and had
violated the terms of the Administrative Order.
59
<PAGE>
On February 28, 1995, the court granted the Commission's motion for the
Permanent Injunction and ordered Stratton Oakmont to comply with the
Administrative Order, which required the appointment of an independent
consultant, and a separate independent auditor and required that all
recommendations be complied with, including the taping of all telephone
conversations between the Stratton Oakmont's brokers and their customers. In
granting the Commission's motion for a Permanent Injunction, the Court
determined that Stratton Oakmont's conduct unequivocally demonstrated that there
is a substantial likelihood that it will continue to evade its responsibilities
under the Administrative Order. On April 20, 1995, Stratton Oakmont also filed
an appeal to the United States Court of Appeals for the District of Columbia,
and on April 24, 1995 filed a motion to stay the permanent injunction pending
the outcome of the appeal. The motion to stay was denied. Subsequently, Stratton
Oakmont voluntarily dismissed its appeal. The failure by Stratton Oakmont to
comply with the Administrative Order or Permanent Injunction may adversely
effect Stratton Oakmont's activities in that the court may enter a further order
restricting the ability of Stratton Oakmont to act as a market maker of the
Company's securities. The effect of such action may prevent the holders of the
Company's securities from selling such securities since Stratton Oakmont may be
restricted from acting as a market maker of the Company's securities and, in
such event, will not be able to execute a sale of such securities. Also, if
other broker dealers fail to make a market in the Company's securities, the
public security holders may not have anyone to purchase their securities when
offered for sale at any price and the security holders may suffer the loss of
their entire investment.
As a result of the Permanent Injunction, the states of Pennsylvania, Indiana
and Illinois have commenced administrative proceedings seeking, among other
things, to revoke Stratton Oakmont's license to do business in such states. In
Indiana, the Commissioner suspended Stratton Oakmont's license for a three year
period. Stratton Oakmont has appealed the decision and has requested a stay
pending appeal. The requested stay would maintain the status quo pending appeal.
In Illinois, Stratton Oakmont intends to file an answer to the administrative
complaint denying the basis for revocation. The District of Columbia suspended
Stratton Oakmont's license pending the outcome of an investigation. The states
of North Carolina and Arkansas also have suspended Stratton Oakmont's license
pending a resolution of the proceedings in those states. The states of
Minnesota, Vermont, and Nevada have served upon Stratton Oakmont notices of
intent to revoke Stratton Oakmont's license in such states. The state of Rhode
Island has served on Stratton Oakmont a Notice of Intent to suspend its license
in that state. The state of Connecticut has served on Stratton Oakmont a notice
of intent to suspend or revoke registration in that state with a notice of right
to hearing. In the state of Mississippi, Stratton Oakmont has agreed to a
suspension of its license pending resolution of certain claims and review of its
procedures and practices by the state authorities. In addition, Stratton Oakmont
withdrew its registration in the state of New Hampshire (with the right of
reapplication) and in the state of Maryland. There may be further administrative
action against the firm in Maryland. The firm withdrew its registration in
Massachusetts with a right to reapply for registration after two years, withdrew
its registration in Delaware with a right to reapply in three years and agreed
to a temporary cessation of business in Utah pending an on-site inspection and
further administrative proceedings. Stratton Oakmont's license in the state of
New Jersey was revoked by an administrative law judge, which revocation was
affirmed by the New Jersey Bureau of Securities, and an appeal has been filed
with the appellate division of the New Jersey Superior Court. The states of
Georgia, Alabama and South Carolina have lifted their suspension and have
granted Stratton Oakmont conditional licenses. Such conditional licenses were
granted pursuant to an order, which Stratton Oakmont has proposed to various
states, which provides provisions for: (i) the suspension of revocation, (ii)
compliance with recommendations of the Consultant, (iii) an expedited claims
mediation arbitration process, (iv) resolution of claims seeking compensatory
damages, (v) restrictions on use of operating revenue, (vi) the limitation on
selling group members in offerings underwritten by Stratton Oakmont and the
prohibition of participating as a selling group member in offerings underwritten
by certain other NASD member firms, (vii) the periodic review of Stratton
Oakmont's agents, (viii) the retention of an accounting firm, and (ix)
supervision and training, restrictions on trading, discretionary accounts and
60
<PAGE>
other matters. The state of Oregon, as a result of the Permanent Injunction, has
filed a notice of intent to revoke Stratton Oakmont's license subject to the
holding of a hearing to determine definitively Stratton Oakmont's license
status, and Stratton Oakmont, in this proceeding as well as other proceedings,
expects to be able to demonstrate that the Permanent Injunction is not of a
nature as to be a lawful basis to revoke Stratton Oakmont's license permanently.
Finally, Stratton Oakmont has received an order limiting license in the state of
Nebraska. Such proceedings, if ultimately successful, may adversely affect the
market for and liquidity of the Company's securities if additional broker-
dealers do not make a market in the Company's securities. Moreover, should
investors purchase any of the securities in this offering from Stratton Oakmont
prior to a revocation of Stratton Oakmont's license in their state, such
investors will not be able to resell such securities in such state through
Stratton Oakmont but will be required to retain a new broker-dealer firm for
such purpose. The Company cannot ensure that other broker-dealers will make a
market in the Company's securities. In the event that other broker-dealers fail
to make a market in the Company's securities, the possibility exists that the
market for and the liquidity of the Company's securities may be adversely
affected to such an extent that public security holders may not have anyone to
purchase their securities when offered for sale at any price. In such event, the
market for, and liquidity and prices of the Company's securities may not exist.
It should be noted that although Stratton Oakmont may not be the sole market
maker in the Company's securities, it will most likely be the dominant market
maker in the Company's securities. In addition, in the event that the
Underwriter's license to do business is revoked in the states set forth above,
the Underwriter has advised the Company that the members of the selling
syndicate in this offering may be able to make a market in the Company's
securities in such states and that such an event will not have a materially
adverse effect on this offering, although no assurance can be made that such an
event will not have a materially adverse effect on this offering.The Company has
applied to register this offering for the offer and sale of its securities in
the following states: California, Colorado, Connecticut, Delaware, Florida,
Georgia, Hawaii, Illinois, Louisiana, New York, Rhode Island and Virginia. The
offer and sale of the securities of this offering are not available in any other
state, absent an exemption from registration. See "Underwriting."
The Company has been advised by Stratton Oakmont that Honorable John E.
Sprizzo, United States Judge for the Southern District of New York, on May 6,
1994 denied the class certification motion in PAUL CARMICHAEL V. STRATTON
OAKMONT, INC., ET AL., Civ. 0720 (JES), of the plaintiff Paul Carmichael. The
class action complaint alleges manipulation and fraudulent sales practices in
connection with a number of securities. The allegations were substantially
similar and involve much of the same time period as the Commission's civil
complaint (discussed above). The Company has further been informed that counsel
for the class action plaintiff sought to re-argue the motion for class
certification, which motion for re-argument was denied.
DETERMINATION OF PUBLIC OFFERING PRICE
Prior to this offering, there has been no public market for the securities
of the Company. The initial public offering price for the Units and the exercise
price of the Class A Warrants have been determined by negotiations between the
Company and the Underwriter. Among the factors considered in the negotiations
were an analysis of the areas of activity in which the Company is engaged, the
present state of the Company's business, the Company's financial condition, the
Company's prospects, an assessment of management, the general condition of the
securities market at the time of this offering and the demand for similar
securities of comparable companies. The public offering price of the Units and
the exercise prices of the Class A Warrants do not necessarily bear any
relationship to assets, earnings, book value or other criteria of value
applicable to the Company.
LEGAL PROCEEDINGS
e-Net, Inc. is not a party to any legal proceedings and, to the best of its
information, knowledge and belief, none is contemplated or has been threatened.
61
<PAGE>
LEGAL MATTERS
The validity of the securities being offered hereby will be passed upon for
the Company by Thomas T. Prousalis, Jr., Esq., 1919 Pennsylvania Avenue, N.W.,
Suite 800, Washington, D.C. 20006. Mr. Prousalis is the beneficial owner of
450,000 shares of Common Stock of the Company. See "Principal Stockholders."
Certain legal matters will be passed upon for the Underwriter by Bernstein &
Wasserman, LLP, 950 Third Avenue, New York, New York 10022.
EXPERTS
The financial statements of e-Net, Inc. as of March 31, 1996, included in
the Registration Statement and this Prospectus have been included herein in
reliance on the report dated April 12, 1996, of Grant Thornton LLP, Independent
Certified Public Accountants, and upon the authority of such firm as experts in
accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission an SB-2 Registration Statement
under the Securities Act of 1933, as amended, with respect to the securities
offered by this Prospectus. This Prospectus does not contain all of the
information set forth in the Registration Statement and exhibits, to all of
which reference is hereby made. Statements contained in this Prospectus as to
the contents of any contract or other document referred to are not necessarily
complete; with respect to each such contract or other document filed or
incorporated by reference as an exhibit to the Registration Statement, reference
is made to the exhibit for a more complete description of the matter involved,
and each such statement shall be deemed to be qualified in its entirety by such
reference. All of these documents may be inspected without charge at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549.
62
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS........................ F-2
FINANCIAL STATEMENTS
Balance Sheet........................................................... F-3
Statement of Operations................................................. F-4
Statement of Cash Flows................................................. F-5
Statement of Stockholders' Equity....................................... F-6
Notes to Financial Statements........................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
e-Net, Inc.
We have audited the accompanying balance sheet of e-Net, Inc. (a Delaware
Corporation) as of March 31, 1996, and the related statements of operations,
stockholders' equity and cash flows for the period from beginning of operations
(June 8, 1995) to March 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of e-Net, Inc.
as of March 31, 1996, and the results of its operations and its cash flows for
the period from beginning of operations (June 8, 1995) to March 31, 1996, in
conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Vienna, Virginia
April 12, 1996 (except for
note B, as to which the
date is June 24, 1996 and
note G, as to which the
date is July 31, 1996)
F-2
<PAGE>
E-NET, INC.
BALANCE SHEET
MARCH 31, 1996
ASSETS
<TABLE>
<CAPTION>
PRO
FORMA
HISTORICAL (NOTE B)
-------------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents....................................................... $ 557,960 $ 1,057,960
Accounts receivable............................................................. 53,677 53,677
-------------- --------------
TOTAL CURRENT ASSETS.............................................................. 611,637 1,111,637
PROPERTY, PLANT AND EQUIPMENT, NET................................................ 134,285 134,285
-------------- --------------
$ 745,922 $ 1,245,922
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Stockholder/Officer notes payable............................................... $ 45,000 $ 45,000
Accounts payable -- trade....................................................... 5,326 5,326
Accrued liabilities............................................................. 22,787 22,787
Deferred revenue................................................................ 20,000 20,000
-------------- --------------
TOTAL CURRENT LIABILITIES......................................................... 93,113 93,113
LONG-TERM DEBT.................................................................... 500,000 --
-------------- --------------
TOTAL LIABILITIES................................................................. 593,113 93,113
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 50,000,000 shares authorized, 3,750,000 shares
outstanding, historical; 4,000,000 shares outstanding, pro forma............... 37,500 40,000
Stock subscriptions and notes receivable........................................ (280,000) (30,000)
Unamortized cost of bridge financing............................................ (2,885,135) (5,385,135)
Additional paid-in capital...................................................... 3,817,500 7,065,000
Retained deficit................................................................ (537,056) (537,056)
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY........................................................ 152,809 1,152,809
-------------- --------------
$ 745,922 $ 1,245,922
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
E-NET, INC.
STATEMENT OF OPERATIONS
PERIOD FROM BEGINNING OF OPERATIONS (JUNE 8, 1995) TO MARCH 31, 1996
<TABLE>
<S> <C>
SALES.......................................................................... $ 293,876
OPERATING EXPENSES
Cost of product sales and service............................................ 88,360
Selling, general and administrative.......................................... 115,171
----------
INCOME FROM OPERATIONS......................................................... 90,345
INTEREST AND FINANCING CHARGES
Interest expense -- private placement........................................ (614,865)
Interest expense............................................................. (6,884)
Other expenses............................................................... (6,143)
Interest Income.............................................................. 491
----------
LOSS BEFORE INCOME TAXES....................................................... (537,056)
INCOME TAX PROVISION........................................................... --
----------
NET LOSS....................................................................... $ (537,056)
----------
----------
PRO FORMA ADJUSTMENT TO REFLECT ADDITIONAL COMPENSATION EXPENSE................ (237,500)
----------
PRO FORMA NET LOSS............................................................. (774,556)
----------
----------
PRO FORMA LOSS PER SHARE....................................................... $ (.26)
----------
----------
WEIGHTED AVERAGE SHARES OUTSTANDING............................................ 3,017,808
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
E-NET, INC.
STATEMENTS OF CASH FLOWS
PERIOD FROM BEGINNING OF OPERATIONS (JUNE 8, 1995) TO MARCH 31, 1996
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss...................................................................... $(537,056)
---------
Adjustments to reconcile net loss to net cash from operating activities
Interest expense -- private placement....................................... 614,865
Depreciation and amortization............................................... 30,715
Changes in operating assets and liabilities
(Increase) in accounts receivable......................................... (53,677)
Increase in accounts payable and accrued liabilities...................... 28,113
Increase in deferred revenue.............................................. 20,000
---------
NET CASH PROVIDED BY OPERATING ACTIVITIES....................................... 102,960
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from shareholder/officer loans....................................... 30,000
Payment of shareholder/officer loans.......................................... (25,000)
Payment of notes payable arising from asset acquisition....................... (50,000)
Proceeds from Issuance of bridge notes payable................................ 500,000
---------
NET CASH PROVIDED BY FINANCING ACTIVITIES....................................... 455,000
---------
NET INCREASE IN CASH............................................................ 557,960
CASH AT BEGINNING OF PERIOD..................................................... --
---------
CASH AT END OF PERIOD........................................................... $ 557,960
---------
---------
SUPPLEMENTAL DISCLOSURES:
Income Taxes Paid............................................................. $ --
---------
---------
Interest Paid................................................................. $ 688
---------
---------
</TABLE>
NONCASH INVESTING AND FINANCING ACTIVITIES
The Company acquired fixed assets of $165,000 in exchange for notes payable of
$90,000 and a capital contribution of $75,000.
The Company issued 3,250,000 shares of common stock for notes receivable of
$310,000.
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
E-NET, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM BEGINNING OF OPERATIONS (JUNE 8, 1995) TO MARCH 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK STOCK UNAMORTIZED
------------------ SUBSCRIPTIONS COST OF ADDITIONAL TOTAL
NO. OF AND NOTES BRIDGE PAID IN RETAINED STOCKHOLDERS
SHARES AMOUNT RECEIVABLE FINANCING CAPITAL DEFICIT EQUITY
--------- ------- ------------- ----------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, inception
Initial capitalization....................... 3,000,000 $30,000 $ (30,000) $ -- $ -- $ -- $ --
Contribution of assets from
stockholder/officer......................... -- -- -- -- 75,000 -- 75,000
Sale of common stock for note................ 250,000 2,500 (250,000) -- 247,500 -- --
Issuance of common stock and additional
capital associated with the financing cost
from the issuance of bridge units........... 500,000 5,000 -- (2,885,135) 3,495,000 -- 614,865
Net loss..................................... -- -- -- -- -- (537,056) (537,056)
--------- ------- ------------- ----------- ---------- --------- ------------
Balance, March 31, 1996...................... 3,750,000 $37,500 $(280,000) $(2,885,135) $3,817,500 $(537,056) $ 152,809
--------- ------- ------------- ----------- ---------- --------- ------------
--------- ------- ------------- ----------- ---------- --------- ------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
E-NET, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
e-Net, Inc. was incorporated on January 9, 1995 with an initial
capitalization of 3,000,000 shares of Common Stock after giving effect to a
600:1 stock split in January 1996 and a 2:1 reverse stock split in July 1996.
The Company commenced operations on June 8, 1995. The Company develops, markets,
and supports open client, server and integrated applications software that
enables local, national and international telephone communications, information
exchange and commerce over the Internet and private networks. The Company also
sells other products used in the management and billing of computer network,
telephone and computer usage.
The Company's operations to date have concentrated on continuing development
of its products, establishing acceptance of its software products in the
telecommunications industry, providing services to its existing customer base
and securing financing necessary to fund development, operations and expansion
of its business. Management believes cash flow provided by operations and
proceeds of $1,000,000 from bridge financing described in Note B will be
sufficient to sustain operations in fiscal 1997. Additional financing may be
necessary to provide for continued product development and further expansion of
operations. While assurance cannot be given as to its success, the Company has
entered into a letter of intent in March 1996 with an underwriter for a firm
commitment offering of securities as described in Note G.
REVENUE RECOGNITION
Revenue is recognized on the sale of software products upon shipment unless
future obligations exist wherein a portion of the revenue is deferred until the
obligation is satisfied. Revenue from services rendered is recognized either as
the services are rendered based upon fixed hourly rates or at contractually
determined fixed monthly fees. Approximately 20% of the total revenue recognized
was derived from the sale of software products. The remaining revenue was the
result of providing services.
For the period ending March 31, 1996, the Company derived 32%, 29%, 16% and
13% of its sales from four customers, respectively.
ACCOUNTS RECEIVABLE
Accounts receivable are stated at the unpaid balances, less allowance on
uncollectible accounts, if any. Management periodically reviews its outstanding
accounts receivable to assess collectibility of balances based on past
experience and evaluation of current adverse situations which may affect
collectibility of receivables. At March 31, 1996, management deemed all balances
fully collectible and did not establish an allowance for uncollectible accounts.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, net of an allowance for
accumulated depreciation and amortization. Depreciation is computed on equipment
and furniture, using a declining balance method over a five-year period.
F-7
<PAGE>
E-NET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Earnings per share for each period presented are based upon weighted average
shares outstanding during the period from June 1995, the date operations
commenced, through March 31, 1996, adjusted retroactively, where applicable, for
the effect of a 600:1 stock split in January 1996 and a 2:1 reverse stock split
in July 1996. The weighted average shares outstanding also includes the weighted
average effect (17,808 shares) of 500,000 shares of Common Stock issued in March
1996 pursuant to the issuance of the Bridge Units. The Bridge Units have
otherwise not been taken into account in computing earnings per share as the
value of the Bridge Units is equivalent to the Units offered in the Company's
initial public offering. The effect of the issuance of 250,000 shares of Common
Stock in March 1996 for a $250,000 promissory note has not been reflected in
weighted average shares outstanding because the note was cancelled in June 1996
in exchange for the return of all such shares.
NOTE B -- SIGNIFICANT TRANSACTIONS
PRIVATE PLACEMENT TRANSACTIONS
In March 1996, the Company issued 250,000 shares of Common Stock to a
nonaffiliated investment banking firm in a private placement transaction for
aggregate consideration of $250,000, represented by a full recourse promissory
note for the entire purchase price. In June 1996, this promissory note was
cancelled in exchange for the return of the 250,000 shares of Common Stock.
In March 1996, in a transaction arranged by the underwriter of the Company's
initial public offering, the Company was loaned $500,000 by a nonaffiliated
person. Principal and interest computed at the rate of eight percent per annum
becomes due at the earlier of June 1, 1997, or the closing date of an initial
public offering of securities of the Company which is expected to occur in June
1996. As additional consideration for making such loan, the Company issued
250,000 Units ("Bridge Units") each containing two shares of Common Stock, two
Class A Warrants and two Class B Warrants to the lender. In June 1996, the loan
principal was converted to paid in capital and accounted for as consideration
for the 250,000 Bridge Units received in connection with the loan. Inasmuch as
these Bridge Units have been issued in contemplation of the proposed offering,
financing expense, valued using the proposed offering price per share, related
to the issuance of these securities of $3,000,000 will be recorded between the
date of issuance and the anticipated offering date, with a corresponding credit
to paid-in capital. The value of $3,000,000 attributed to issuance of the Bridge
Units was computed using the offering price of the Units offered in the
Company's proposed public offering less the amount of debt converted to paid in
capital in June 1996. As of March 31, 1996, the Company had accrued $614,865 of
this financing expense. The Company has recorded the loan of $500,000 as a
noncurrent liability at March 31, 1996. It is not practicable to estimate the
fair value of this debt as there are no quoted market prices for debt with
similar terms. The effect of the June 1996 conversion of the bridge loans
outstanding as of March 31, 1996 to equity will be recorded in the Company's
fiscal 1997 financial statements.
In April 1996, in a transaction arranged by the underwriter of the Company's
initial public offering, the Company was loaned $500,000 by three nonaffiliated
persons. Principal and interest computed at the rate of eight percent per annum
becomes due at the earlier of June 1, 1997, or the closing date of an initial
public offering of securities of the Company which is expected to occur in June
1996. As additional consideration for making such loan, the Company issued
250,000 Bridge Units identical to those issued in March 1996 as described above.
In June 1996, the loan principal was converted to paid in capital and accounted
for as consideration for the 250,000 Bridge Units received in connection with
the loan. Inasmuch as these Bridge Units have been issued in contemplation of
the
F-8
<PAGE>
E-NET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE B -- SIGNIFICANT TRANSACTIONS (CONTINUED)
proposed offering, financing expense related to the issuance of these securities
of $3,000,000 will be recorded between the date of issuance and the anticipated
offering date, with a corresponding credit to paid-in capital. The value of
$3,000,000 attributed to issuance of the Bridge Units was computed using the
offering price of the Units offered in the Company's proposed public offering
less the amount of debt converted to paid in capital in June 1996.
Due to the significance of the transactions which occurred in April and June
1996, a pro forma balance sheet has been presented in the accompanying financial
statements to present the financial position of the Company as if the following
transactions had occurred on March 31, 1996:
-Proceeds from $500,000 bridge loan in April 1996 which was converted to
capital in June 1996 in connection with the issuance of associated bridge
units.
-Increase in the unamortized cost associated with the issuance of the bridge
units in April 1996 and corresponding credit to paid in capital for
$3,000,000.
-Decrease in the unamortized cost associated with the issuance of bridge
units in March 1996 as a result of the conversion of debt to equity in June
1996 of $500,000.
-Cancellation of the $250,000 note receivable in June 1996 upon the return
of 250,000 shares of common stock.
ACQUISITIONS
In June 1995, the Company acquired the rights and title to certain tangible
assets comprised primarily of computer equipment and peripherals, certain
products and intangible assets related thereto, and contract rights in return
for a promissory note of $50,000 and the release of the seller's obligation
valued at $75,000 for compensation formerly due to the president of the Company.
The Company allocated the entire purchase price of $125,000 to the tangible
assets acquired based upon their fair value. The portion of the purchase price
attributable to the release of the compensation obligation due to the
stockholder/officer was credited to additional paid in capital. The entire
principal balance due under the promissory note and interest thereon was repaid
by the Company in March 1996.
In March 1996, the Company acquired the right, title and interest to certain
inventions and related patents ("Technology") from two individuals who are also
stockholders of the Company in an assignment of patent rights in return for
future royalties to each individual computed quarterly equal to 2 1/2% of gross
profit from products sold related to the acquired Technology. Royalties will be
expensed in the period in which related sales are recognized. The assignment
agreement provides for the right of the individuals to repurchase the Technology
if the Company fails to make reasonable efforts to develop and exploit the
market opportunities made available by the Technology. The agreement provides
that the Company allocate $1,000,000 of paid in capital to develop and exploit
the market opportunities of the Technology by December 31, 1996, or the
Technology will be subject to repurchase by the inventors of the Technology.
F-9
<PAGE>
E-NET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE C -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following at March 31, 1996:
<TABLE>
<S> <C>
Furniture and office equipment................................... $ 125,000
Airplane......................................................... 40,000
---------
165,000
Less accumulated depreciation.................................... (30,715)
---------
Property and equipment -- net.................................... $ 134,285
---------
---------
</TABLE>
NOTE D -- STOCKHOLDER/OFFICER NOTES PAYABLE
Stockholder notes payable consist of the following as of March 31, 1996:
<TABLE>
<S> <C>
Loan from an officer of the Company, bearing interest at 8% per
annum with principal and interest due June 3, 1996. The note is
collateralized by an airplane.................................... $ 40,000
Loan from an officer of the Company, bearing interest at 10% per
annum with payment of principal and interest due June 15,
1996............................................................. 5,000
---------
$ 45,000
---------
---------
</TABLE>
Management's estimate of the fair value of these liabilities is the carrying
value.
NOTE E -- INCOME TAXES
The income tax provision consists of the following for the period ended
March 31, 1996:
<TABLE>
<S> <C>
Deferred
Federal......................................................... $ 2,267
State........................................................... 426
Valuation allowance............................................. (2,693)
---------
Net provision..................................................... $ --
---------
---------
</TABLE>
The effective tax rate for the period ended March 31, 1996 was (7.4)%. A
reconciliations between the United States federal statutory rate and the
effective tax rate follows:
<TABLE>
<S> <C>
Tax (benefit) at U.S. federal statutory rates................... $(182,599)
Increase (decrease) resulting from:
State tax (benefit)........................................... (21,267)
Permanent difference -- interest expense private placement.... 200,812
Other permanent differences................................... 361
Valuation allowance........................................... 2,693
---------
Income tax provision.......................................... $ --
---------
---------
</TABLE>
The Company's reporting period for tax purposes is the calendar year. Taxes
on the net loss for the period January through March is reflected in the
calculation of the deferred tax asset. A valuation allowance has been recognized
in an amount equal to the deferred tax asset.
F-10
<PAGE>
E-NET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE E -- INCOME TAXES (CONTINUED)
The tax effect of temporary differences between the financial statement
amounts and tax bases of assets and liabilities which give rise to a deferred
tax asset is as follows at March 31, 1996:
<TABLE>
<S> <C>
Net loss for January 1 through March 31, 1996..................... $ 31,997
Accounts Receivable............................................... (28,704)
Accounts Payable and Accrued Expenses............................. 893
Depreciation expense.............................................. (1,493)
Valuation allowance............................................... (2,693)
---------
Deferred taxes payable............................................ $ --
---------
---------
</TABLE>
NOTE F -- COMMITMENTS AND CONTINGENT LIABILITIES
LEASE COMMITMENT
The Company leases office space under an month to month operating lease
which provides for monthly rent payments of $1,900.
EMPLOYMENT AGREEMENT
The Company entered into an employment agreement effective April 1, 1996
with an officer. Minimum future annual salary commitments of the Company under
the agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31, SALARY BONUS TOTAL
- ---------------------------------------- ----------- ----------- -------------
<S> <C> <C> <C>
1997................................. $ 175,000 $ 87,500 $ 262,500
1998................................. 175,000 87,500 262,500
1999................................. 175,000 87,500 262,500
2000................................. 175,000 87,500 262,500
2001................................. 175,000 87,500 262,500
----------- ----------- -------------
$ 875,000 $ 437,500 $ 1,312,500
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
The agreement also provides for bonuses upon certain performance criteria of
the Company and the determination of the Board of Directors. Pursuant to the
agreement, employment may be terminated by the Company with cause or by the
executive with or without good reason. Termination by the Company without cause,
or by the executive for good reason, would subject the Company to liability for
in an amount equal to six months of the terminated executive's salary at the
date of termination plus comparable insurance benefits being received prior to
termination.
The accompanying financial statements reflect compensation paid and accrued
for services rendered, if any, by the officer at the salary level which the
Company believes is reasonable under the circumstances. PRO FORMA data presented
in the accompanying statement of operations reflects the result of operations on
a PRO FORMA basis had the officer been employed by the Company for the entire
period at a compensation level equal to that contained in the above agreement.
NOTE G -- STOCKHOLDERS' EQUITY
PROPOSED INITIAL PUBLIC OFFERING
The Company has entered into a letter of intent with an underwriter for a
firm commitment offering of 500,000 Units at a price of $14.00 per Unit. Each
Unit consists of two shares of Common Stock and two redeemable Class A Warrants.
The Class A Warrants shall be exercisable commencing
F-11
<PAGE>
E-NET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1996
NOTE G -- STOCKHOLDERS' EQUITY (CONTINUED)
one year after the date of the prospectus and entitles the holder to purchase
one share of Common Stock at $7.50 per share during the four year period
commencing one year from the effective date of the offering. The Class A
Warrants are redeemable under certain conditions.
The Company paid $50,000 in April 1996 to an attorney who is also a
stockholder of the Company in return for services rendered in connection with
the offering.
REVERSE STOCK SPLIT
In July 1996, the Company caused a 2:1 reverse stock split of its issued and
outstanding securities. Accordingly, all references to the securities of the
Company have been retroactively adjusted to reflect this reverse split.
NOTE H -- SUBSEQUENT EVENT
In January 1996, the Company signed a letter of intent to purchase certain
assets from an entity of which two of the three owners are also stockholders of
the Company. These assets are prototype boards, proprietary software code and
existing research and development relating to specific computer software
products. In May 1996, the Company completed the purchase for cash of $50,000.
Management intends to allocate the entire purchase price of $50,000 to research
and development expense and therefore, record a charge to operations in fiscal
year 1997 for that amount. The entity from which the assets are intended to be
acquired is dormant and contains no assets other than the above intangible
assets. As a result, condensed financial statements of this entity have not been
presented.
F-12
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THE
SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH AN OFFER WOULD BE UNLAWFUL. ANY MATERIAL MODIFICATION OF THE OFFERING
WILL BE ACCOMPLISHED BY MEANS OF AN AMENDMENT TO THE REGISTRATION STATEMENT. IN
ADDITION, THE RIGHT IS RESERVED BY THE COMPANY TO CANCEL ANY CONFIRMATION OF
SALE PRIOR TO THE RELEASE OF FUNDS, IF, IN THE OPINION OF THE COMPANY,
COMPLETION OF SUCH SALE WOULD VIOLATE FEDERAL OR STATE SECURITIES LAWS OR A RULE
OR POLICY OF THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., WASHINGTON,
D.C. 20006.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 20
Dilution.................................................................. 22
Capitalization............................................................ 23
Dividend Policy........................................................... 23
Management's Discussion and Analysis or Plan of Operation................. 24
Business.................................................................. 29
Management................................................................ 42
Principal Stockholders.................................................... 48
Certain Transactions...................................................... 49
Description of Securities................................................. 51
Underwriting.............................................................. 56
Legal Proceedings......................................................... 61
Legal Matters............................................................. 62
Experts................................................................... 62
Additional Information.................................................... 62
Index to Financial Statements............................................. F-1
Report of Independent Certified Public Accountants........................ F-2
</TABLE>
------------------------
UNTIL AUGUST , 1996 (25 DAYS AFTER THE EFFECTIVE DATE OF THIS PROSPECTUS),
ALL BROKER-DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
500,000 UNITS
E-NET, INC.
---------------------
PROSPECTUS
---------------------
STRATTON OAKMONT, INC.
AUGUST , 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART TWO
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by Delaware law, the Company's Certificate of Incorporation
includes a provision which provides that a director of the Company shall not be
personally liable to the Company or its stockholders for monetary damages for a
breach of fiduciary duty as a director, except (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 that involve intentional misconduct or a knowing
violation of the law, (iii) under Section 174 of the General Corporation Law of
the State of Delaware, which prohibits the unlawful payment of dividends or the
unlawful repurchase or redemption of stock, or (iv) for any transaction from
which the director derives an improper personal benefit. This provision is
intended to afford directors protection against, and to limit their potential
liability for monetary damages resulting from, suits alleging a breach of the
duty of care by a director. As a consequence of this provision, stockholders of
the Company will be unable to recover monetary damages against directors for
action taken by them that may constitute negligence or gross negligence in
performance of their duties unless such conduct falls within one of the
foregoing exceptions. The provision, however, does not alter the applicable
standards governing a director's fiduciary duty and does not eliminate or limit
the right of the Company or any stockholder to obtain an injunction or any other
type of nonmonetary relief in the event of a breach of fiduciary duty.
Management of the Company believes this provision will assist the Company in
securing and retaining qualified persons to serve as directors. The Company is
unaware of any pending or threatened litigation against the Company or its
directors that would result in any liability for which such director would seek
indemnification or similar protection.
Such indemnification provisions are intended to increase the protection
provided directors and, thus, increase the Company's ability to attract and
retain qualified persons to serve as directors. Because directors liability
insurance is only available at considerable cost and with low dollar limits of
coverage and broad policy exclusions, the Company does not currently maintain a
liability insurance policy for the benefit of its directors although the Company
may attempt to acquire such insurance in the future. The Company believes that
the substantial increase in the number of lawsuits being threatened or filed
against corporations and their directors and the general unavailability of
directors liability insurance to provide protection against the increased risk
of personal liability resulting from such lawsuits have combined to result in a
growing reluctance on the part of capable persons to serve as members of boards
of directors of public companies. The Company also believes that the increased
risk of personal liability without adequate insurance or other indemnity
protection for its directors could result in overcautious and less effective
direction and management of the Company. Although no directors have resigned or
have threatened to resign as a result of the Company's failure to provide
insurance or other indemnity protection from liability, it is uncertain whether
the Company's directors would continue to serve in such capacities if improved
protection from liability were not provided.
The provisions affecting personal liability do not abrogate a director's
fiduciary duty to the Company and its shareholders, but eliminate personal
liability for monetary damages for breach of that duty. The provisions do not,
however, eliminate or limit the liability of a director for failing to act in
good faith, for engaging in intentional misconduct or knowingly violating a law,
for authorizing the illegal payment of a dividend or repurchase of stock, for
obtaining an improper personal benefit, for breaching a director's duty of
loyalty (which is generally described as the duty not to engage in any
transaction which involves a conflict between the interest of the Company and
those of the director) or for violations of the federal securities laws. The
provisions also limit or indemnify against liability resulting from grossly
negligent decisions including grossly negligent business decisions relating to
attempts to change control of the Company.
The provisions regarding indemnification provide, in essence, that the
Company will indemnify its directors against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with any action, suit or proceeding arising
II-1
<PAGE>
out of the director's status as a director of the Company, including actions
brought by or on behalf of the Company (shareholder derivative actions). The
provisions do not require a showing of good faith. Moreover, they do not provide
indemnification for liability arising out of willful misconduct, fraud, or
dishonesty, for "short-swing" profits violations under the federal securities
laws, or for the receipt of illegal remuneration. The provisions also do not
provide indemnification for any liability to the extent such liability is
covered by insurance. One purpose of the provisions is to supplement the
coverage provided by such insurance. However, as mentioned above, the Company
does not currently provide such insurance to its directors, and there is no
guarantee that the Company will provide such insurance to its directors in the
near future although the Company may attempt to obtain such insurance.
The provisions diminish the potential rights of action which might otherwise
be available to shareholders by limiting the liability of officers and directors
to the maximum extent allowable under Delaware law and by affording
indemnification against most damages and settlement amounts paid by a director
of the Company in connection with any shareholders derivative action. However,
the provisions do not have the effect of limiting the right of a shareholder to
enjoin a director from taking actions in breach of his fiduciary duty, or to
cause the Company to rescind actions already taken, although as a practical
matter courts may be unwilling to grant such equitable remedies in circumstances
in which such actions have already been taken. Also, because the Company does
not presently have directors liability insurance and because there is no
assurance that the Company will procure such insurance or that if such insurance
is procured it will provide coverage to the extent directors would be
indemnified under the provisions, the Company may be forced to bear a portion or
all of the cost of the director's claims for indemnification under such
provisions. If the Company is forced to bear the costs for indemnification, the
value of the Company stock may be adversely affected. In the opinion of the
Securities and Exchange Commission, indemnification for liabilities arising
under the Securities Act of 1933 is contrary to public policy and, therefore, is
unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemization of expenses, payable by the Company from the
net proceeds of this offering, incurred by the Company in connection with the
issuance and distribution of the securities of the Company being offered hereby.
The Company has agreed to pay all of the expenses related to the registration of
the securities by the Selling Security-holders, which are included herein. All
expenses are estimated except the SEC, NASD and Nasdaq Registration and Filing
Fees. See "Use of Proceeds."
<TABLE>
<S> <C>
SEC Registration and Filing Fee(1)............................. $ 6,407
NASD Registration and Filing Fee(1)............................ 2,358
Nasdaq Registration and Filing Fee............................. 10,000
Financial Printing............................................. 175,000
Transfer Agent Fees............................................ 10,000
Accounting Fees and Expenses................................... 85,000
Legal Fees and Expenses........................................ 375,000
Blue Sky Fees and Expenses..................................... 85,000
Underwriter's Nonaccountable Expense Allowance................. 241,500
Miscellaneous.................................................. 9,735
----------
TOTAL...................................................... $1,000,000
----------
----------
</TABLE>
- ------------------------
(1) Paid upon initial filing of this Registration Statement and related
Prospectus.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following information sets forth all securities of the Company sold by
it within the past three years, adjusted retroactively for a 600:1 stock split
in January 1996 and a 2:1 reverse stock split in July 1996, which securities
were not registered under the Securities Act of 1933, as amended.
II-2
<PAGE>
In January 1995, the Company issued 3,000,000 shares of its common stock
(which includes a 600:1 stock split in January 1996 and a 2:1 reverse split in
July 1996) to 15 persons, including the officers and directors of the Company,
in a private placement transaction in consideration of $100, or its par value at
the time of issuance.
In March 1996, the Company issued 250,000 shares of its Common Stock to ATG
Group, Inc., a Brookville, New York based investment firm, in a private
placement transaction for aggregate consideration of $250,000, represented by a
full recourse promissory note for the entire purchase price. The promissory note
is due in full in March 2001 and bears interest, payable upon maturity at 8% per
annum. Andrew T. Greene, a former officer and director of the Underwriter, is
the officer, director and stockholder of ATG Group, Inc. At the time of the
acquisition of the shares of Common Stock of the Company by ATG Group, Inc.,
neither ATG Group, Inc. nor Mr. Greene had an association or affiliation, in any
manner whatsoever, with the Underwriter or any other member firm of the National
Association of Securities Dealers, Inc. However, in June 1996, ATG Group, Inc.
agreed to cancel its 250,000 shares of the Company's Common Stock in
consideration of the cancellation of its $250,000 full recourse promissory note.
Also, in March and April 1996, the Company borrowed $1,000,000 in a bridge
loan from four persons who are nonaffiliated with the Underwriter and the
Company, each of whom is an accredited investor, to wit: Edward Ratkovich
($500,000), Robert Foise ($250,000), Armstrong Industries ($200,000) and Martin
Sumichrast ($50,000), at the rate of eight percent simple annual interest.
General Ratkovich and Mr. Sumichrast are officers, directors and principal
stockholders of Nasdaq listed companies recently underwritten by the
Underwriter. Mr. Foise and Armstrong Industries have previously participated as
investors in companies recently underwritten by the Underwriter. In further
consideration of the bridge loan, the Company issued 1,000,000 shares of Common
Stock, 1,000,000 Class A Warrants and 1,000,000 Class B Warrants to such
persons. However, in June 1996, such persons converted their loans to equity in
consideration of the prior issuance of the securities. See "Description of
Securities."
In July 1996, the Company caused a 2:1 reverse split of its issued and
outstanding shares of common stock, Class A Warrants and Class B Warrants,
resulting in 4,000,000 shares of common stock, 1,000,000 Class A Warrants and
1,000,000 Class B Warrants currently issued and outstanding.
All unregistered securities issued by the Company prior to this offering are
deemed "restricted securities" within the meaning of that term as defined in
Rule 144 and have been issued pursuant to certain "private placement" exemptions
under Section 4(2) of the Securities Act of 1933, as amended, and the rules and
regulations as promulgated by the Securities and Exchange Commission,
Washington, D.C. 20549, such that the sales of the securities were transactions
by an issuer not involving any public offering. See "Description of Securities."
Reference is also made hereby to "Dilution," "Principal Stockholders,"
"Certain Transactions" and "Description of Securities" in the Prospectus for
more information with respect to the previous issuance and sale of the Company's
securities.
All of the aforesaid securities have been appropriately marked with a
restricted legend and are "restricted securities," as defined in Rule 144 of the
rules and regulations of the Securities and Exchange Commission, Washington,
D.C. 20549. All of the aforesaid securities were issued for investment purposes
only and not with a view to redistribution, absent registration. All of the
aforesaid persons have been fully informed and advised concerning the
Registrant, its business, financial and other matters. Transactions by the
Registrant involving the sales of these securities set forth above were issued
pursuant to the "private placement" exemptions under the Securities Act of 1933,
as amended, as transactions by an issuer not involving any public offering. The
Registrant has been informed that each person is able to bear the economic risk
of his investment and is aware that the securities were not registered under the
Securities Act of 1933, as amended, and cannot be re-offered or re-sold until
they have been so registered or until the availability of an exemption
therefrom. The
II-3
<PAGE>
transfer agent and registrar of the Registrant will be instructed to mark "stop
transfer" on its ledgers to assure that these securities will not be transferred
absent registration or until the availability of an exemption therefrom is
determined.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
This following is a list of Exhibits marked by an asterisk (*) filed
herewith by e-Net, Inc. as part of Amendment No. 11 to the SB-2 Registration
Statement and related Prospectus:
<TABLE>
<C> <S>
1.0 Form of Underwriting Agreement.*
1.1 Selected Dealers Agreement.*
3.0 Certificate of Incorporation, filed January 9, 1995.
3.1 By-laws, as amended.
4.0 Specimen Copy of Common Stock Certificate.
4.1 Form of Class A Warrant Certificate.
4.2 Form of Class B Warrant Certificate.
4.3 Form of Underwriter's Purchase Option.*
4.4 Form of Warrant Agreement.*
5.0 Opinion of Thomas T. Prousalis, Jr., Esq. for Registrant.
10.0 Employment Agreement, Robert A. Veschi, dated April 1, 1996.
10.1 United States Patent, Notice of Allowance, dated January 23, 1996.
10.2 Assignment of Patent Rights, dated March 22, 1996.
10.3 Sprint Agreement, dated March 1, 1996.
11.0 Computation of Per Share Loss.
23.0 Consent of Thomas T. Prousalis, Jr., Esq. is contained on page II-7 of
the Registration Statement.
24.0 Consent of Grant Thornton LLP is contained on page II-8 of the
Registration Statement.
25.0 Power of Attorney appointing Robert A. Veschi is contained on page II-6
of the Registration Statement.
</TABLE>
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to participating
broker-dealers, at the closing, certificates in such denominations and
registered in such names as required by the participating broker-dealers, to
permit prompt delivery to each purchaser.
The undersigned Registrant also undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii)To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement:
(iii)
To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the registration statement is on Form S-3 or Form S-8, and
the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the
registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
registration statement.
II-4
<PAGE>
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
This Registration Statement consists of the following:
<TABLE>
<C> <S>
1. Facing page.
2. Cross-Reference Sheet.
3. Prospectus.
4. Complete text of Items 24-28 in Part Two of Registration Statement.
5. Exhibits.
6. Signature page.
7. Consents of:
Thomas T. Prousalis, Jr., Esq.
Grant Thornton LLP
</TABLE>
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Washington, District of Columbia, on July 31, 1996.
e-NET, INC.
By: ROBERT A. VESCHI
-------------------------------------------
Robert A. Veschi
President
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ------------------------------- ----------------
<C> <S> <C>
ALONZO E. SHORT, JR., LT. GEN., USA (RET.)*
------------------------------------------- Chairman of the Board July 31, 1996
Alonzo E. Short, Jr., Lt. Gen., USA (ret.)
President, Chief Executive
ROBERT A. VESCHI Officer, Chief Financial
------------------------------------------- Officer, Controller, July 31, 1996
Robert A. Veschi Secretary, Director
GEORGE PORTA*
------------------------------------------- Vice President, Operations July 31, 1996
George Porta
WILLIAM L. HOOTON*
------------------------------------------- Director July 31, 1996
William L. Hooton
EDWARD RATKOVICH, MAJ. GEN., USAF (RET.)
------------------------------------------- Director July 31, 1996
Edward Ratkovich, Maj. Gen., USAF (ret.)
CLIVE WHITTENBURY, PH.D.
------------------------------------------- Director July 31, 1996
Clive Whittenbury, Ph.D.
By: ROBERT A. VESCHI*
------------------------------------------
Robert A. Veschi
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
CONSENT OF COUNSEL
The consent of Thomas T. Prousalis, Jr., Esq., 1919 Pennsylvania Avenue,
N.W., Suite 800, Washington, D.C. 20006, to the use of his name in this Form
SB-2 Registration Statement, and related Prospectus, as amended, of e-Net, Inc.
is contained in his opinion filed as Exhibit 5.0 hereto.
II-7
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated April 12, 1996 accompanying the Financial
Statements of e-Net, Inc. contained in the Registration Statement and
Prospectus. We consent to the use of the aforementioned report in the
Registration Statement and Prospectus, and to the use of our name as it appears
under the caption "Experts."
GRANT THORNTON LLP
Washington, D.C.
July 31, 1996
II-8
<PAGE>
E-NET, INC.
INDEX TO EXHIBITS
The following is a list of Exhibits marked by an asterisk (*) filed herewith
by e-Net, Inc. as part of Amendment No. 11 to the SB-2 Registration Statement
and related Prospectus:
<TABLE>
<C> <S> <C>
1.0 Form of Underwriting Agreement.*
1.1 Selected Dealers Agreement.*
3.0 Certificate of Incorporation, filed January 9, 1995.
3.1 By-laws, as amended.
4.0 Specimen Copy of Common Stock Certificate.
4.1 Form of Class A Warrant Certificate.
4.2 Form of Class B Warrant Certificate.
4.3 Form of Underwriter's Purchase Option.*
4.4 Form of Warrant Agreement.*
5.0 Opinion of Thomas T. Prousalis, Jr., Esq. for Registrant.
10.0 Employment Agreement, Robert A. Veschi, dated April 1, 1996.
10.1 United States Patent, Notice of Allowance, dated January 23, 1996.
10.2 Assignment of Patent Rights, dated March 22, 1996.
10.3 Sprint Agreement, dated March 1, 1996.
11.0 Computation of Per Share Loss.
23.0 Consent of Thomas T. Prousalis, Jr., Esq. is contained on page II-7 of
the Registration Statement.
24.0 Consent of Grant Thornton LLP is contained on page II-8 of the
Registration Statement.
25.0 Power of Attorney appointing Robert A. Veschi is contained on page II-6
of the Registration Statement.
</TABLE>
<PAGE>
500,000 Units
(Each Unit consisting of two shares of Common Stock, par value $.01
per share and two Class A Redeemable Common Stock Purchase Warrants,
each to purchase one share of Common Stock.)
e-NET, INC.
UNDERWRITING AGREEMENT
New York, New York
August___, 1996
Stratton Oakmont, Inc.
1979 Marcus Avenue
Lake Success, New York 11042
e-NET, Inc., a Delaware corporation (the "Company"), proposes to issue and
sell to you (the "Underwriter") an aggregate of 500,000 Units, each Unit
consisting of two (2) shares of Common Stock, par value $.01 per share ("Common
Stock") and two (2) Class A Redeemable Common Stock Purchase Warrants ("Class A
Warrants"), each to purchase one share of Common Stock at $7.50 per share from
August ___ , 1997 until August ___ , 2001, subject to redemption, in certain
instances. In addition, the Company proposes to grant to the Underwriter the
option referred to in Section 2(b) to purchase all or any part of an aggregate
of 75,000 additional Units.
Unless the context otherwise requires, the aggregate of 500,000 Units to be
sold by the Company, together with all or any part of the 75,000 Units which the
Underwriter has the option to purchase, and the shares of Common Stock and the
Warrants comprising such Units, are herein called the "Units." The Common Stock
to be outstanding after giving effect to the sale of the Units are herein called
the "Shares." The Shares and Warrants included in the Units (including the
Units which the Underwriter
<PAGE>
has the option to purchase pursuant to paragraph 2(b)), are herein collectively
called the "Securities."
You have advised the Company that you desire to purchase the Units. The
Company confirms the agreements made by it with respect to the purchase of the
Units by the Underwriter as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to, and agrees with you that:
(a) A registration statement (File No. 333-3860) on Form SB-2
relating to the public offering of the Units, including a form of prospectus
subject to completion, copies of which have heretofore been delivered to you,
has been prepared in conformity with the requirements of the Securities Act of
1933, as amended (the "Act"), and the rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the "Commission")
thereunder, and has been filed with the Commission under the Act and one or more
amendments to such registration statement may have been so filed. After the
execution of this Agreement, the Company will file with the Commission either
(i) if such registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, a prospectus in the
form most recently included in an amendment to such registration statement (or,
if no such amendment shall have been filed, in such registration statement),
with such changes or insertions as are required by Rule 430A under the Act or
permitted by Rule 424(b) under the Act and as have been provided to and approved
by you prior to the execution of this Agreement, or (ii) if such registration
statement, as it may have been amended, has not been declared by the Commission
to be effective under the Act, an amendment to such registration statement,
including a form of prospectus, a copy of which amendment has been furnished to
and approved by you prior to the execution of this Agreement. As used in this
Agreement, the term "Registration Statement" means such registration statement,
as amended at the time when it was or is declared effective, including all
financial schedules and exhibits thereto and including any information omitted
therefrom pursuant to Rule 430A under the Act and included in the Prospectus (as
hereinafter defined); the term "Preliminary Prospectus" means each prospectus
subject to completion filed with such registration statement or any amendment
thereto (including the prospectus subject to completion, if any, included in the
Registration
2
<PAGE>
Statement or any amendment thereto at the time it was or is declared effective);
and the term "Prospectus" means the prospectus first filed with the Commission
pursuant to Rule 424(b) under the Act, or, if no prospectus is required to be
filed pursuant to said Rule 424(b), such term means the prospectus included in
the Registration Statement; except that if such registration statement or
prospectus is amended or such prospectus is supplemented, after the effective
date of such registration statement and prior to the Option Closing Date (as
hereinafter defined), the terms "Registration Statement" and "Prospectus" shall
include such registration statement and prospectus as so amended, and the term
"Prospectus" shall include the prospectus as so supplemented, or both, as the
case may be.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus. At the time the Registration Statement
becomes effective and at all times subsequent thereto up to and on the First
Closing Date (as hereinafter defined) or the Option Closing Date, as the case
may be, (i) the Registration Statement and Prospectus will in all respects
conform to the requirements of the Act and the Rules and Regulations; and
(ii) neither the Registration Statement nor the Prospectus will include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make statements therein not misleading;
provided, however, that the Company makes no representations, warranties or
agreements as to information contained in or omitted from the Registration
Statement or Prospectus in reliance upon, and in conformity with, written
information furnished to the Company by or on behalf of the Underwriter
specifically for use in the preparation thereof. It is understood that the
statements set forth in the Prospectus on page 2 with respect to stabilization,
the paragraph under the heading "Underwriting" relating to concessions to
certain dealers, the three legends on page 2 of the Prospectus, all descriptions
involving litigation of the Underwriter, the "Underwriting" Section of the
Prospectus and the identity of counsel to the Underwriter under the heading
"Legal Matters" constitute for purposes of this Section and Section 6(b) the
only information furnished in writing by or on behalf of the Underwriter for
inclusion in the Registration Statement and Prospectus, as the case may be.
3
<PAGE>
(c) The Company and each of its subsidiaries ("the Subsidiaries")
have been duly incorporated and are validly existing as corporations in good
standing under the laws of their respective jurisdictions of incorporation, with
full corporate power and authority to own its properties and conduct its
business as described in the Prospectus and is duly qualified or licensed to do
business as a foreign corporation and is in good standing in each other
jurisdiction in which the nature of its business or the character or location of
its properties requires such qualification, except where the failure to so
qualify will not materially adversely affect the Company's or Subsidiaries'
business, properties or financial condition.
(d) The authorized, issued and outstanding capital stock of the
Company, including the predecessors of the Company, as of March 31, 1996 is as
set forth in the Prospectus under "Capitalization"; the shares of issued and
outstanding capital stock of the Company set forth thereunder have been duly
authorized, validly issued and are fully paid and nonassessable; except as set
forth in the Prospectus, no options, warrants, or other rights to purchase,
agreements or other obligations to issue, or agreements or other rights to
convert any obligation into, any shares of capital stock of the Company have
been granted or entered into by the Company; and the capital stock conforms to
all statements relating thereto contained in the Registration Statement and
Prospectus.
(e) The Units and Shares are duly authorized, and when issued and
delivered pursuant to this Agreement, will be duly authorized, validly issued,
fully paid and nonassessable and free of preemptive rights of any security
holder of the Company. Neither the filing of the Registration Statement nor the
offering or sale of the Units as contemplated in this Agreement gives rise to
any rights, other than those which have been waived or satisfied, for or
relating to the registration of any shares of Common Stock, except as described
in the Registration Statement.
The Warrants have been duly authorized and, when issued and delivered
pursuant to this Agreement, will have been duly executed, issued and delivered
and will constitute valid and legally binding obligations of the Company
enforceable in accordance with their terms, except as enforceability may be
limited by bankruptcy, insolvency or other laws affecting the right
4
<PAGE>
of creditors generally or by general equitable principles, and entitled to the
benefits provided by the warrant agreement pursuant to which such Warrants are
to be issued (the "Warrant Agreement"), which will be substantially in the form
filed as an exhibit to the Registration Statement. The shares of Common Stock
issuable upon exercise of the Warrants have been reserved for issuance upon the
exercise of the Warrants and when issued in accordance with the terms of the
Warrants and Warrant Agreement, will be duly and validly authorized, validly
issued, fully paid and non-assessable, and free of preemptive rights and no
personal liability will attach to the ownership thereof. The Warrant Agreement
has been duly authorized and, when executed and delivered pursuant to this
Agreement, will have been duly executed and delivered and will constitute the
valid and legally binding obligation of the Company enforceable in accordance
with its terms, except as enforceability may be limited by bankruptcy,
insolvency or other laws affecting the rights of creditors generally or by
general equitable principles. The Warrants and Warrant Agreement conform to the
respective descriptions thereof in the Registration Statement and Prospectus.
The Shares, Warrants and Common Stock contained in the Purchase
Option (as defined as the Underwriters' Purchase Option in the Registration
Statement) have been duly authorized and, when duly issued and delivered, such
Warrants will constitute valid and legally binding obligations of the Company
enforceable in accordance with their terms and entitled to the benefits provided
by the Purchase Option, except as enforceability may be limited by bankruptcy,
insolvency or other laws affecting the rights of creditors generally or by
general equitable principles and the indemnification contained in paragraph 7 of
the Purchase Option may be unenforceable. The shares of Common Stock included
in the Purchase Option (and the shares of Common Stock issuable upon exercise of
the Warrants included therein) when issued and sold, will be duly authorized,
validly issued, fully paid and non-assessable and free of preemptive rights and
no personal liability will attach to the ownership thereof.
(f) This Agreement and the Purchase Option have been duly and validly
authorized, executed, and delivered by the Company. The Company has full power
and authority to authorize, issue, and sell the Units to be sold by it hereunder
on the terms and conditions set forth herein, and no consent, approval,
5
<PAGE>
authorization or other order of any governmental authority is required in
connection with such authorization, execution and delivery or in connection with
the authorization, issuance, and sale of the Units or the Purchase Option,
except such as may be required under the Act or state securities laws.
(g) Except as described in the Prospectus, or which would not have a
material adverse effect on the condition (financial or otherwise), business
prospects, net worth or properties of the Company and Subsidiaries taken as a
whole (a "Material Adverse Effect"), the Company and Subsidiaries are not in
material violation, breach, or default of or under, and consummation of the
transactions herein contemplated and the fulfillment of the terms of this
Agreement will not conflict with, or result in a material breach or violation
of, any of the terms or provisions of, or constitute a material default under,
or result in the creation or imposition of any material lien, charge, or
encumbrance upon any of the property or assets of the Company or the
Subsidiaries pursuant to the terms of any material indenture, mortgage, deed of
trust, loan agreement, or other material agreement or instrument to which the
Company or the Subsidiaries is a party or by which the Company or the
subsidiaries may be bound or to which any of the property or assets of the
Company or the Subsidiaries is subject, nor will such action result in any
violation of the provisions of the articles of incorporation or the by-laws of
the Company or the Subsidiaries, as amended, or any statute or any order, rule
or regulation applicable to the Company of any court or of any regulatory
authority or other governmental body having jurisdiction over the Company or the
Subsidiaries.
(h) Subject to the qualifications stated in the Prospectus, the
Company and Subsidiaries have good and marketable title to all properties and
assets described in the Prospectus as owned by it, free and clear of all liens,
charges, encumbrances or restrictions, except such as are not materially
significant or important in relation to their business; subject to the
qualifications stated in the Prospectus, all of the material leases and
subleases under which the Company or the Subsidiaries is the lessor or sublessor
of properties or assets or under which the Company or the Subsidiaries holds
properties or assets as lessee or sublessee as described in the Prospectus are
in full force and effect, and, except as described in the Prospectus, the
Company and Subsidiaries are not in default in any material respect with
6
<PAGE>
respect to any of the terms or provisions of any of such leases or subleases,
and, to the best knowledge of the Company, no claim has been asserted by
anyone adverse to rights of the Company or the Subsidiaries as lessor,
sublessor, lessee, or sublessee under any of the leases or subleases
mentioned above, or affecting or questioning the right of the Company or the
Subsidiaries to continued possession of the leased or subleased premises or
assets under any such lease or sublease except as described or referred to in
the Prospectus; and the Company and Subsidiaries own or lease all such
properties described in the Prospectus as are necessary to its operations as
now conducted and, except as otherwise stated in the Prospectus, as proposed
to be conducted as set forth in the Prospectus.
(i) Grant Thornton LLP, who have given its reports on certain
financial statements filed with the Commission as a part of the Registration
Statement, are with respect to the Company, independent public accountants as
required by the Act and the Rules and Regulations.
(j) The combined/consolidated financial statements, and schedules
together with related notes, set forth in the Prospectus or the Registration
Statement present fairly the financial position and results of operations and
changes in cash flow position of the Company and the Subsidiaries on the basis
stated in the Registration Statement, at the respective dates and for the
respective periods to which they apply. Said statements and schedules and
related notes have been prepared in accordance with generally accepted
accounting principles applied on a basis which is consistent during the periods
involved except as disclosed in the Prospectus and Registration Statement. The
information set forth under the caption "Selected Financial Data" in the
Prospectus fairly present, on the basis stated in the Prospectus, the
information included therein.
(k) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus and except as otherwise
disclosed or contemplated therein, the Company and the Subsidiaries have not
incurred any liabilities or obligations, direct or contingent, not in the
ordinary course of business, or entered into any transaction not in the ordinary
course of business, which would have a Material Adverse Effect, and there has
not been any change in the capital stock of, or any
7
<PAGE>
incurrence of short-term or long-term debt by, the Company or the Subsidiaries
or any issuance of options, warrants or other rights to purchase the capital
stock of the Company or the Subsidiaries or any Material Adverse Effect or any
development involving, so far as the Company or the Subsidiaries can now
reasonably foresee a prospective Material Adverse Effect.
(l) Except as set forth in the Prospectus, there is not now pending
or, to the knowledge of the Company, threatened, any action, suit or proceeding
to which the Company or the Subsidiaries is a party before or by any court or
governmental agency or body, which might result in any Material Adverse Effect,
nor are there any actions, suits or proceedings related to environmental matters
or related to discrimination on the basis of age, sex, religion or race; and no
labor disputes involving the employees of the Company or the Subsidiaries exist
or to the knowledge of the Company, are threatened which might be reasonably
expected to have a Material Adverse Effect.
(m) Except as disclosed in the Prospectus, the Company and the
Subsidiaries have filed all necessary federal, state, and foreign income and
franchise tax returns required to be filed as of the date hereof and have paid
all taxes shown as due thereon; and there is no tax deficiency which has been
asserted against the Company or the Subsidiaries.
(n) Except as disclosed in the Registration Statement, the Company
and each of the Subsidiaries has sufficient licenses, permits, and other
governmental authorizations currently necessary for the conduct of its business
or the ownership of its properties as described in the Prospectus and is in all
material respects complying therewith and owns or possesses adequate rights to
use all material patents, patent applications, trademarks, service marks,
trade-names, trademark registrations, service mark registrations, copyrights,
and licenses necessary for the conduct of such business and has not received any
notice of conflict with the asserted rights of others in respect thereof. To
the best knowledge of the Company, none of the activities or business of the
Company and the Subsidiaries are in violation of, or cause the Company or the
Subsidiaries to violate, any law, rule, regulation, or order of the United
States, any state, county, or locality, or of any agency or body of the United
States or of any state, county
8
<PAGE>
or locality, the violation of which would have a Material Adverse Effect.
(o) The Company and the Subsidiaries have not, directly or
indirectly, at any time (i) made any contributions to any candidate for
political office, or failed to disclose fully any such contribution in violation
of law or (ii) made any payment to any state, federal or foreign governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments or contributions required or allowed by applicable
law. The Company's internal accounting controls and procedures are sufficient
to cause the Company and the Subsidiaries to comply in all material respects
with the Foreign Corrupt Practices Act of 1977, as amended.
(p) On the Closing Dates (as hereinafter defined) all transfer or
other taxes, (including franchise, capital stock or other tax, other than income
taxes, imposed by any jurisdiction) if any, which are required to be paid in
connection with the sale and transfer of the Units to the Underwriter hereunder
will have been fully paid or provided for by the Company and all laws imposing
such taxes will have been complied with in all material respects.
(q) All contracts and other documents of the Company and the
Subsidiaries which are, under the Rules and Regulations, required to be filed as
exhibits to the Registration Statement have been so filed.
(r) Except as disclosed in the Registration Statement, the Company
has no other subsidiaries.
(s) Except as disclosed in the Registration Statement, the Company
and the Subsidiaries have not entered into any agreement pursuant to which any
person is entitled either directly or indirectly to compensation from the
Company or the Subsidiaries for services as a finder in connection with the
proposed public offering.
(t) Except as disclosed in the Prospectus, no officer, director, or
stockholder of the Company has any National Association of Securities
Dealers, Inc. (the "NASD") affiliation.
9
<PAGE>
(u) No other firm, corporation or person has any rights to underwrite
an offering of any of the Company's securities.
2. PURCHASE, DELIVERY AND SALE OF THE UNITS.
(a) Subject to the terms and conditions of this Agreement, and upon
the basis of the representations, warranties, and agreements herein contained,
the Company agrees to issue and sell to the Underwriter, and the Representative
agrees to buy from the Company at $12.60 per Unit, at the place and time
hereinafter specified, 500,000 Units (the "First Units").
Delivery of the First Units against payment therefor shall take
place at the offices of Bernstein & Wasserman, LLP, 950 Third Avenue, New York,
New York (or at such other place as may be designated by agreement between the
Underwriter and the Company) at 10:00 a.m., New York time, on August ___ , 1996,
or at such later time and date as the Underwriter may designate in writing to
the Company at least two business days prior to such purchase, but not later
than August ___ , 1996, such time and date of payment and delivery for the
First Units being herein called the "First Closing Date."
(b) In addition, subject to the terms and conditions of this
Agreement, and upon the basis of the representations, warranties and agreements
herein contained, the Company hereby grants an option to the Underwriter to
purchase all or any part of an aggregate of an additional 75,000 Units at the
same price per Unit as the Underwriter shall pay for the First Units being sold
pursuant to the provisions of subsection (a) of this Section 2 (such additional
Units being referred to herein as the "Option Units"). This option may be
exercised within 30 days after the effective date of the Registration Statement
upon written notice by the Underwriter to the Company advising as to the amount
of Option Units as to which the option is being exercised, the names and
denominations in which the certificates for such Option Units are to be
registered and the time and date when such certificates are to be delivered.
Such time and date shall be determined by the Underwriter but shall not be
earlier than four nor later than ten full business days after the exercise of
said option (but in no event more than 40 days after the First Closing Date),
nor in any event prior to the First Closing Date, and such time and date is
referred to herein as the "Option Closing Date." Delivery of the
10
<PAGE>
Option Units against payment therefor shall take place at the offices of
Bernstein & Wasserman, LLP, 950 Third Avenue, New York, New York (or at such
other place as may be designated by agreement between the Underwriter and the
Company). The Option granted hereunder may be exercised only to cover over-
allotments in the sale by the Underwriter of First Units referred to in
subsection (a) above. No Option Units shall be delivered unless all First Units
shall have been delivered to the Underwriter as provided herein.
(c) The Company will make the certificates for the securities
comprising the Units to be purchased by the Underwriter hereunder available to
the Underwriter for checking at least two full business days prior to the First
Closing Date or the Option Closing Date (which are collectively referred to
herein as the "Closing Dates"). The certificates shall be in such names and
denominations as the Underwriter may request, at least three full business days
prior to the Closing Dates. Delivery of the certificates at the time and place
specified in this Agreement is a further condition to the obligations of the
Underwriter.
Definitive certificates in negotiable form for the Units to be
purchased by the Underwriter hereunder will be delivered by the Company to the
Underwriter for the account of the Underwriter against payment of the respective
purchase prices by the Underwriter, by wire transfer in immediately available
funds, payable to the Company.
In addition, in the event the Underwriter exercises the option to
purchase from the Company all or any portion of the Option Units pursuant to the
provisions of subsection (b) above, payment for such Units shall be made to or
upon the order of the Company by certified or bank cashier's checks payable in
immediately available funds at the offices of Bernstein & Wasserman, LLP,
950 Third Avenue, New York, New York (or at such other place as may be
designated by agreement between the Underwriter and the Company), at the time
and date of delivery of such Units as required by the provisions of
subsection (b) above, against receipt of the certificates for such Units by the
Underwriter for the Underwriter's account registered in such names and in such
denominations as the Underwriter may reasonably request.
11
<PAGE>
It is understood that the Underwriter proposes to offer the Units to
be purchased hereunder to the public upon the terms and conditions set forth in
the Registration Statement, after the Registration Statement becomes effective.
3. COVENANTS OF THE COMPANY. The Company covenants and agrees with the
Underwriter that:
(a) The Company will use its best efforts to cause the Registration
Statement to become effective. If required, the Company will file the
Prospectus and any amendment or supplement thereto with the Commission in the
manner and within the time period required by Rule 424(b) under the Act. Upon
notification from the Commission that the Registration Statement has become
effective, the Company will so advise the Underwriter and will not at any time,
whether before or after the effective date, file any amendment to the
Registration Statement or supplement to the Prospectus of which the Underwriter
shall not previously have been advised and furnished with a copy or to which the
Underwriter or its counsel shall have reasonably objected in writing or which is
not in compliance with the Act and the Rules and Regulations. At any time prior
to the later of (A) the completion by the Underwriter of the distribution of the
Units contemplated hereby (but in no event more than nine months after the date
on which the Registration Statement shall have become or been declared
effective) and (B) 25 days after the date on which the Registration Statement
shall have become or been declared effective, the Company will prepare and file
with the Commission, promptly upon the Underwriter's request, any amendments or
supplements to the Registration Statement or Prospectus which, in the opinion of
counsel to the Company and the Underwriter, may be reasonably necessary or
advisable in connection with the distribution of the Units.
As soon as the Company is advised thereof, the Company will advise the
Underwriter, and provide the Underwriter copies of any written advice, of the
receipt of any comments of the Commission, of the effectiveness of any
post-effective amendment to the Registration Statement, of the filing of any
supplement to the Prospectus or any amended Prospectus, of any request made by
the Commission for an amendment of the Registration Statement or for
supplementing of the Prospectus or for additional information with respect
thereto, of the issuance by the Commission or any state or
12
<PAGE>
regulatory body of any stop order or other order or threat thereof suspending
the effectiveness of the Registration Statement or any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of the
qualification of the Units for offering in any jurisdiction, or of the
institution of any proceedings for any of such purposes, and will use its best
efforts to prevent the issuance of any such order, and, if issued, to obtain as
soon as possible the lifting thereof.
The Company has caused to be delivered to the Underwriter copies of
each Preliminary Prospectus, and the Company has consented and hereby consents
to the use of such copies for the purposes permitted by the Act. The Company
authorizes the Underwriter and dealers to use the Prospectus in connection with
the sale of the Units for such period as in the opinion of counsel to the
Underwriter and the Company the use thereof is required to comply with the
applicable provisions of the Act and the Rules and Regulations. In case of the
happening, at any time within such period as a Prospectus is required under the
Act to be delivered in connection with sales by the Underwriter or dealer of any
event of which the Company has knowledge and which has a Material Adverse Effect
on the Company or the securities of the Company, or which in the opinion of
counsel for the Company and counsel for the Underwriter should be set forth in
an amendment of the Registration Statement or a supplement to the Prospectus in
order to make the statements therein not then misleading, in light of the
circumstances existing at the time the Prospectus is required to be delivered to
a purchaser of the Units or in case it shall be necessary to amend or supplement
the Prospectus to comply with law or with the Rules and Regulations, the Company
will notify the Underwriter promptly and forthwith prepare and furnish to the
Underwriter copies of such amended Prospectus or of such supplement to be
attached to the Prospectus, in such quantities as the Underwriter may reasonably
request, in order that the Prospectus, as so amended or supplemented, will not
contain any untrue statement of a material fact or omit to state any material
facts necessary in order to make the statements in the Prospectus, in the light
of the circumstances under which they are made, not misleading. The preparation
and furnishing of any such amendment or supplement to the Registration Statement
or amended Prospectus or supplement to be attached to the Prospectus shall be
without expense to the Underwriter, except that in case the Underwriter is
required, in connection with the sale of the Units to deliver a
13
<PAGE>
Prospectus nine months or more after the effective date of the Registration
Statement, the Company will upon request of and at the expense of the
Underwriter, amend or supplement the Registration Statement and Prospectus and
furnish the Underwriter with reasonable quantities of prospectuses complying
with Section 10(a)(3) of the Act.
The Company will comply with the Act, the Rules and Regulations and
the Securities Exchange Act of 1934 (the "Exchange Act") and the rules and
regulations thereunder in connection with the offering and issuance of the
Units.
(b) The Company will furnish such information as may be required and
to otherwise cooperate and use its best efforts to qualify to register the Units
for sale under the securities or "blue sky" laws of such jurisdictions as the
Underwriter may designate and will make such applications and furnish such
information as may be required for that purpose and to comply with such laws,
provided the Company shall not be required to qualify as a foreign corporation
or a dealer in securities or to execute a general consent of service of process
in any jurisdiction in any action other than one arising out of the offering or
sale of the Units. The Company will, from time to time, prepare and file such
statements and reports as are or may be required to continue such qualification
in effect for so long a period as the counsel to the Company and the Underwriter
deem reasonably necessary.
(c) If the sale of the Units provided for herein is not consummated
as a result of the Company not performing its obligations hereunder in all
material respects, the Company shall pay all costs and expenses incurred by it
which are incident to the performance of the Company's obligations hereunder,
including but not limited to, all of the accountable out of pocket expenses of
the Underwriter up to $150,000.00 (including the reasonable fees and expenses of
counsel to the Underwriter).
(d) The Company will use its best efforts to (i) cause a registration
statement under the Securities Exchange Act of 1934 to be declared effective
concurrently with the completion of this offering and will notify you in writing
immediately upon the effectiveness of such registration statement, and (ii)
obtain and keep current a listing in the Standard & Poors or Moody's OTC
Industrial Manual.
14
<PAGE>
(e) For so long as the Company is a reporting company under either
Section 12(g) or 15(d) of the Securities Exchange Act of 1934, the Company, at
its expense, will furnish to its stockholders an annual report (including
financial statements audited by independent public accountants), in reasonable
detail and at its expense, will furnish to the Underwriter during the period
ending five (5) years from the date hereof, (i) as soon as practicable after the
end of each fiscal year, but no earlier than the filing of such information with
the Commission a balance sheet of the Company and any of its subsidiaries as at
the end of such fiscal year, together with statements of income, surplus and
cash flow of the Company and any subsidiaries for such fiscal year, all in
reasonable detail and accompanied by a copy of the certificate or report thereon
of independent accountants; (ii) as soon as practicable after the end of each of
the first three fiscal quarters of each fiscal year, but no earlier than the
filing of such information with the Commission, consolidated summary financial
information of the Company for such quarter in reasonable detail; (iii) as soon
as they are publicly available, a copy of all reports (financial or other)
mailed to security holders; (iv) as soon as they are available, a copy of all
non-confidential reports and financial statements furnished to or filed with the
Commission or any securities exchange or automated quotation system on which any
class of securities of the Company is listed; and (v) such other information as
you may from time to time reasonably request. Notwithstanding the above,
reports provided by the Company to the Commission shall be deemed satisfactory
for the foregoing purposes.
(f) So long as the Company has an active subsidiary or subsidiaries,
such financial statements referred to in subsection (e) above will be on a
consolidated basis to the extent the accounts of the Company and its subsidiary
or subsidiaries are consolidated in reports furnished to its stockholders
generally.
(g) The Company will deliver to the Underwriter at or before the
First Closing Date two signed copies of the Registration Statement including all
financial statements and exhibits filed therewith, and of all amendments
thereto, and will deliver to the Underwriter such number of conformed copies of
the Registration Statement, including such financial statements but without
exhibits, and of all amendments thereto, as the Underwriter may reasonably
request. The Company will deliver to or upon the Underwriter's order, from time
to time until the effective date of
15
<PAGE>
the Registration Statement, as many copies of any Preliminary Prospectus filed
with the Commission prior to the effective date of the Registration Statement as
the Underwriter may reasonably request. The Company will deliver to the
Underwriter on the effective date of the Registration Statement and thereafter
for so long as a Prospectus is required to be delivered under the Act, from time
to time, as many copies of the Prospectus, in final form, or as thereafter
amended or supplemented, as the Underwriter may from time to time reasonably
request.
(h) The Company will make generally available to its security holders
and to the registered holders of its Warrants and deliver to the Underwriter as
soon as it is practicable to do so but in no event later than 90 days after the
end of twelve months after its current fiscal quarter, an earnings statement
(which need not be audited) covering a period of at least twelve consecutive
months beginning after the effective date of the Registration Statement, which
shall satisfy the requirements of Section 11(a) of the Act.
(i) The Company will apply the net proceeds from the sale of the
Units substantially for the purposes set forth under "Use of Proceeds" in the
Prospectus, and will file such reports with the Commission with respect to the
sale of the Units and the application of the proceeds therefrom as may be
required pursuant to Rule 463 under the Act.
(j) The Company will promptly prepare and file with the Commission
any amendments or supplements to the Registration Statement, Preliminary
Prospectus or Prospectus and take any other action, which in the opinion of
counsel to the Underwriter and counsel to the Company, may be reasonably
necessary or advisable in connection with the distribution of the Units, and
will use its best efforts to cause the same to become effective as promptly as
possible.
(k) The Company will reserve and keep available that maximum number
of its authorized but unissued securities which are issuable upon exercise of
the Purchase Option outstanding from time to time.
(l) (1) For a period of thirty- six (36) months from the First
Closing Date, no shareholder prior to the offering will,
16
<PAGE>
directly or indirectly, offer, sell (including any short sale), grant any option
for the sale of, acquire any option to dispose of, or otherwise dispose of any
shares of Common Stock. In order to enforce this covenant, the Company shall
impose stop-transfer instructions with respect to the shares owned by every
shareholder prior to the offering until the end of such period (subject to any
exceptions to such limitation on transferability set forth in the Registration
Statement). If necessary to comply with any applicable Blue-sky Law, the shares
held by such shareholders will be escrowed with counsel for the Company or
otherwise as required.
(2) except for the issuance of shares of capital stock by the Company
in connection with a dividend, recapitalization, reorganization or similar
transactions or as result of the exercise of warrants or options disclosed in or
issued or granted pursuant to plans disclosed in the Registration Statement, the
Company shall not, for a period of twenty four (24) months following the First
Closing Date, directly or indirectly, offer, sell, issue or transfer any shares
of its capital stock, or any security exchangeable or exercisable for, or
convertible into, shares of the capital stock, without the prior written consent
of the Underwriter.
(m) Upon completion of this offering, the Company will make all
filings required, including registration under the Securities Exchange Act of
1934, to obtain the listing of the Units, Common Stock, and Warrants in the
NASDAQ system, and will use its best efforts to effect and maintain such listing
or a listing on a national securities exchange for at least five years from the
date of this Agreement to the extent that the Company has at least 300 record
holders of Common Stock.
(n) Except for the transactions contemplated by this Agreement or as
otherwise permitted by law, the Company represents that it has not taken and
agrees that it will not take, directly or indirectly, any action designed to or
which has constituted or which might reasonably be expected to cause or result
in the stabilization or manipulation of the price of the Units, Shares, the
Warrants or to facilitate the sale or resale of the Securities.
(o) On the First Closing Date and simultaneously with the delivery of
the Units, the Company shall execute and deliver to
17
<PAGE>
you the Purchase Option. The Purchase Option will be substantially in the form
filed as an Exhibit to the Registration Statement.
(p) Intentionally Omitted
(q) Upon the Closing Dates, the Company will have in force key person
life insurance on the life of Mr. Veschi in an amount of not less than
$1,000,000.00, payable to the Company, and will use its best efforts to maintain
such insurance for a three year period.
(r) So long as any Warrants are outstanding and the exercise price of
the Warrants is less than the market price of the Common Stock, the Company
shall use its best efforts to cause post-effective amendments to the
Registration Statement to become effective in compliance with the Act and
without any lapse of time between the effectiveness of any such post-effective
amendments and cause a copy of each Prospectus, as then amended, to be delivered
to each holder of record of a Warrant and to furnish to the Underwriter and each
dealer as many copies of each such Prospectus as such Underwriter or dealer may
reasonably request. The Company shall not call for redemption any of the
Warrants unless a registration statement covering the securities underlying the
Warrants has been declared effective by the Commission and remains current at
least until the date fixed for redemption.
(s) For a period of five (5) years from the Effective Date, the
Company, at its expense, shall cause its regularly engaged independent certified
public accountants to review (but not audit) the Company's financial statements
for each of the first three (3) fiscal quarters prior to the announcement of
quarterly financial information, the filing of the Company's 10-Q quarterly
report and the mailing of quarterly financial information to stockholders,
provided that the Company shall not be required to file a report of such
accountants relating to such review with the Commission.
(t) For the three (3) year period commencing on the First Closing
Date, the Underwriter shall have the right to appoint an advisor who will be
able to attend all meetings of the Board of Directors. However, if the Board of
Directors determines that confidential information is to be discussed during any
part of any meeting attended by such advisor, it shall have the right to
18
<PAGE>
exclude the advisor from the meeting during such discussion. The Underwriter
shall also have the right to obtain copies of the minutes, if requested, from
all Board of Directors meetings for three (3) years following the Effective Date
of the Registration Statement, whether or not a nominee of the Underwriter
attends or participates in any such Board meeting. The Company agrees to
reimburse the Underwriter immediately upon the Underwriter's request therefor of
any reasonable travel and lodging expenses directly incurred by the Underwriter
in connection with its representative attending Company Board meetings on the
same basis for other Board members.
(u) The Company agrees to pay to the Underwriter a finder's fee of
5.0% of the first $3,000,000.00, 4.0% of the next $3,000,000.00, 3.0% of the
next $2,000,000.00, 2% of next $2,000,000.00 and 1% of the excess, if any, over
$10,000,000.00, of the aggregate consideration received by the Company with
respect to any transaction (including, but not limited to, mergers,
acquisitions, joint ventures, and any other capital business transaction for the
Company) introduced to the Company by the Underwriter and consummated by the
Company (an "Introduced Consummated Transaction") during the five (5) year
period commencing on the First Closing Date. The entire amount of any such
finder's fee due and payable to the Underwriter shall be paid in full by
certified funds or cashier's check payable to the order of the Underwriter or in
cash, in each case in the discretion of the Company, at the first closing of the
Introduced Consummated Transaction for which the finder's fee is due. For the
purposes hereof, a party shall not be deemed to be introduced by the Underwriter
unless and until (a) a written disclosure of the identity of such prospective
party shall have been given by the Underwriter and received by the Company
during the period; (b) such party was not previously known to the Company; and
(c) such party shall have commenced substantive negotiations with the Company
relating to a Introduced Consummated Transaction during such five (5) year
period.
(v) The Company agrees to pay the Underwriter a warrant solicitation
fee of 4.0% of the exercise price of any of the Warrants exercised beginning one
(1) year after the Effective Date (not including warrants exercised by the
Underwriter) if (a) the market price of the Company's Common Stock on the date
the Warrant is exercised is greater than the exercise price of the Warrant, (b)
19
<PAGE>
the exercise of the Warrant was solicited by the Underwriter and the Underwriter
was designated by the holder of the Warrant in writing as having solicited the
exercise of the Warrant, (c) the Warrant is not held in a discretionary account,
(d) disclosure of the compensation arrangement is made upon the sale and
exercise of the Warrants, (e) soliciting the exercise is not in violation of
Rule 10b-6 under the Securities Exchange Act of 1934, and (f) solicitation of
the exercise is in compliance with the NASD Notice to Members 81-38 (September
22, 1981).
4. CONDITIONS OF UNDERWRITER'S OBLIGATION. The obligations of the
Underwriter to purchase and pay for the Units which it has agreed to purchase
hereunder, are subject to the accuracy (as of the date hereof, and as of the
Closing Dates) of and compliance with the representations and warranties of the
Company herein, to the performance by the Company of its obligations hereunder,
and to the following conditions:
(a) The Registration Statement shall have become effective and you
shall have received notice thereof not later than 10:00 a.m., New York time, on
the day following the date of this Agreement, or at such later time or on such
later date as to which the Underwriter may agree in writing; on or prior to the
Closing Dates no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that or a similar
purpose shall have been instituted or shall be pending or, to the Underwriter's
knowledge or to the knowledge of the Company, shall be contemplated by the
Commission; any request on the part of the Commission for additional information
shall have been complied with to the satisfaction of the Commission; and no stop
order shall be in effect denying or suspending effectiveness of such
qualification nor shall any stop order proceedings with respect thereto be
instituted or pending or threatened. If required, the Prospectus shall have
been filed with the Commission in the manner and within the time period required
by Rule 424(b) under the Act.
(b)(1) At the First Closing Date, you shall have received the
opinion, dated as of the First Closing Date, of the Law Offices of Thomas T.
Prousalis, Jr., Esq., counsel for the Company, in form and substance
satisfactory to counsel for the Underwriter, to the effect that:
20
<PAGE>
(i) the Company and each of its Subsidiaries have been duly
incorporated and are validly existing as corporations in good standing under the
laws of their respective jurisdictions of incorporation, with all requisite
corporate power and authority to own its properties and conduct its business as
described in the Registration Statement and Prospectus and is duly qualified or
licensed to do business as a foreign corporation and is in good standing in each
other jurisdiction in which the ownership or leasing of its properties or
conduct of its business requires such qualification except where the failure to
qualify or be licensed will not have a Material Adverse Effect;
(ii) the authorized capitalization of the Company as of March 31,
1996 is as set forth under "Capitalization" in the Prospectus; all shares of the
Company's outstanding Common Stock requiring authorization for issuance by
directors have been duly authorized and upon payment of consideration therefor,
will be validly issued, fully paid and non-assessable and conform in all
material respects to the description thereof contained in the Prospectus; to
such counsel's knowledge the outstanding shares of Common Stock of the Company
have not been issued in violation of the preemptive rights of any shareholder
and the shareholders of the Company do not have any preemptive rights or other
rights to subscribe for or to purchase, nor are there any restrictions upon the
voting or transfer of any of the Common Stock except as provided in the
Prospectus; the Common Stock, the Warrants, the Purchase Option, and the Warrant
Agreement conform in all material respects to the respective descriptions
thereof contained in the Prospectus; the Shares have been, and the shares of
Common Stock to be issued upon exercise of the Warrants and the Purchase Option,
upon issuance in accordance with the terms of such Warrants, the Warrant
Agreement and Purchase Option will have been duly authorized and, when issued
and delivered in accordance with their respective terms, will be duly and
validly issued, fully paid, non-assessable, free of preemptive rights and no
personal liability will attach to the ownership thereof; all prior sales by the
Company of the Company's securities have been made in compliance with or under
an exemption from registration under the Act and applicable state securities
laws; a sufficient number of shares of Common Stock has been reserved for
issuance upon exercise of the Warrants and Purchase Option and to the best of
such counsel's knowledge, neither the filing of the Registration Statement nor
the offering or sale of the Units as contemplated by this Agreement
21
<PAGE>
gives rise to any registration rights other than those which have been waived or
satisfied for or relating to the registration of any shares of Common Stock or
as otherwise being exercised in connection with the concurrent offering;
(iii) this Agreement, the Purchase Option, and the Warrant
Agreement have been duly and validly authorized, executed, and delivered by the
Company;
(iv) the certificates evidencing the shares of Common Stock
comply with the Delaware General Corporation Law; the Warrants will be
exercisable for shares of Common Stock in accordance with the terms of the
Warrants and Warrant Agreement and at the prices therein provided for;
(v) except as otherwise disclosed in the Registration Statement,
such counsel knows of no pending or threatened legal or governmental proceedings
to which the Company or any Subsidiary is a party which would materially
adversely affect the business, property, financial condition, or operations of
the Company or any Subsidiary; or which question the validity of the Securities,
this Agreement, the Warrant Agreement, or the Purchase Option, or of any action
taken or to be taken by the Company pursuant to this Agreement, the Warrant
Agreement, or the Purchase Option; to such counsel's knowledge there are no
governmental proceedings or regulations required to be described or referred to
in the Registration Statement which are not so described or referred to;
(vi) the execution and delivery of this Agreement, the Purchase
Option, or the Warrant Agreement and the incurrence of the obligations herein
and therein set forth and the consummation of the transactions herein or therein
contemplated, will not result in a breach or violation of, or constitute a
default under the certificate or articles of incorporation or by-laws of the
Company or any Subsidiary, or to the best knowledge of counsel after due
inquiry, in the performance or observance of any material obligations,
agreement, covenant, or condition contained in any bond, debenture, note, or
other evidence of indebtedness or in any material contract, indenture, mortgage,
loan agreement, lease, joint venture, or other agreement or instrument to which
the Company or any Subsidiary is a party or by which it or any of its properties
is bound or in violation of any order, rule, regulation,
22
<PAGE>
writ, injunction, or decree of any government, governmental instrumentality, or
court, domestic or foreign, the result of which would have a Material Adverse
Effect;
(vii) the Registration Statement has become effective under the
Act, and to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement is in effect, and no proceedings for
that purpose have been instituted or are pending before, or threatened by, the
Commission; the Registration Statement and the Prospectus (except for the
financial statements and other financial data contained therein, or omitted
therefrom, as to which such counsel need express no opinion) as of the Effective
Date comply as to form in all material respects with the applicable requirements
of the Act and the Rules and Regulations;
(viii) in the course of preparation of the Registration Statement
and the Prospectus such counsel has participated in conferences with the
President and Chief Executive Officer of the Company with respect to the
Registration Statement and Prospectus and such discussions did not disclose to
such counsel any information which gives such counsel reason to believe that the
Registration Statement or any amendment thereto at the time it became effective
contained any untrue statement of a material fact required to be stated therein
or omitted to state any material fact required to be stated therein or necessary
to make the statements therein not misleading or that the Prospectus or any
supplement thereto contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make statements therein, in light of
the circumstances under which they were made, not misleading (except, in the
case of both the Registration Statement and any amendment thereto and the
Prospectus and any supplement thereto, for the financial statements, notes
thereto, and other financial information (including without limitation, the pro
forma financial information) and schedules contained therein, as to which such
counsel need express no opinion);
(ix) all descriptions in the Registration Statement and the
Prospectus, and any amendment or supplement thereto, of contracts and other
agreements to which the Company or any Subsidiary is a party are accurate and
fairly present in all material respects the information required to be shown,
and such
23
<PAGE>
counsel is familiar with all contracts and other agreements referred to in the
Registration Statement and the Prospectus and any such amendment or supplement
or filed as exhibits to the Registration Statement, and such counsel does not
know of any contracts or agreements to which the Company or any Subsidiary is a
party of a character required to be summarized or described therein or to be
filed as exhibits thereto which are not so summarized, described, or filed;
(x) no authorization, approval, consent, or license of any
governmental or regulatory authority or agency is necessary in connection with
the authorization, issuance, transfer, sale, or delivery of the Units by the
Company, in connection with the execution, delivery, and performance of this
Agreement by the Company or in connection with the taking of any action
contemplated herein, or the issuance of the Purchase Option or the Securities
underlying the Purchase Option, other than registrations or qualifications of
the Units under applicable state or foreign securities or Blue Sky laws and
registration under the Act; and
(xi) the Units, Common Stock and Warrants have been duly
authorized for quotation on the NASD OTC Bulletin Board.
Such opinion shall also cover such matters incident to the
transactions contemplated hereby as the Underwriter or counsel for the
Underwriter shall reasonably request. In rendering such opinion, such counsel
may rely upon certificates of any officer of the Company or public officials as
to matters of fact; and may rely as to all matters of law other than the laws of
the United States or of the States of Delaware and New York upon opinions of
counsel satisfactory to the Underwriter, in which case the opinion shall state
that they have no reason to believe that the Underwriter and they are not
entitled to so rely.
(2) At the First Closing Date, you shall have received the Opinion of Hitt,
Chwang & Gaines, P.C., special patent and trademark counsel, in form and
substance satisfactory to you, describing any patent searches conducted with
respect to the Company's patents/patent applications including those licensed to
the Company and providing that the description in the Registration Statement
with respect to the status of such patents/patent applications and trademarks is
accurate, that the Company and each of the Subsidiaries owns or possesses
adequate rights to use all
24
<PAGE>
material patents, patent applications, trademarks, service marks, trade-names,
trademark registrations, service mark registration, copyrights and licenses
necessary for the conduct of such business and as described in the Prospectus
and has not received any notice of conflict with the asserted rights of others
in respect thereof and that the statements in the Prospectus under the captions
"Prospectus Summary - The Company", Risk Factors - Uncertain Protection of
Patent, Trademark, Copyright and Proprietary Rights", Business-Overview", and
"Business - Patent, Trademark, Copyright and Proprietary Rights" are accurate.
(b) All corporate proceedings and other legal matters relating to
this Agreement, the Registration Statement, the Prospectus and other related
matters shall be satisfactory to or approved by Bernstein & Wasserman, LLP,
counsel to the Underwriter.
(c) The Underwriter shall have received a letter prior to the
effective date of the Registration Statement and again on and as of the First
Closing Date from Grant Thornton LLP, independent public accountants for the
Company, substantially in the form reasonably acceptable to the Underwriter.
(d) At the Closing Dates, (i) the representations and warranties of
the Company contained in this Agreement shall be true and correct in all
material respects with the same effect as if made on and as of the Closing Dates
taking into account for the Option Closing Dates the effect of the transactions
contemplated hereby and the Company shall have performed all of its obligations
hereunder and satisfied all the conditions on its part to be satisfied at or
prior to such Closing Date; (ii) the Registration Statement and the Prospectus
and any amendments or supplements thereto shall contain all statements which are
required to be stated therein in accordance with the Act and the Rules and
Regulations, and shall in all material respects conform to the requirements
thereof, and neither the Registration Statement nor the Prospectus nor any
amendment or supplement thereto shall contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading; (iii) there shall have
been, since the respective dates as of which information is given, no Material
Adverse Effect, or to the Company's knowledge, any development involving a
prospective Material Adverse Effect from that set forth in the Registration
Statement and the Prospectus,
25
<PAGE>
except changes which the Registration Statement and Prospectus indicate might
occur after the effective date of the Registration Statement, and the Company
and the Subsidiaries shall not have incurred any material liabilities or entered
into any material agreement not in the ordinary course of business other than as
referred to in the Registration Statement and Prospectus; (iv) except as set
forth in the Prospectus, no action, suit, or proceeding at law or in equity
shall be pending or threatened against the Company or any Subsidiaries which
would be required to be set forth in the Registration Statement, and no
proceedings shall be pending or threatened against the Company or any Subsidiary
before or by any commission, board, or administrative agency in the United
States or elsewhere, wherein an unfavorable decision, ruling, or finding would
have a Material Adverse Effect, (v) the Underwriter shall have received, at the
First Closing Date, a certificate signed by the President and the Chief
Executive Officer of the Company, dated as of the First Closing Date, evidencing
compliance with the provisions of this subsection (e) and (vi) the Underwriter
shall have received, at the First Closing Date, such opinions, certificates,
letters and other documents as it reasonably requests.
(e) Upon exercise of the option provided for in Section 2(b) hereof,
the obligations of the Underwriter to purchase and pay for the Option Units
referred to therein will be subject (as of the date hereof and as of the Option
Closing Date) to the following additional conditions:
(i) The Registration Statement shall remain effective at the
Option Closing Date, and no stop order suspending the effectiveness thereof
shall have been issued and no proceedings for that purpose shall have been
instituted or shall be pending, or, to the Underwriter's knowledge or the
knowledge of the Company, shall be contemplated by the Commission, and any
reasonable request on the part of the Commission for additional information
shall have been complied with to the satisfaction of the Commission.
(ii) At the Option Closing Date there shall have been delivered
to the Representative the signed opinions of Thomas T. Prousalis, Jr., Esq. and
Hitt, Chwang & Gaines, P.C., counsel and special patent counsel to the Company,
respectively, dated as of the Option Closing Date, in form and substance
reasonably satisfactory to Bernstein & Wasserman, LLP, counsel to the
26
<PAGE>
Underwriter, which opinion shall be substantially the same in scope and
substance as the opinion furnished to you at the First Closing Date pursuant to
Sections 4(b) hereof, except that such opinion, where appropriate, shall cover
the Option Units.
(iii) At the Option Closing Date there shall have be delivered to
the Underwriter a certificate of the President and the Chief Executive Officer
of the Company and such other opinions, certificates, letters and other
documents as it reasonably requests, dated the Option Closing Date, in form and
substance reasonably satisfactory to Bernstein & Wasserman, LLP, counsel to the
Underwriter, substantially the same in scope and substance as the certificate or
certificates furnished to you at the First Closing Date pursuant to Section 4(e)
hereof.
(iv) At the Option Closing Date there shall have been delivered
to the Representative a letter in form and substance satisfactory to the
Representative from Grant Thornton LLP, dated the Option Closing Date and
addressed to the Representative confirming the information in their letter
referred to in Section 4(d) hereof and stating that nothing has come to their
attention during the period from the ending date of their review referred to in
said letter to a date not more than five business days prior to the Option
Closing Date, which would require any change in said letter if it were required
to be dated the Option Closing Date.
(f) All proceedings taken at or prior to the Option Closing Date in
connection with the sale and issuance of the Option Units shall be reasonably
satisfactory in form and substance to you, and you and Bernstein & Wasserman,
LLP, counsel to the Underwriter, shall have been furnished with all such
documents, certificates, and opinions as you may reasonably request in
connection with this transaction in order to evidence the accuracy and
completeness of any of the representations, warranties, or statements of the
Company or its compliance with any of the covenants or conditions contained
herein.
(g) No action shall have been taken by the Commission or the NASD the
effect of which would make it improper, at any time prior to either of the
Closing Dates, for members of the NASD to execute transactions (as principal or
agent) in the Units, Common
27
<PAGE>
Stock or the Warrants and no proceedings for the taking of such action shall
have been instituted or shall be pending, or, to the knowledge of the
Underwriter or the Company, shall be contemplated by the Commission or the NASD.
The Company represents that at the date hereof it has no knowledge that any such
action is in fact contemplated by the Commission or the NASD.
(h) If any of the conditions herein provided for in this Section
shall not have been fulfilled in all material respects as of the date indicated,
this Agreement and all obligations of the Underwriter under this Agreement may
be cancelled at, or at any time prior to, either of the Closing Dates by the
Underwriter notifying the Company of such cancellation in writing or by telegram
at or prior to the applicable Closing Date. Any such cancellation shall be
without liability of the Underwriter to the Company.
5. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY. The obligation of the
Company to sell and deliver the Units is subject to the following conditions:
(a) The Registration Statement shall have become effective not later
than 10:00 a.m. New York time, on the day following the date of this Agreement,
or on such later date as the Company and the Representative may agree in
writing.
(b) At the Closing Dates, no stop orders suspending the effectiveness
of the Registration Statement shall have been issued under the Act or any
proceedings therefor initiated or threatened by the Commission.
If the conditions to the obligations of the Company provided for
in this Section have been fulfilled on the First Closing Date but are not
fulfilled after the First Closing Date and prior to the Option Closing Date,
then only the obligation of the Company to sell and deliver the Units on
exercise of the option provided for in Section 2(b) hereof shall be affected.
28
<PAGE>
6. INDEMNIFICATION.
(a) The Company agrees (i) to indemnify and hold harmless the
Underwriter and each person, if any, who controls the Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act against
any losses, claims, damages, or liabilities, joint or several (which shall, for
all purposes of this Agreement, include, but not be limited to, all reasonable
costs of defense and investigation and all reasonable attorneys' fees), to which
such Underwriter or such controlling person may become subject, under the Act or
otherwise, and (ii) to reimburse, as incurred, the Underwriter and such
controlling persons for any legal or other expenses reasonably incurred in
connection with investigating, defending against or appearing as a third party
witness in connection with any losses, claims, damages, or liabilities; insofar
as such losses, claims, damages, or liabilities (or actions in respect thereof)
relating to (i) and (ii) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in (A) the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, (B) any blue sky application or other document executed by
the Company specifically for that purpose containing written information
specifically furnished by the Company and filed in any state or other
jurisdiction in order to qualify any or all of the Units under the securities
laws thereof (any such application, document or information being hereinafter
called a "Blue Sky Application"), or arise out of or are based upon the omission
or alleged omission to state in the Registration Statement, any Preliminary
Prospectus, Prospectus, or any amendment or supplement thereto, or in any Blue
Sky Application, a material fact required to be stated therein or necessary to
make the statements therein not misleading; provided, however, that the Company
will not be required to indemnify the Underwriter and any controlling person or
be liable in any such case to the extent, but only to the extent, that any such
loss, claim, damage, or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of the Underwriter specifically for use in the
preparation of the Registration Statement or any such amendment or supplement
thereof or any such Blue Sky Application or any such preliminary Prospectus or
the Prospectus or any such amendment or supplement thereto,
29
<PAGE>
provided, further that the indemnity with respect to any Preliminary Prospectus
shall not be applicable on account of any losses, claims, damages, liabilities,
or litigation arising from the sale of Units to any person if a copy of the
Prospectus was not delivered to such person at or prior to the written
confirmation of the sale to such person. This indemnity will be in addition to
any liability which the Company may otherwise have.
(b) The Underwriter will indemnify and hold harmless the Company,
each of its directors, each nominee (if any) for director named in the
Prospectus, each of its officers who have signed the Registration Statement and
each person, if any, who controls the Company within the meaning of the Act,
against any losses, claims, damages, or liabilities (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of defense
and investigation and reasonable attorneys' fees) to which the Company or any
such director, nominee, officer, or controlling person may become subject under
the Act or otherwise, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or any Blue Sky Application in reliance upon and in
conformity with written information furnished to the Company by the Underwriter
specifically for use in the preparation thereof and for any violation by the
Underwriter in the sale of such Units of any applicable state or federal law or
any rule, regulation or instruction thereunder relating to violations based on
unauthorized statements by Underwriter or its representative, provided that such
violation is not based upon any violation of such law, rule, or regulation or
instruction by the party claiming indemnification or inaccurate or misleading
information furnished by the Company or its representatives, including
information furnished to the Underwriter as contemplated herein. This indemnity
agreement will be in addition to any liability which the Underwriter may
otherwise have.
30
<PAGE>
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section, notify in writing the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
this Section. In case any such action is brought against any indemnified party,
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, subject to the provisions herein stated, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. The indemnified party
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall not be at the expense of the indemnifying party if the indemnifying party
has assumed the defense of the action with counsel reasonably satisfactory to
the indemnified party; provided that the reasonable fees and expenses of such
counsel shall be at the expense of the indemnifying party if (i) the employment
of such counsel has been specifically authorized in writing by the indemnifying
party or (ii) the named parties to any such action (including any impleaded
parties) include both the indemnified party and the indemnifying party and in
the reasonable judgment of the counsel to the indemnified party, it is advisable
for the indemnified party to be represented by separate counsel (in which case
the indemnifying party shall not have the right to assume the defense of such
action on behalf of such indemnified party, it being understood, however, that
the indemnifying party shall not, in connection with any one such action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys for the
indemnified party, which firm shall be designated in writing by the indemnified
party). No
31
<PAGE>
settlement of any action against an indemnified party shall be made without the
consent of the indemnified party, which shall not be unreasonably withheld in
light of all factors of importance to such indemnified party. If it is
ultimately determined that indemnification is not permitted, then an indemnified
party will return all monies advanced to the indemnifying party.
7. CONTRIBUTION. In order to provide for just and equitable contribution
under the Act in any case in which the indemnification provided in Section 6
hereof is requested but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case, notwithstanding the fact that
the express provisions of Section 6 provide for indemnification in such case,
then the Company and the Underwriter shall contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (which shall, for
all purposes of this Agreement, include, but not be limited to, all reasonable
costs of defense and investigation and all reasonable attorneys' fees) (after
contribution from others) in such proportions that the Underwriter is
responsible in the aggregate for that portion of such losses, claims, damages,
or liabilities represented by the percentage that the underwriting discount per
Unit appearing on the cover page of the Prospectus bears to the public offering
price appearing thereon and the Company shall be responsible for the remaining
portion, provided, however, that if such allocation is not permitted by
applicable law, then allocated in such proportion as is appropriate to reflect
relative benefits but also the relative fault of the Company and the
Underwriter, in the aggregate, in connection with the statements or omissions
which resulted in such damages and other relevant equitable considerations shall
also be considered. The relative fault shall be determined by reference to,
among other things, whether in the case of an untrue statement of a material
fact or the omission to state a material fact, such statement or omission
relates to information supplied by the Company or the Underwriter and the
parties' relative intent, knowledge, access to information, and opportunity to
correct or prevent such untrue statement or omission. The Company and the
Underwriter agree that it would not be just and equitable if the respective
obligations of the Company and the Underwriter to contribute pursuant to this
Section 7 were to be determined by pro rata or per capita allocation of the
aggregate damages or by any other method of
32
<PAGE>
allocation that does not take account of the equitable considerations referred
to in this Section 7. No person guilty of a fraudulent misrepresentation
(within the meaning of Section 1(f) of the Act) shall be entitled to
contribution from any person who is not guilty of such fraudulent
misrepresentation. If the full amount of the contribution specified in this
paragraph is not permitted by law, then the Underwriter and each person who
controls the Underwriter shall be entitled to contribution from the Company and
the Company, its officers, directors, and controlling persons shall be entitled
to contribution from the Underwriter to the full extent permitted by law. The
foregoing contribution agreement shall in no way affect the contribution
liabilities of any persons having liability under Section 11 of the Act other
than the Company and the Underwriter. No contribution shall be requested with
regard to the settlement of any matter from any party who did not consent to the
settlement; provided, however, that such consent shall not be unreasonably
withheld in light of all factors of importance to such party.
8. COSTS AND EXPENSES.
(a) Whether or not this Agreement becomes effective or the sale of
the Units to the Underwriter is consummated, the Company will pay all costs and
expenses incident to the performance of this Agreement by the Company including,
but not limited to, the fees and expenses of counsel to the Company and of the
Company's accountants; the costs and expenses incident to the preparation,
printing, filing, and distribution under the Act of the Registration Statement
(including the financial statements therein and all amendments and exhibits
thereto), Preliminary Prospectus, and the Prospectus, as amended or
supplemented, the fee of the NASD in connection with the filing required by the
NASD relating to the offering of the Units contemplated hereby; all expenses,
including fees (which does not include blue sky filing fees) and disbursements
of counsel to the Underwriter, in connection with the qualification of the Units
under the state securities or blue sky laws which the Underwriter shall
designate; the cost of printing and furnishing to the Underwriter copies of the
Registration Statement, each Preliminary Prospectus, the Prospectus, this
Agreement, and the Blue Sky Memorandum, any fees relating to the listing of the
Units, Common Stock, and Warrants on NASDAQ or any other securities exchange;
the cost of printing the certificates representing the securities comprising the
Units; fees for bound
33
<PAGE>
volumes and prospectus memorabilia; and the fees of the transfer agent and
warrant agent. The Company shall pay any and all taxes (including any transfer,
franchise, capital stock, or other tax imposed by any jurisdiction) on sales to
the Underwriter hereunder. The Company will also pay all costs and expenses
incident to the furnishing of any amended Prospectus or of any supplement to be
attached to the Prospectus as called for in Section 3(a) of this Agreement
except as otherwise set forth in said Section.
(b) In addition to the foregoing expenses the Company shall at the
First Closing Date pay to the Underwriter a non-accountable expense allowance of
$210,000. In the event the over-allotment option is exercised, the Company
shall pay to the Underwriter at the Option Closing Date an additional amount in
the aggregate equal to 3.0% of the gross proceeds received upon exercise of the
over-allotment option. In the event the transactions contemplated hereby are
not consummated by reason of any action by the Underwriter (except if such
prevention is based upon a breach by the Company of any covenant,
representation, or warranty contained herein or because any other condition to
the Underwriter's obligations hereunder required to be fulfilled by the Company
is not fulfilled) the Company shall not be liable for any expenses of the
Underwriter, including the Underwriter's legal fees. In the event the
transactions contemplated hereby are not consummated by reason of the Company
being unable to perform its obligations hereunder in all material respects, the
Company shall be liable for the actual accountable out-of-pocket expenses of the
Underwriter, including reasonable legal fees, not to exceed in the aggregate
$150,000.00.
(c) Except as disclosed in the Registration Statement, no person is
entitled either directly or indirectly to compensation from the Company, from
the Underwriter or from any other person for services as a finder in connection
with the proposed offering, and the Company agrees to indemnify and hold
harmless the Underwriter, against any losses, claims, damages, or liabilities,
joint or several (which shall, for all purposes of this Agreement, include, but
not be limited to, all costs of defense and investigation and all reasonable
attorneys' fees), to which the Underwriter or person may become subject insofar
as such losses, claims, damages, or liabilities (or actions in respect thereof)
arise out of or are based upon the claim of any person (other than an employee
of the party claiming indemnity) or entity that he or it is entitled to a
34
<PAGE>
finder's fee in connection with the proposed offering by reason of such person's
or entity's influence or prior contact with the indemnifying party.
9. EFFECTIVE DATE. The Agreement shall become effective upon its
execution except that the Underwriter may, at its option, delay its
effectiveness until 11:00 a.m., New York time on the first full business day
following the effective date of the Registration Statement, or at such earlier
time on such business day after the effective date of the Registration Statement
as the Underwriter in its discretion shall first commence the initial public
offering of the Units. The time of the initial public offering shall mean the
time of release by the Underwriter of the first newspaper advertisement with
respect to the Units, or the time when the Units are first generally offered by
the Underwriter to dealers by letter or telegram, whichever shall first occur.
This Agreement may be terminated by the Underwriter at any time before it
becomes effective as provided above, except that Sections 3(c), 6, 7, 8, 12, 13,
14, and 15 shall remain in effect notwithstanding such termination.
10. TERMINATION.
(a) After this Agreement becomes effective, this Agreement, except
for Sections 3(c), 6, 7, 8, 12, 13, 14, and 15 hereof, may be terminated at any
time prior to the First Closing Date, and the option referred to in Section 2(b)
hereof, if exercised, may be cancelled at any time prior to the Option Closing
Date, by the Underwriter if in the Underwriter's judgment it is impracticable to
offer for sale or to enforce contracts made by the Underwriter for the resale of
the Units agreed to be purchased hereunder by reason of (i) the Company having
sustained a material loss, whether or not insured, by reason of fire,
earthquake, flood, accident, or other calamity, or from any labor dispute or
court or government action, order, or decree, which has caused a Material
Adverse Effect, (ii) trading in securities on the New York Stock Exchange or the
American Stock Exchange having been suspended or limited, (iii) material
governmental restrictions having been imposed on trading in securities generally
(not in force and effect on the date hereof), (iv) a banking moratorium having
been declared by federal or New York state authorities, (v) an outbreak of major
international hostilities involving the United States or other substantial
national or international calamity having occurred,
35
<PAGE>
(vi) a pending or threatened legal or governmental proceeding or action relating
generally to the Company's or any of the Subsidiaries' business, or a
notification having been received by the Company or any Subsidiary, of the
threat of any such proceeding or action, which would have a Material Adverse
Effect;(vii) except as contemplated by the Prospectus, the Company is merged
with or consolidated into or acquired by another company or group or there
exists a binding legal commitment for the foregoing or any other material change
of ownership or control occurs; (viii) the passage by the Congress of the United
States or by any state legislative body of similar impact, of any act or
measure, or the adoption of any orders, rules or regulations by any governmental
body or any authoritative accounting institute or board, or any governmental
executive, which is reasonably believed likely by the Underwriter to have a
material adverse impact on the business, financial condition, or financial
statements of the Company and its Subsidiaries taken as a whole, (ix) any
material adverse change in the financial or securities markets beyond normal
market fluctuations having occurred since the date of this Agreement, or (x) any
Material Adverse Effect having occurred, since the respective dates of which
information is given in the Registration Statement and Prospectus.
(b) If the Underwriter elects to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 10, the
Company shall be promptly notified by the Underwriter, by telephone or telegram,
confirmed by letter.
11. PURCHASE OPTION. At or before the First Closing Date, the Company
will sell the Underwriter or its designees for a consideration of $50.00, and
upon the terms and conditions set forth in the form of Purchase Option annexed
as an exhibit to the Registration Statement, a Purchase Option to purchase an
aggregate of 50,000 Units. In the event of conflict in the terms of this
Agreement and the Purchase Option with respect to language relating to the
Purchase Option, the language of the Purchase Option shall control.
12. REPRESENTATIONS AND WARRANTIES OF THE UNDERWRITER. The Underwriter
represents and warrants to the Company that it is registered as a broker-dealer
in all jurisdictions in which it is offering the Units and that it will comply
with all applicable state or federal laws relating to the sale of the Units
including
36
<PAGE>
but not limited to, violations based on unauthorized statements by the
Underwriter or its representatives.
13. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties, and other
statements of the Company and the Underwriter and the undertakings set forth in
or made pursuant to this Agreement will remain in full force and effect until
three years from the date of this Agreement, regardless of any investigation
made by or on behalf of the Underwriter, the Company, or any of its officers or
directors or any controlling person and will survive delivery of and payment of
the Units and the termination of this Agreement.
14. NOTICE. Any communications specifically required hereunder to be in
writing, if sent to the Underwriter, will be mailed, delivered, or telecopied
and confirmed to them at Stratton Oakmont, Inc., 1979 Marcus Avenue, Lake
Success, New York 11042, with a copy sent to Bernstein & Wasserman, LLP, 950
Third Avenue, New York, NY 10022, Attention: Hartley T. Bernstein, Esq., or
if sent to the Company, will be mailed, delivered, or telecopied and confirmed
to it at 7-4 Metropolitan Court, Gaithersburg, Maryland 20878 Attention: Robert
A. Veschi, with a copy sent to Thomas T. Prousalis, Jr., Esq., 1919 Pennsylvania
Avenue, N.W., Washington, D.C. 20006. Notice shall be deemed to have been duly
given if mailed or transmitted by any standard form of telecommunication.
15. PARTIES IN INTEREST. The Agreement herein set forth is made solely
for the benefit of the Underwriter, the Company, any person controlling the
Company or the Underwriter, and directors of the Company, nominees for directors
(if any) named in the Prospectus, its officers who have signed the Registration
Statement, and their respective executors, administrators, successors, assigns
and no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include any purchaser,
as such purchaser, from the Underwriter of the Units.
16. APPLICABLE LAW. This Agreement will be governed by, and construed in
accordance with, of the laws of the State of New York applicable to agreements
made and to be entirely performed within New York.
37
<PAGE>
17. COUNTERPARTS. This agreement may be executed in one or more
counterparts each of which shall be deemed to constitute an original and shall
become effective when one or more counterparts have been signed by each of the
parties hereto and delivered to the other parties (including by fax, followed by
original copies by overnight mail).
18. ENTIRE AGREEMENT; AMENDMENTS. This Agreement constitutes the entire
agreement of the parties hereto and supersedes all prior written or oral
agreements, understandings, and negotiations with respect to the subject matter
hereof. This Agreement may not be amended except in writing, signed by the
Underwriter and the Company.
38
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return this agreement, whereupon it will become a binding
agreement between the Company and the Underwriter in accordance with its terms.
Very truly yours,
e-NET, INC.
By: __________________________
Its
The foregoing Underwriting Agreement is hereby confirmed and accepted
as of the date first above written.
STRATTON OAKMONT, INC.
By:__________________________
Its
39
<PAGE>
The undersigned are executing this Agreement solely to be bound by the
provisions of Section 3(l) hereof.
____________________________
Alonzo Short
____________________________ ____________________________
Arthur Henley Robert A. Veschi
____________________________ ____________________________
George Porta William Hooton
____________________________ ____________________________
Thomas T. Pousalis Scott Grau
___________________________ ____________________________
David W. Wells William Kingsley
___________________________ ____________________________
Christine Swisher Sandra Lenga
____________________________ ____________________________
Donald Shoff Patricia Robertson
__________________________ ______________________________
Michael Nickel Robert L. Veschi
____________________________ ______________________________
William Rodgers Edward Ratkovich
____________________________ ______________________________
Robert Foise Martin Sumichrast
Armstrong Industries
By _____________________
Name:
Title:
40
<PAGE>
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. NO
OFFER TO BUY THE SECURITIES CAN BE ACCEPTED AND NO PART OF THE PURCHASE PRICE
CAN BE RECEIVED UNTIL THE REGISTRATION STATEMENT HAS BECOME EFFECTIVE, AND ANY
SUCH OFFER MAY BE WITHDRAWN OR REVOKED, WITHOUT OBLIGATION OR COMMITMENT OF ANY
KIND, AT ANY TIME PRIOR TO NOTICE OF ITS ACCEPTANCE GIVEN AFTER THE EFFECTIVE
DATE.
e-NET, INC.
500,000 UNITS
CONSISTING OF
1,000,000 SHARES OF COMMON STOCK
AND
1,000,000 CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANTS
SELECTED DEALERS AGREEMENT
_____________________, 1996
Dear Sirs:
1. Stratton Oakmont, Inc., named as the underwriter in the enclosed
Preliminary Prospectus (the "Underwriter"), proposes to offer on a firm
commitment basis, subject to the terms and conditions and execution of the
Underwriting Agreement, 500,000 units (including any additional units offered
pursuant to an over-allotment option, the "Firm Units") of e-NET, Inc. (the
"Company") each consisting of two (2) shares of common stock par value $.01 per
share (the "Common Stock") and two (2) Class A Redeemable Common Stock Purchase
Warrants (the "Warrants"), each to purchase one share of Common Stock. The Firm
Units are more particularly described in the enclosed Preliminary Prospectus,
additional copies of which as well as the Prospectus (after effective date) will
be supplied in reasonable quantities upon request.
2. The Underwriter is soliciting offers to buy Units upon the terms and
conditions hereof, from Selected Dealers, who are to act as principals,
including you, who are (i) registered with the Securities and Exchange
Commission ("the Commission") as broker-dealers under the Securities Exchange
Act of 1934, as amended ("the 1934 Act"), and members in good standing with the
National Association of Securities Dealers, Inc. ("the NASD"), or (ii) dealers
of institutions with their principal place of business located outside the
United States, its territories and possessions and not registered under the 1934
Act who agree to make no sales within the United States, its territories and
possessions or to persons who are nationals thereof or residents therein and, in
making sales, to comply with the NASD's interpretation
<PAGE>
with respect to free-riding and withholding. Units are to be offered to the
public at a price of $14.00 per Unit. Selected Dealers will be allowed a
concession of not less than _____% of the offering price. You will be notified
of the precise amount of such concession prior to the effective date of the
Registration Statement. The offer is solicited subject to the issuance and
delivery of the Units and their acceptance by the Underwriter to the approval of
legal matters by counsel and to the terms and conditions as herein set forth.
3. Your offer to purchase may be revoked in whole or in part without
obligation or commitment of any kind by you any time prior to acceptance and no
offer may be accepted by us and no sale can be made until after the registration
statement covering the Units has become effective with the Commission. Subject
to the foregoing, upon execution by you of the Offer to Purchase below and the
return of same to us, you shall be deemed to have offered to purchase the number
of Units set forth in your offer on the basis set forth in paragraph 2 above.
Any oral notice by us of acceptance of your offer shall be immediately followed
by written or telegraphic confirmation preceded or accompanied by a copy of the
Prospectus. If a contractual commitment arises hereunder, all the terms of this
Selected Dealers Agreement shall be applicable. We may also make available to
you an allotment to purchase Units, but such allotment shall be subject to
modification or termination upon notice from us any time prior to an exchange of
confirmations reflecting completed transactions. All references hereafter in
this Agreement to the purchase and sale of the Units assume and are applicable
only if contractual commitments to purchase are completed in accordance with the
foregoing.
4. You agree that in re-offering the Units, if your offer is accepted
after the Effective Date, you will make a bona fide public distribution of same.
You will advise us upon request of the Units purchased by you remaining unsold,
and we shall have the right to repurchase such Units upon demand at the public
offering price less the concession as set forth in paragraph 2 above. Any of
the Units purchased by you pursuant to this Agreement are to be re-offered by
you to the public at the public offering price, subject to the terms hereof and
shall not be offered or sold by you below the public offering price before the
termination of this Agreement.
5. Payment for Units which you purchase hereunder shall be made by you on
such date as we may determine by certified or bank cashier's check payable in
New York Clearinghouse funds to Stratton Oakmont, Inc. Certificates for the
securities shall be delivered as soon as practicable at the offices of Stratton
Oakmont, Inc., 1979 Marcus Avenue, Lake Success, New York, New York 11042.
Unless specifically authorized by us, payment by you may not be deferred until
delivery of certificates to you.
6. A registration statement covering the offering has been filed with the
Commission in respect to the Units. You will be promptly advised when the
registration statement becomes effective. Each Selected Dealer in selling the
Units pursuant hereto agrees (which agreement shall also be for the benefit of
the Company) that it will comply with the applicable requirements of the
Securities Act of 1933 and of the 1934 Act and any applicable
2
<PAGE>
rules and regulations issued under said Acts. No person is authorized by the
Company or by the Underwriter to give any information or to make any
representations other than those contained in the Prospectus in connection with
the sale of the Units. Nothing contained herein shall render the Selected
Dealers a member of the underwriting group or partners with the Underwriter or
with one another.
7. You will be informed by us as to the states in which we have been
advised by counsel the Units have been qualified for sale or are exempt under
the respective securities or blue sky laws of such states, but we have not
assumed and will not assume any obligation or responsibility as to the right of
any Selected Dealer to sell Units in any state.
8. The Underwriter shall have full authority to take such action as we
may deem advisable in respect of all matters pertaining to the offering or
arising thereunder. The Underwriter shall not be under any liability to you,
except such as may be incurred under the Securities Act of 1933 and the rules
and regulations thereunder, except for lack of good faith and except for
obligations assumed by us in this Agreement, and no obligation on our part shall
be implied or inferred herefrom.
9. Selected Dealers will be governed by the conditions herein set forth
until this Agreement is terminated. This Agreement will terminate when the
offering is completed. Nothing herein contained shall be deemed a commitment on
our part to sell you any Units; such contractual commitment can only be made in
accordance with the provisions of paragraph 3 hereof.
10. You represent that you are a member in good standing of the National
Association of Securities Dealers, Inc. ("Association") and registered as a
broker-dealer or are not eligible for membership under Section I of the By-Laws
of the Association who agree to make no sales within the United States, its
territories, or possessions or to persons who are nationals thereof or residents
therein and, in making sales, to comply with the NASD's interpretation with
respect to free-riding and withholding. Your attention is called to the
following: (a) Article III, Sections 1, 8, 24, 25, 26 and 36 of the Rules of
Fair Practice of the Association and the interpretations of said Section
promulgated by the Board of Governors of such Association including the
interpretation with respect to "Free-Riding and Withholding"; (b) Section 10(b)
of the 1934 Act and Rules 10b-6 and 10b-10 of the general rules and regulations
promulgated under said Act; (c) Securities Act Release #3907; (d) Securities Act
Release #4150; and (e) Securities Act Release #4968 requiring the distribution
of a Preliminary Prospectus to all persons reasonably expected to be purchasers
of Shares from you at least 48 hours prior to the time you expect to mail
confirmations. You, if a member of the Association, by signing this Agreement,
acknowledge that you are familiar with the cited law, rules, and releases, and
agree that you will not directly and/or indirectly violate any provisions of
applicable law in connection with your participation in the distribution of the
Shares.
3
<PAGE>
11. In addition to compliance with the provisions of paragraph 10 hereof,
you will not, until advised by us in writing or by wire that the entire offering
has been distributed and closed, bid for or purchase Units or its component
securities in the open market or otherwise make a market in such securities or
otherwise attempt to induce others to purchase such securities in the open
market. Nothing contained in this paragraph 11 shall, however, preclude you
from acting as agent in the execution of unsolicited orders of customers in
transactions effectuated for them through a market maker.
12. You understand that the Underwriter may in connection with the
offering engage in stabilizing transactions. If the Underwriter contracts for
or purchases in the open market in connection with such stabilization any Units
sold to you hereunder and not effectively placed by you, the Underwriter may
charge you the Selected Dealer's concession originally allowed you on the Units
so purchased, and you agree to pay such amount to us on demand.
13. By submitting an Offer to Purchase you confirm that your net capital
is such that you may, in accordance with Rule 15c3-1 adopted under the 1934 Act,
agree to purchase the number of Units you may become obligated to purchase under
the provisions of this Agreement.
14. You agree that (i) you shall not recommend to a customer the
purchase of Firm Units unless you shall have reasonable grounds to believe that
the recommendation is suitable for such customer on the basis of information
furnished by such customer concerning the customer's investment objectives,
financial situation and needs, and any other information known to you, (ii) in
connection with all such determinations, you shall maintain in your files the
basis for such determination, and (iii) you shall not execute any transaction in
Firm Units in a discretionary account without the prior specific written
approval of the customer.
4
<PAGE>
15. All communications from you should be directed to us at the office of
the Underwriter, Stratton Oakmont, Inc., 1979 Marcus Avenue, Lake Success,
New York 11042. All communications from us to you shall be directed to the
address to which this letter is mailed.
Very truly yours,
STRATTON OAKMONT, INC.
By: ______________________________
Its
ACCEPTED AND AGREED TO AS OF THE _____
DAY OF _____________________, 1996
[Name of Dealer]
By: ______________________________
Its
5
<PAGE>
To: Stratton Oakmont, Inc.
1979 Marcus Avenue
Lake Success, New York 11042
We hereby subscribe for _____________ Units of e-NET, Inc., each Unit
consisting of two (2) shares of common stock, par value $.01 per share (the
"Common Stock") and two (2) Class A Redeemable Common Stock Purchase Warrants
(the "Class A Warrants"), each to purchase one share of Common Stock, in
accordance with the terms and conditions stated in the foregoing letter. We
hereby acknowledge receipt of the Prospectus referred to in the first paragraph
thereof relating to said Units. We further state that in purchasing said Units
we have relied upon said Prospectus and upon no other statement whatsoever,
whether written or oral. We confirm that we are a dealer actually engaged in
the investment banking or securities business and that we are either (i) a
member in good standing of the National Association of Securities Dealers, Inc.
(the "NASD") or (ii) a dealer with its principal place of business located
outside the United States, its territories and its possessions and not
registered as a broker or dealer under the Securities Exchange Act of 1934, as
amended, who hereby agrees not to make any sales within the United States, its
territories or its possessions or to persons who are nationals thereof or
residents therein. We hereby agree to comply with the provisions of Section 24
of Article III of the Rules of Fair Practice of the NASD, and if we are a
foreign dealer and not a member of the NASD, we also agree to comply with the
NASD's interpretation with respect to free-riding and withholding, to comply, as
though we were a member of the NASD, with the provisions of Sections 8 and 36 of
Article III thereof as that Section applies to non-member foreign dealers.
[Name of Dealer]
______________________________
By: ______________________________
Address
______________________________
______________________________
Dated _____________________, 1996
<PAGE>
Option to Purchase
50,000 Units
e-NET, INC.
PURCHASE OPTION
Dated: August ___, 1996
THIS CERTIFIES that STRATTON OAKMONT, INC., 1979 Marcus Avenue, Lake
Success, New York 11042 (hereinafter sometimes referred to as the "Holder" which
shall include any permitted transferee hereunder), is entitled to purchase from
e-NET, INC., a Delaware corporation (hereinafter referred to as the "Company"),
at the prices and during the periods as hereinafter specified, up to
50,000 Units consisting of the Company's Common Stock and Warrants to purchase
the Company's Common Stock. Each Unit consists of two (2) shares of the
Company's Common Stock, $.01 par value, as now constituted ("Common Stock") and
two (2) Class A Redeemable Common Stock Purchase Warrants, each to purchase one
(1) share of Common Stock as now constituted at an exercise price of $7.50 per
share (the "Class A Warrants"). The Warrants are exercisable until August ___,
2001.
The Units have been registered under a Registration Statement on Form SB-2
(File No. 333-3860) declared effective by the Securities and Exchange Commission
on August ___, 1996 (the "Registration Statement"). This Option (the "Option")
to purchase 50,000 Units (the "Option Units") was originally issued pursuant to
an underwriting agreement between the Company and Stratton Oakmont, Inc., as
underwriter (the "Underwriter"), in connection with a public offering of 500,000
Units (the "Public Units") through the Underwriter, in consideration of $50.00
received for the Option.
Except as specifically otherwise provided herein, the Common Stock and the
Warrants issued pursuant to this Option shall bear the same terms and conditions
as described under the caption "Description of Securities" in the Registration
Statement, and the
<PAGE>
Warrants shall be governed by the terms of the Warrant Agreement dated as of
August ___, 1996, executed in connection with such public offering (the "Warrant
Agreement"), and except that the Holder shall have registration rights under
the Securities Act of 1933, as amended (the "Act"), for the Option, the Common
Stock and the Warrants included in the Units, and the shares of Common Stock
underlying the Warrants, as more fully described in paragraph 6 of this Option .
In the event of any reduction of the exercise price of the Warrants included in
the Public Units, the same changes to the Warrants included in the Option Units
shall be simultaneously effected.
1. The rights represented by this Option shall be exercised at the
prices, subject to adjustment in accordance with paragraph 8 of this Option, and
during the periods as follows:
(a) Between August ___, 1997 and August ___, 2001, inclusive, the
Holder shall have the option to purchase Units hereunder at a price of $23.10
per Unit(subject to adjustment pursuant to paragraph 8 hereof) (the "Exercise
Price").
(b) After August ___, 2001, the Holder shall have no right to
purchase any Units hereunder.
2. The rights represented by this Option may be exercised at any time
within the period above specified, in whole or in part, by (i) the surrender of
this Option (with the purchase form at the end hereof properly executed) at the
principal executive office of the Company (or such other office or agency of the
Company as it may designate by notice in writing to the Holder at the address of
the Holder appearing on the books of the Company); (ii) payment to the Company
of the applicable Exercise Price then in effect for the number of Units
specified in the above-mentioned purchase form together with applicable stock
transfer taxes, if any; and (iii) delivery to the Company of a duly executed
agreement signed by the person(s)' designated in the purchase form to the effect
that such person(s) agree(s) to be bound by the provisions of paragraph 6 and
subparagraphs (b), (c) and (d) of paragraph 7 hereof. This Option shall be
deemed to have been exercised, in whole or in part to the extent specified,
immediately prior to the close of business on the date this Option is
surrendered and payment is made in accordance with the foregoing provisions of
this paragraph 2, and the person or persons in whose name or names the
certificates for shares of
2
<PAGE>
Common Stock and Warrants shall be issuable upon such exercise shall become the
Holder or Holders of record of such Common Stock and Warrants at that time and
date. The Common Stock and Warrants and the certificates for the Common Stock
and Warrants so purchased shall be delivered to the Holder within a reasonable
time, not exceeding ten (10) days, after the rights represented by this Option
shall have been so exercised.
3. For a period of one (1) year from the Effective Date, this Option
shall not be transferred, sold, assigned, or hypothecated, except that it may be
transferred to successors of the Holder, and may be assigned in whole or in part
to any person who is an officer of the Holder during such period. Any such
assignment shall be effected by the Holder (i) executing the form of assignment
at the end hereof and (ii) surrendering this Option for cancellation at the
office or agency of the Company referred to in paragraph 2 hereof, accompanied
by a certificate (signed by an officer of the Holder if the Holder is a
corporation), stating that each transferee is a permitted transferee under this
paragraph 3 hereof; whereupon the Company shall issue, in the name or names
specified by the Holder (including the Holder) a new Option or Options of like
tenor and representing in the aggregate rights to purchase the same number of
Units as are purchasable hereunder.
4. The Company covenants and agrees that all shares of Common Stock which
may be issued as part of the Units purchased hereunder and the Common Stock
which may be issued upon exercise of the Warrants will, upon issuance, be duly
and validly issued, fully paid and nonassessable, and no personal liability will
attach to the Holder thereof. The Company further covenants and agrees that
during the periods within which this Option may be exercised, the Company will
at all times have authorized and reserved a sufficient number of shares of its
Common Stock to provide for the exercise of this Option and that it will have
authorized and reserved a sufficient number of shares of Common Stock for
issuance upon exercise of the Warrants included in the Units.
5. This Option shall not entitle the Holder to any voting, dividend, or
other rights as a stockholder of the Company.
6. (a) During the period set forth in paragraph l(a) hereof, the Company
shall advise the Holder or its transferee, whether the Holder holds the Option
or has exercised the Option and
3
<PAGE>
holds Units, or any of the securities underlying the Units by written notice at
least thirty (30) days prior to the filing of any post-effective amendment to
the Registration Statement or of any new registration statement or post-
effective amendment thereto under the Act covering any securities of the
Company, for its own account or for the account of others (other than a
registration statement on Form S-4 or S-8 or any successor forms thereto), and
will for a period of five years from the effective date of the Registration
Statement, upon the request of the Holder, include in any such post-effective
amendment or registration statement, such information as may be required to
permit a public offering of the Option, all or any of the Units underlying the
Option, the Common Stock, or Warrants included in the Units or the Common Stock
issuable upon the exercise of the Warrants (the "Registrable Securities"). The
Company shall supply prospectuses and such other documents as the Holder may
reasonably request in order to facilitate the public sale or other disposition
of the Registrable Securities, use its best efforts to register and qualify any
of the Registrable Securities for sale in such states as such Holder designates;
provided that the Company shall not be required to qualify as a foreign
corporation or a dealer in securities or execute a general consent to service of
process in any jurisdiction in any action; and do any and all other acts and
things which may be reasonably necessary or desirable to enable such Holders to
consummate the public sale or other disposition of the Registrable Securities,
and furnish indemnification in the manner provided in paragraph 7 hereof. The
Holder shall furnish information and indemnification as set forth in paragraph
7, except that the maximum amount which may be recovered from the Holder shall
be limited to the amount of proceeds received by the Holder from the sale of the
Registrable Securities. The Company shall use its best efforts to cause the
managing underwriter or underwriters of a proposed underwritten offering to
permit the Holders of Registrable Securities requested to be included in the
registration to include such securities in such underwritten offering on the
same terms and conditions as any similar securities of the Company included
therein. Notwithstanding the foregoing, if the managing underwriter or
underwriters of such offering advises the Holders of Registrable Securities that
the total amount of securities which they intend to include in such offering is
such as to materially and adversely affect the success of such offering, then
the amount of securities to be offered for the accounts of Holders of
Registrable Securities shall be eliminated, reduced, or limited to
4
<PAGE>
the extent necessary to reduce the total amount of securities to be included in
such offering to the amount, if any, recommended by such managing underwriter or
underwriters (any such reduction or limitation in the total amount of
Registrable Securities to be included in such offering to be borne by the
Holders of Registrable Securities proposed to be included therein pro rata).
The Holder will pay its own legal fees and expenses and any underwriting
discounts and commissions on the securities sold by such Holder and shall not be
responsible for any other expenses of such registration.
(b) If any 50% Holder (as defined below) shall give notice to the
Company at any time during the period set forth in paragraph l(a) hereof to the
effect that such Holder desires to register under the Act this Option, the
Units, or any of the underlying securities contained in the Units underlying the
Option under such circumstances that a public distribution (within the meaning
of the Act) of any such securities will be involved then the Company will
promptly, but no later than sixty (60) days after receipt of such notice, file a
post-effective amendment to the current Registration Statement or a new
registration statement pursuant to the Act, to the end that the Option, the
Units, and/or any of the securities underlying the Units may be publicly sold
under the Act as promptly as practicable thereafter and the Company will use its
best efforts to cause such registration to become and remain effective for a
period of 120 days (including the taking of such steps as are reasonably
necessary to obtain the removal of any stop order); provided that such Holder
shall furnish the Company with appropriate information in connection therewith
as the Company may reasonably request in writing. The 50% Holder (which for
purposes hereof shall mean any direct or indirect transferee of such Holder)
may, at its option, request the filing of a post-effective amendment to the
current Registration Statement or a new registration statement under the Act
with respect to the Registrable Securities on only one occasion during the term
of this Option. The Holder may at its option request the registration of the
Option and/or any of the securities underlying the Option in a registration
statement made by the Company as contemplated by Section 6(a) or in connection
with a request made pursuant to this Section 6(b) prior to acquisition of the
Units issuable upon exercise of the Option and even though the Holder has not
given notice of exercise of the Option. The 50% Holder may, at its option,
request such post-effective amendment or new registration
5
<PAGE>
statement during the described period with respect to the Option, the Units as a
Unit, or separately as to the Common Stock and/or Warrants included in the
Units, and/or the Common Stock issuable upon the exercise of the Warrants, and
such registration rights may be exercised by the 50% Holder prior to or
subsequent to the exercise of the Option. Within ten (10) business days after
receiving any such notice pursuant to this subsection (b) of paragraph 6, the
Company shall give notice to the other Holders of the Options, advising that the
Company is proceeding with such post-effective amendment or registration
statement and offering to include therein the securities underlying the Options
of the other Holders. Each Holder electing to include its Registrable
Securities in any such offering shall provide written notice to the Company
within twenty (20) days after receipt of notice from the Company. The failure
to provide such notice to the Company shall be deemed conclusive evidence of
such Holder's election not to include its Registrable Securities in such
offering. Each Holder electing to include its Registrable Securities shall
furnish the Company with such appropriate information (relating to the
intentions of such Holders) in connection therewith as the Company shall
reasonably request in writing. All costs and expenses of the first such post-
effective amendment or new registration statement shall be borne by the Company,
except that the Holders shall bear the fees of their own counsel and any
underwriting discounts or commissions applicable to any of the securities sold
by them. If the Company determines to include securities to be sold by it in
any registration statement pursuant to this Section 6(b), such registration
shall be deemed to have been a registration under Section 6(a). In no event
shall the demand registration right granted hereunder extend beyond five years
from the effective date of the Registration Statement. Notwithstanding anything
herein to the contrary, there shall be only one (1) demand registration right
granted hereunder.
The Company shall be entitled to postpone the filing of any
registration statement pursuant to this Section 6(b) otherwise required to be
prepared and filed by it if (i) the Company is engaged in a material
acquisition, reorganization, or divestiture, (ii) the Company is currently
engaged in a self-tender or exchange offer and the filing of a registration
statement would cause a violation of Rule 10b-6 under the Securities Exchange
Act of 1934, (iii) the Company is engaged in an underwritten offering and the
managing underwriter has advised the Company in writing
6
<PAGE>
that such a registration statement would have a material adverse effect on the
consummation of such offering or (iv) the Company is subject to an underwriter's
lock-up as a result of an underwritten public offering and such underwriter has
refused in writing, the Company's request to waive such lock-up. In the event
of such postponement, the Company shall be required to file the registration
statement pursuant to this Section 6(b), within sixty (60) days of the
consummation of the event requiring such postponement.
The Company will use its best efforts to maintain such
registration statement or post-effective amendment current under the Act for a
period of at least six (6) months (and for up to an additional three (3) months
if requested by the Holder) from the effective date thereof. The Company shall
supply prospectuses, and such other documents as the Holder may reasonably
request in order to facilitate the public sale or other disposition of the
Registrable Securities, use its best efforts to register and qualify any of the
Registrable Securities for sale in such states as such Holder designates,
provided that the Company shall not be required to qualify as a foreign
corporation or a dealer in securities or execute a general consent to service of
process in any jurisdiction in any action and furnish indemnification in the
manner provided in paragraph 7 hereof.
(c) The term "50% Holder" as used in this paragraph 6 shall mean the
Holder of at least 50% of the Common Stock and the Warrants underlying the
Option (considered in the aggregate) and Additional Stock and shall include any
owner or combination of owners of such securities, which ownership shall be
calculated by determining the number of shares of Common Stock held by such
owner or owners as well as the number of shares then issuable upon exercise of
the Warrants.
7. (a) Whenever pursuant to paragraph 6 a registration statement
relating to the Option or any shares or warrants issued or issuable upon the
exercise of any Options, is filed under the Act, amended or supplemented, the
Company will indemnify and hold harmless each Holder of the securities covered
by such registration statement, amendment, or supplement (such Holder being
hereinafter called the "Distributing Holder"), and each person, if any, who
controls (within the meaning of the Act) the Distributing Holder, and each
underwriter (within the meaning of the Act) of such
7
<PAGE>
securities and each person, if any, who controls (within the meaning of the Act)
any such underwriter, against any losses, claims, damages, or liabilities, joint
or several, to which the Distributing Holder, any such controlling person or any
such underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any such registration statement or any preliminary
prospectus or final prospectus constituting a part thereof or any amendment or
supplement thereto, or arise out of or are based upon the omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading; and will reimburse the Distributing Holder
and each such controlling person and underwriter for any legal or other expenses
reasonably incurred by the Distributing Holder or such controlling person or
underwriter in connection with investigating or defending any such loss, claim,
damage, liability, or action; provided, however, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage, or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in said registration statement,
said preliminary prospectus, said final prospectus, or said amendment or
supplement in reliance upon and in conformity with written information furnished
by such Distributing Holder or any other Distributing Holder, for use in the
preparation thereof.
(b) The Distributing Holder will indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed said
registration statement and such amendments and supplements thereto, each person,
if any, who controls the Company (within the meaning of the Act) against any
losses, claims, damages, or liabilities, joint and several, to which the Company
or any such director, officer, or controlling person may become subject, under
the Act or otherwise, insofar as such losses, claims, damages, or liabilities
arise out of or are based upon any untrue or alleged untrue statement of any
material fact contained in said registration statement, said preliminary
prospectus, said final prospectus, or said amendment or supplement, or arise out
of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent that
such untrue statement or
8
<PAGE>
alleged untrue statement or omission or alleged omission was made in said
registration statement, said preliminary prospectus, said final prospectus, or
said amendment or supplement in reliance upon and in conformity with written
information furnished by such Distributing Holder for use in the preparation
thereof; and will reimburse the Company or any such director, officer, or
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability, or action.
(c) Promptly after receipt by an indemnified party under this
paragraph 7 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against any indemnifying
party, give the indemnifying party notice of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Paragraph 7.
(d) In case any such action is brought against any indemnified party,
and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
paragraph 7 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof.
8. With respect to the Option Units, the Exercise Price in effect at any
time and the number and kind of securities purchasable upon the exercise of this
Option shall be subject to adjustment from time to time upon the happening of
certain events as follows:
(a) In case the Company shall (i) declare a dividend or make a
distribution on its outstanding shares of Common Stock in shares of Common
Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into
a greater number of shares, or (iii) combine or reclassify its outstanding
shares of Common
9
<PAGE>
Stock into a smaller number of shares, the Exercise Price in effect at the time
of the record date for such dividend or distribution or of the effective date of
such subdivision, combination or reclassification shall be adjusted so that it
shall equal the price determined by multiplying the Exercise Price by a
fraction, the denominator of which shall be the number of shares of Common Stock
outstanding after giving effect to such action, and the numerator of which shall
be the number of shares of Common Stock outstanding immediately prior to such
action. Notwithstanding anything to the contrary contained in the Warrant
Agreement, in the event an adjustment to the Exercise Price is effected pursuant
to this Subsection (a) (and a corresponding adjustment to the number of Option
Units is made pursuant to Subsection (g) below), the exercise price of the
Warrants shall be adjusted so that it shall equal the price determined by
multiplying the exercise price of the Warrants by a fraction, the denominator of
which shall be the number of shares of Common Stock outstanding immediately
after giving effect to such action and the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such action.
In such event, there shall be no adjustment to the number of shares of Common
Stock or other securities issuable upon exercise of the Warrants. Such
adjustment shall be made successively whenever any event listed above shall
occur.
(b) In case the Company shall fix a record date for the issuance of
rights or warrants to all Holders of its Common Stock entitling them to
subscribe for or purchase shares of Common Stock (or securities convertible into
Common Stock) at a price (the "Subscription Price") (or having a conversion
price per share) less than the current market price of the Common Stock (as
defined in Subsection (e) below) on the record date mentioned below, the
Exercise Price shall be adjusted so that the same shall equal the price
determined by multiplying the number of shares then comprising an Option Unit by
the product of the Exercise Price in effect immediately prior to the date of
such issuance multiplied by a fraction, the numerator of which shall be the sum
of the number of shares of Common Stock outstanding on the record date mentioned
below and the number of additional shares of Common Stock which the aggregate
offering price of the total number of shares of Common Stock so offered (or the
aggregate conversion price of the convertible securities so offered) would
purchase at such current market price per share of the Common Stock, and the
denominator of which shall be the sum of the number of shares of Common Stock
10
<PAGE>
outstanding on such record date and the number of additional shares of Common
Stock offered for subscription or purchase (or into which the convertible
securities so offered are convertible). Such adjustment shall be made
successively whenever such rights or warrants are issued and shall become
effective immediately after the record date for the determination of
shareholders entitled to receive such rights or warrants; and to the extent that
shares of Common Stock are not delivered (or securities convertible into Common
Stock are not delivered) after the expiration of such rights or warrants the
Exercise Price shall be readjusted to the Exercise Price which would then be in
effect had the adjustments made upon the issuance of such rights or warrants
been made upon the basis of delivery of only the number of shares of Common
Stock (or securities convertible into Common Stock) actually delivered.
(c) In case the Company shall hereafter distribute to the holders of
its Common Stock evidences of its indebtedness or assets (excluding cash
dividends or distributions and-dividends or distributions referred to in
Subsection (a) above) or subscription rights or warrants (excluding those
referred to in Subsection (b) above), then in each such case the Exercise Price
in effect thereafter shall be determined by multiplying the number of shares
then comprising an Option Unit by the product of the Exercise Price in effect
immediately prior thereto multiplied by a fraction, the numerator of which shall
be the total number of shares of Common Stock outstanding multiplied by the
current market price per share of Common Stock (as defined in Subsection (e)
below), less the fair market value (as determined by the Company's Board of
Directors) of said assets or evidences of indebtedness so distributed or of such
rights or warrants, and the denominator of which shall be the total number of
shares of Common Stock outstanding multiplied by such current market price per
share of Common Stock. Such adjustment shall be made successively whenever such
a record date is fixed. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record
date for the determination of shareholders entitled to receive such
distribution.
(d) Whenever the Exercise Price payable upon exercise of this Option
is adjusted pursuant to Subsections (a), (b), or (c), above, the number of
Option Units purchasable upon exercise of this Option shall simultaneously be
adjusted by multiplying the number of Option Units initially issuable upon
exercise of this Option by
11
<PAGE>
the Exercise Price in effect on the date hereof and dividing the product so
obtained by the Exercise Price, as adjusted.
(e) For the purpose of any computation under Subsections (b) or (c)
above, the current market price per share of Common Stock at any date shall be
deemed to be the average of the daily closing prices for twenty (20) consecutive
business days before such date. The closing price for each day shall be the
last sale price regular way or, in case no such reported sale takes place on
such day, the average of the last reported bid and asked prices regular way, in
either case on the principal national securities exchange on which the Common
Stock is admitted to trading or listed, or if not listed or admitted to trading
on such exchange, the average of the highest reported bid and lowest reported
asked prices as reported by NASDAQ, or other similar organization if NASDAQ is
no longer reporting such information, or if not so available, the fair market
price as determined by the Board of Directors.
(f) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least ten cents ($0.10)
in such price; provided, however, that any adjustments which by reason of this
Subsection (f) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment required to be made hereunder. All
calculations under this Section 8 shall be made to the nearest cent or to the
nearest one-hundredth of a share, as the case may be. Anything in this Section
8 to the contrary notwithstanding, the Company shall be entitled, but shall not
be required, to make such changes in the Exercise Price, in addition to those
required by this Section 8, as it shall determine, in its sole discretion, to be
advisable in order that any dividend or distribution in shares of Common Stock,
or any subdivision, reclassification or combination of Common Stock, hereafter
made by the Company shall not result in any Federal Income tax liability to the
holders of Common Stock or securities convertible into Common Stock (including
Warrants issuable upon exercise of this Option).
(g) Whenever the Exercise Price is adjusted, as herein provided, the
Company shall promptly, but no later than twenty(20) days after any request for
such an adjustment by the Holder, cause a notice setting forth the adjusted
Exercise Price and adjusted number of Option Units issuable upon exercise of
this Option and,
12
<PAGE>
if requested, information describing the transactions giving rise to such
adjustments, to be mailed to the Holder, at the address set forth herein, and
shall cause a certified copy thereof to be mailed to its transfer agent, if any.
The Company may retain a firm of independent certified public accountants
selected by the Board of Directors (who may be the regular accountants employed
by the Company) to make any computation required by this Section 8, and a
certificate signed by such firm shall be conclusive evidence of the correctness
of such adjustment.
(h) In the event that at any time, as a result of an adjustment made
pursuant to Subsection (a) above, the Holder thereafter shall become entitled to
receive any shares of the Company, other than Common Stock, thereafter the
number of such other shares so receivable upon exercise of this Option shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Common Stock
contained in Subsections (a) to (g), inclusive above.
9. This Agreement shall be governed by and in accordance with the laws of
the State of New York.
IN WITNESS WHEREOF, e-NET, Inc. has caused this Option to be signed by its
duly authorized officers under its corporate seal, and this Option to be dated
as of the date first above written.
e-NET, Inc.
By: ______________________________
Robert A. Veschi
Its President
(Corporate Seal)
13
<PAGE>
PURCHASE FORM
(To be signed only upon exercise of option)
THE UNDERSIGNED, the holder of the foregoing Option, hereby irrevocably
elects to exercise the purchase rights represented by such Option for, and to
purchase thereunder,
Units of e-NET, Inc., each Unit consisting of two shares of $.01 Par Value
Common Stock and two Class A Redeemable Common Stock Purchase Warrants and
herewith makes payment of $______________ therefor, and requests that the
Warrants and certificates for shares of Common Stock be issued in the name(s)
of, and delivered to ________________________ whose address(es) is
(are)_________________________________________.
Dated:
<PAGE>
TRANSFER FORM
(To be signed only upon transfer of the Option)
For value received, the undersigned hereby sells, assigns, and transfers
unto _________________________________ the right to purchase Units represented
by the foregoing Option to the extent of _______ Units and appoints
_________________________________ attorney to transfer such rights on the books
of e-NET, Inc. with full power of substitution in the premises.
Dated:
By: ______________________________
Address:
______________________________
______________________________
______________________________
In the presence of:
<PAGE>
WARRANT AGREEMENT
AGREEMENT, dated as of this __th day of August 1996, by and between e-NET,
INC., a Delaware corporation ("Company"), and American Stock Transfer & Trust
Company, as Warrant Agent (the "Warrant Agent").
WITNESSETH:
WHEREAS, in connection with a public offering of up to 575,000 units
("Units"), each unit consisting of two (2) shares of the Company's Common Stock,
$.01 par value ("Common Stock") and two (2) Class A Redeemable Common Stock
Purchase Warrants (the "Class A Warrants") pursuant to an underwriting agreement
(the "Underwriting Agreement") dated August __, 1996 between the Company and
Stratton Oakmont, Inc. ("Stratton"), and the issuance(i) to Stratton or its
designees of a Purchase Option to purchase 50,000 additional Units, (the
"Purchase Option"), and (ii) the issuance of 500,000 Bridge Units consisting of
two (2) shares of Common Stock, two (2) Class A Warrants and two (2) Class B
Redeemable Common Stock Purchase Warrants (the "Class B Warrants", and together
with Class A Warrants, the "Warrants") the Company will issue up to 2,250,000
Class A Warrants and 1,000,000 Class B Warrants;
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the
Warrants, and the rights of the holders thereof;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth and for the purpose of defining the terms and provisions
of the Warrants and the certificates representing the Warrants and the
respective rights and obligations thereunder of the Company, the holders of
certificates representing the Warrants and the Warrant Agent, the parties hereto
agree as follows:
<PAGE>
1. DEFINITIONS. As used herein, the following terms shall have the
following meanings, unless the context shall otherwise require:
(a) "Common Stock" shall mean the common stock of the Company of
which at the date hereof consists of 50,000,000 authorized shares, $.01 par
value, and shall also include any capital stock of any class of the Company
thereafter authorized which shall not be limited to a fixed sum or percentage in
respect to the rights of the holders thereof to participate in dividends and in
the distribution of assets upon the voluntary liquidation, dissolution, or
winding up of the Company; provided, however, that the shares issuable upon
exercise of the Warrants shall include (1) only shares of such class designated
in the Company's Certificate of Incorporation as Common Stock on the date of the
original issue of the Warrants or (ii), in the case of any reclassification,
change, consolidation, merger, sale, or conveyance of the character referred to
in Section 9(c) hereof, the stock, securities, or property provided for in such
section or (iii), in the case of any reclassification or change in the
outstanding shares of Common Stock issuable upon exercise of the Warrants as a
result of a subdivision or combination or a change in par value, or from par
value to no par value, or from no par value to par value, such shares of Common
Stock as so reclassified or changed.
(b) "Corporate Office" shall mean the office of the Warrant Agent (or
its successor) at which at any particular time its principal business shall be
administered, which office is located at the date hereof at 40 Wall Street,
New York, New York 10005.
(c) "Exercise Date" shall mean, as to any Warrant, the date on which
the Warrant Agent shall have received both (a) the Warrant Certificate
representing such Warrant, with the exercise form thereon duly executed by the
Registered Holder (as defined below) thereof or his attorney duly authorized in
writing, and (b) payment in cash, or by official bank or certified check made
payable to the Company, of an amount in lawful money of the United States of
America equal to the applicable Purchase Price (as defined below).
(d) "Initial Warrant Exercise Date" shall mean August __, 1997.
2
<PAGE>
(e) "Purchase Price" shall mean the purchase price per share to be
paid upon exercise of each Warrant in accordance with the terms hereof, which
price shall be $7.50 per share for the Class A Warrant and $8.00 per share for
the Class B Warrant, subject to adjustment from time to time pursuant to the
provisions of Section 9 hereof, and subject to the Company's right, in its sole
discretion, upon thirty (30) days written notice, to reduce the Purchase Price
upon notice to all warrant holders.
(f) "Redemption Price" shall mean the price at which the Company may,
at its option, redeem the Warrants, in accordance with the terms hereof, which
price shall be $0.05 per Warrant.
(g) "Registered Holder" shall mean as to any Warrant and as of any
particular date, the person in whose name the certificate representing the
Warrant shall be registered on that date on the books maintained by the Warrant
Agent pursuant to Section 6.
(h) "Transfer Agent" shall mean American Stock Transfer & Trust
Company, as the Company's transfer agent, or its authorized successor, as such.
(i) "Warrant Expiration Date" shall mean 5:00 P.M. (New York time) on
August __, 2001 or the Redemption Date as defined in Section 8, whichever is
earlier; provided that if such date shall in the State of New York be a holiday
or a day on which banks are authorized or required to close, then 5:00 P.M. (New
York time) on the next following day which in the State of New York is not a
holiday or a day on which banks are authorized or required to close. Upon
notice to all warrantholders, the Company shall have the right to extend the
warrant expiration date.
2. WARRANTS AND ISSUANCE OF WARRANT CERTIFICATES.
(a) A Warrant initially shall entitle the Registered Holder of the
Warrant representing such Warrant to purchase one share of Common Stock upon the
exercise thereof, in accordance with the terms hereof, subject to modification
and adjustment as provided in Section 9.
(b) Upon execution of this Agreement, Warrant Certificates
representing the number of Warrants sold pursuant to the Underwriting Agreement
shall be executed by the Company and
3
<PAGE>
delivered to the Warrant Agent. Upon written order of the Company signed by its
President or a Vice President and by its Secretary or an Assistant Secretary,
the Warrant Certificates shall be countersigned, issued, and delivered by the
Warrant Agent.
(c) From time to time, up to the Warrant Expiration Date, the
Transfer Agent shall countersign and deliver stock certificates in required
whole number denominations representing up to an aggregate of 3,250,000 shares
of Common Stock, subject to adjustment as described herein, upon the exercise of
Warrants in accordance with this Agreement.
(d) From time to time, up to the Warrant Expiration Date, the Warrant
Agent shall countersign and deliver Warrant Certificates in required whole
number denominations to the persons entitled thereto in connection with any
transfer or exchange permitted under this Agreement; provided that no Warrant
Certificates shall be issued except (i) those initially issued hereunder, (ii)
those issued on or after the Initial Warrant Exercise Date, upon the exercise of
fewer than all Warrants represented by any Warrant Certificate, to evidence any
unexercised warrants held by the exercising Registered Holder, (iii) those
issued upon any transfer or exchange pursuant to Section 6; (iv) those issued in
replacement of lost, stolen, destroyed, or mutilated Warrant Certificates
pursuant to Section 7; (v) those issued pursuant to the Purchase Option; and
(vi) those issued at the option of the Company, in such form as may be approved
by the its Board of Directors, to reflect any adjustment or change in the
Purchase Price, the number of shares of Common Stock purchasable upon exercise
of the Warrants or the Redemption Price therefor made pursuant to Section 9
hereof.
(e) Pursuant to the terms of the Purchase Option, Stratton may
purchase up to 50,000 Units which include up to 100,000 Class A Warrants.
3. FORM AND EXECUTION OF WARRANT CERTIFICATES.
(a) The Class A Warrant Certificates and Class B Warrant Certificates
shall be substantially in the forms annexed hereto as Exhibits A and B (the
provisions of which are hereby incorporated herein) and may have such letters,
numbers, or other marks of identification or designation and such legends,
summaries, or
4
<PAGE>
endorsements printed, lithographed, or engraved thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this Agreement,
or as may be required to comply with any law or with any rule or regulation made
pursuant thereto or with any rule or regulation of any stock exchange on which
the Warrants may be listed, or to conform to usage or to the requirements of
Section 2(b). The Warrant Certificates shall be dated the date of issuance
thereof (whether upon initial issuance, transfer, exchange, or in lieu of
mutilated, lost, stolen, or destroyed Warrant Certificates) and issued in
registered form. Warrant Certificates shall be numbered serially with the
letter W.
(b) Warrant Certificates shall be executed on behalf of the Company
by its President, or any Vice President and by its Secretary or an Assistant
Secretary, by manual signatures or by facsimile signatures printed thereon, and
shall have imprinted thereon a facsimile of the Company's seal. Warrant
Certificates shall be manually countersigned by the Warrant Agent and shall not
be valid for any purpose unless so countersigned. In case any officer of the
Company who shall have signed any of the Warrant Certificates shall cease to be
an officer of the Company or to hold the particular office referenced in the
Warrant Certificate before the date of issuance of the Warrant Certificates or
before countersignature by the Warrant Agent and issue and delivery thereof,
such Warrant Certificates may nevertheless be countersigned by the Warrant
Agent, issued and delivered with the same force and effect as though the person
who signed such Warrant Certificates had not ceased to be an officer of the
Company or to hold such office. After countersignature by the Warrant Agent,
Warrant Certificates shall be delivered by the Warrant Agent to the Registered
Holder without further action by the Company, except as otherwise provided by
Section 4 hereof.
4. EXERCISE. Each Class A Warrant and Class B Warrant may be exercised
by the Registered Holder thereof at any time on or after the Initial Warrant
Exercise Date, but not after the Warrant Expiration Date, upon the terms and
subject to the conditions set forth herein and in the applicable Warrant
Certificate. A Warrant shall be deemed to have been exercised immediately prior
to the close of business on the Exercise Date and the person entitled to receive
the securities deliverable upon such exercise shall be treated for all purposes
as the holder of those securities upon the exercise of the Warrant as of the
close of business on the Exercise
5
<PAGE>
Date. As soon as practicable on or after the Exercise Date, the Warrant Agent
shall deposit the proceeds received from the exercise of a Warrant and shall
notify the Company in writing of the exercise of the Warrants. Promptly
following, and in any event within five (5) business days after the date of such
notice from the Warrant Agent, the Warrant Agent, on behalf of the Company,
shall cause to be issued and delivered by the Transfer Agent, to the person or
persons entitled to receive the same, a certificate or certificates for the
securities deliverable upon such exercise (plus a certificate for any remaining
unexercised Warrants of the Registered Holder), unless prior to the date of
issuance of such certificates the Company shall instruct the Warrant Agent to
refrain from causing such issuance of certificates pending clearance of checks
received in payment of the Purchase Price pursuant to such Warrants. Upon the
exercise of any Warrant and clearance of the funds received, the Warrant Agent
shall promptly remit the payment received for the Warrant (the "Warrant
Proceeds") to the Company or as the Company may direct in writing.
5. RESERVATION OF SHARES; LISTING; PAYMENT OF TAXES, ETC.
(a) The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock, solely for the purpose of issue
upon exercise of Warrants, such number of shares of Common Stock as shall then
be issuable upon the exercise of all outstanding Warrants. The Company
covenants that all shares of Common Stock which shall be issuable upon exercise
of the Warrants shall, at the time of delivery, be duly and validly issued,
fully paid, nonassessable, and free from all taxes, liens, and charges with
respect to the issue thereof, (other than those which the Company shall promptly
pay or discharge) and that upon issuance such shares shall be listed on each
national securities exchange or eligible for inclusion in each automated
quotation system, if any, on which the other shares of outstanding Common Stock
of the Company are then listed or eligible for inclusion.
(b) The Company covenants that if any securities to be reserved for
the purpose of exercise of Warrants hereunder require registration with, or
approval of, any governmental authority under any federal securities law before
such securities may be validly issued or delivered upon such exercise, then the
Company will, to the extent the Purchase Price is less than the Market Price (as
hereinafter defined), in good faith and as expeditiously as
6
<PAGE>
reasonably possible, endeavor to secure such registration or approval and will
use its reasonable efforts to obtain appropriate approvals or registrations
under state "blue sky" securities laws. With respect to any such securities,
however, Warrants may not be exercised by, or shares of Common Stock issued to,
any Registered Holder in any state in which such exercise would be unlawful.
(c) The Company shall pay all documentary, stamp, or similar taxes
and other governmental charges that may be imposed with respect to the issuance
of Warrants, or the issuance, or delivery of any shares upon exercise of the
Warrants; provided, however, that if the shares of Common Stock are to be
delivered in a name other than the name of the Registered Holder of the Warrant
Certificate representing any Warrant being exercised, then no such delivery
shall be made unless the person requesting the same has paid to the Warrant
Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized for such time
as it is acting as such to requisition the Company's Transfer Agent from time
to time for certificates representing shares of Common Stock issuable upon
exercise of the Warrants, and the Company will authorize the Transfer Agent to
comply with all such proper requisitions. The Company will file with the
Warrant Agent a statement setting forth the name and address of the Transfer
Agent of the Company for shares of Common Stock issuable upon exercise of the
Warrants.
6. EXCHANGE AND REGISTRATION OF TRANSFER.
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate Office, and
upon satisfaction of the terms and provisions hereof, the Company shall execute
and the Warrant Agent shall countersign, issue, and deliver in exchange therefor
the Warrant Certificate or Certificates which the Registered Holder making the
exchange shall be entitled to receive.
(b) The Warrant Agent shall keep at its office books in which,
subject to such reasonable regulations as it may prescribe, it shall register
Warrant Certificates and the transfer thereof in
7
<PAGE>
accordance with its regular practice. Upon due presentment for registration of
transfer of any Warrant Certificate at such office, the Company shall execute
and the Warrant Agent shall issue and deliver to the transferee or transferees a
new Warrant Certificate or Certificates representing an equal aggregate number
of Warrants.
(c) With respect to all Warrant Certificates presented for
registration or transfer, or for exchange or exercise, the subscription form on
the reverse thereof shall be duly endorsed, or be accompanied by a written
instrument or instruments of transfer and subscription, in form satisfactory to
the Company and the Warrant Agent, duly executed by the Registered Holder or his
attorney-in-fact duly authorized in writing.
(d) A service charge may be imposed by the Warrant Agent for any
exchange or registration of transfer of Warrant Certificates. In addition, the
Company may require payment by such holder of a sum sufficient to cover any tax
or other governmental charge that may be imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for exchange
in case of mutilated Warrant Certificates shall be promptly canceled by the
Warrant Agent and thereafter retained by the Warrant Agent until termination of
this Agreement or resignation as Warrant Agent, or disposed of or destroyed, at
the direction of the Company.
(f) Prior to due presentment for registration of transfer thereof,
the Company and the Warrant Agent may deem and treat the Registered Holder of
any Warrant Certificate as the absolute owner thereof and of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon made by anyone other than a duly authorized officer of the Company or
the Warrant Agent) for all purposes and shall not be affected by any notice to
the contrary. The Warrants which are being publicly offered in Units with
shares of Common Stock pursuant to the Underwriting Agreement will be
immediately detachable from the Common Stock and transferable separately
therefrom.
7. LOSS OR MUTILATION. Upon receipt by the Company and the Warrant Agent
of evidence satisfactory to them of the ownership of and loss, theft,
destruction, or mutilation of any Warrant Certificate and (in case of loss,
theft, or destruction) of
8
<PAGE>
indemnity satisfactory to them, and (in the case of mutilation) upon surrender
and cancellation thereof, the Company shall execute and the Warrant Agent shall
(in the absence of notice to the Company and/or Warrant Agent that the Warrant
Certificate has been acquired by a bona fide purchaser) countersign and deliver
to the Registered Holder in lieu thereof a new Warrant Certificate of like tenor
representing an equal aggregate number of Warrants. Applicants for a substitute
Warrant Certificate shall comply with such other reasonable regulations and pay
such other reasonable charges as the Warrant Agent may prescribe.
8. REDEMPTION.
(a) Subject to the provisions of paragraph 2(e) hereof, on not less
than thirty (30) days notice given at any time after (1) year from the Initial
Warrant Exercise Date, the Warrants may be redeemed, at the option of the
Company, at a redemption price of $0.05 per Warrant, provided the Market Price
of the Common Stock receivable upon exercise of the Warrant shall equal or
exceed $10.00 (the "Target Price") subject to adjustment as set forth in Section
8(f) below. Market Price for the purpose of this Section 8 shall mean (i) the
average closing bid price for any twenty (20) consecutive trading days within a
period of thirty (30) consecutive trading days ending within ten (10) days prior
to the date of the notice of redemption, which notice shall be mailed no later
than five (5) days thereafter, of the Common Stock as reported by the National
Association of Securities Dealers, Inc. Automatic Quotation System or the NASD
Bulletin Board or (ii) the last reported sale price, for twenty (20) consecutive
business days within a period of thirty (30) consecutive trading days ending
within ten (10) days of the date of the notice of redemption, which notice shall
be mailed no later than five (5) days thereafter, on the primary exchange on
which the Common Stock is traded, if the Common Stock is traded on a national
securities exchange.
(b) If the conditions set forth in Section 8(a) are met, and the
Company desires to exercise its right to redeem the Class A Warrants and/or
Class B Warrants, it shall mail a notice of redemption to each of the Registered
Holders of the Warrants to be redeemed, first class, postage prepaid, not later
than the thirtieth day before the date fixed for redemption, at their last
address as shall appear on the records maintained pursuant to Section 6(b). Any
notice mailed in the manner provided herein
9
<PAGE>
shall be conclusively presumed to have been duly given whether or not the
Registered Holder receives such notice.
(c) The notice of redemption shall specify (i) the redemption price,
(ii) the date fixed for redemption, (iii) the place where the Warrant
Certificates shall be delivered and the redemption price paid, and (iv) that the
right to exercise the Warrant shall terminate at 5:00 P.M. (New York time) on
the business day immediately preceding the date fixed for redemption. The date
fixed for the redemption of the Class A Warrants or Class B Warrants shall be
the Redemption Date. No failure to mail such notice nor any defect therein or
in the mailing thereof shall affect the validity of the proceedings for such
redemption except as to a Registered Holder (a) to whom notice was not mailed or
(b) whose notice was defective and then only to the extent that the Registered
Holder is prejudiced thereby. An affidavit of the Warrant Agent or of the
Secretary or an Assistant Secretary of the Company that notice of redemption has
been mailed shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.
(d) Any right to exercise a Warrant shall terminate at 5:00 P.M. (New
York time) on the business day immediately preceding the Redemption Date. On
and after the Redemption Date, Holders of the Warrants shall have no further
rights except to receive, upon surrender of the Warrant, the Redemption Price.
(e) From and after the Redemption Date specified for, the Company
shall, at the place specified in the notice of redemption, upon presentation and
surrender to the Company by or on behalf of the Registered Holder thereof of one
or more Warrant Certificates evidencing Warrants to be redeemed, deliver or
cause to be delivered to or upon the written order of such Holder a sum in cash
equal to the redemption price of each such Warrant. From and after the
Redemption Date and upon the deposit or setting aside by the Company of a sum
sufficient to redeem all the Warrants called for redemption, such Warrants shall
expire and become void and all rights hereunder and under the Warrant
Certificates, except the right to receive payment of the redemption price, shall
cease.
(f) If the shares of the Company's Common Stock are subdivided or
combined into a greater or smaller number of shares of Common Stock, the Target
Price shall be proportionally adjusted
10
<PAGE>
by the ratio which the total number of shares of Common Stock outstanding
immediately prior to such event bears to the total number of shares of Common
Stock to be outstanding immediately after such event.
9. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES OF COMMON STOCK OR
WARRANTS.
(a) Subject to the exceptions referred to in Section 9(g) below, in
the event the Company shall, at any time or from time to time after the date
hereof, sell any shares of Common Stock for a consideration per share less than
the Market Price of the Common Stock (as defined in Section 8) on the date of
the sale or issue any shares of Common Stock as a stock dividend to the holders
of Common Stock, or subdivide or combine the outstanding shares of Common Stock
into a greater or lesser number of shares (any such sale, issuance, subdivision,
or combination being herein called a "Change of Shares"), then, and thereafter
upon each further Change of Shares, the Purchase Price in effect immediately
prior to such Change of Shares shall be changed to a price (including any
applicable fraction of a cent) determined by multiplying the Purchase Price in
effect immediately prior thereto by a fraction, the numerator of which shall be
the sum of the number of shares of Common Stock outstanding immediately prior to
the issuance of such additional shares and the number of shares of Common Stock
which the aggregate consideration received (determined as provided in subsection
9(f) below) for the issuance of such additional shares would purchase at such
current market price per share of Common Stock, and the denominator of which
shall be the sum of the number of shares of Common Stock outstanding immediately
after the issuance of such additional shares. Such adjustment shall be made
successively whenever such an issuance is made.
Upon each adjustment of the Purchase Price pursuant to this
Section 9, the total number of shares of Common Stock purchasable upon the
exercise of each Warrant shall (subject to the provisions contained in Section
9(b) hereof) be such number of shares (calculated to the nearest tenth)
purchasable at the Purchase Price in effect immediately prior to such adjustment
multiplied by a fraction, the numerator of which shall be the Purchase Price in
effect immediately prior to such adjustment and the denominator of which shall
be the Purchase Price in effect immediately after such adjustment.
11
<PAGE>
(b) The Company may elect, upon any adjustment of the Purchase Price
hereunder, to adjust the number of Warrants outstanding, in lieu of the
adjustment in the number of shares of Common Stock purchasable upon the exercise
of each Warrant as hereinabove provided, so that each Warrant outstanding after
such adjustment shall represent the right to purchase one share of Common Stock.
Each Warrant held of record prior to such adjustment of the number of Warrants
shall become that number of Warrants (calculated to the nearest tenth)
determined by multiplying the number one by a fraction, the numerator of which
shall be the Purchase Price in effect immediately prior to such adjustment and
the denominator of which shall be the Purchase Price in effect immediately after
such adjustment. Upon each adjustment of the number of Warrants pursuant to
this Section 9, the Company shall, as promptly as practicable, cause to be
distributed to each Registered Holder of Warrant Certificates on the date of
such adjustment Warrant Certificates evidencing, subject to Section 10 hereof,
the number of additional Warrants to which such Holder shall be entitled as a
result of such adjustment or, at the option of the Company, cause to be
distributed to such Holder in substitution and replacement for the Warrant
Certificates held by him prior to the date of adjustment (and upon surrender
thereof, if required by the Company) new Warrant Certificates evidencing the
number of Warrants to which such Holder shall be entitled after such adjustment.
(c) In case of any reclassification, capital reorganization, or other
change of outstanding shares of Common Stock, or in case of any consolidation or
merger of the Company with or into another corporation (other than a
consolidation or merger in which the Company is the continuing corporation and
which does not result in any reclassification, capital reorganization, or other
change of outstanding shares of Common Stock), or in case of any sale or
conveyance to another corporation of the property of the Company as, or
substantially as, an entirety (other than a sale/leaseback, mortgage, or other
financing transaction), the Company shall cause effective provision to be made
so that each holder of a warrant then outstanding shall have the right
thereafter, by exercising such Warrant, to purchase the kind and number of
shares of stock or other securities or property (including cash) receivable upon
such reclassification, capital reorganization, or other change, consolidation,
merger, sale, or conveyance by a holder of the number of shares of Common Stock
that
12
<PAGE>
might have been purchased upon exercise of such Warrant immediately prior to
such reclassification, capital reorganization, or other change, consolidation,
merger, sale, or conveyance. Any such provision shall include provision for
adjustments that shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 9. The Company shall not effect any
such consolidation, merger, or sale unless prior to or simultaneously with the
consummation thereof the successor (if other than the Company) resulting from
such consolidation or merger or the corporation purchasing assets or other
appropriate corporation or entity shall assume, by written instrument executed
and delivered to the Warrant Agent, the obligation to deliver to the holder of
each Warrant such shares of stock, securities, or assets as, in accordance with
the foregoing provisions, such holders may be entitled to purchase and the other
obligations under this Agreement. The foregoing provisions shall similarly
apply to successive reclassification, capital reorganizations, and other changes
of outstanding shares of Common Stock and to successive consolidations, mergers,
sales, or conveyances.
(d) Irrespective of any adjustments or changes in the Purchase Price
or the number of shares of Common Stock purchasable upon exercise of the
Warrants, the Warrant Certificates theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue new Warrant Certificates
pursuant to Section 2(d) hereof, continue to express the Purchase Price per
share, the number of shares purchasable thereunder, and the Redemption Price
therefor as the Purchase Price per share, and the number of shares purchasable
and the Redemption Price therefore were expressed in the Warrant Certificates
when the same were originally issued.
(e) After each adjustment of the Purchase Price pursuant to this
Section 9, the Company will promptly prepare a certificate signed by the
President or a Vice President, and by the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary, of the Company setting forth: (i) the
Purchase Price as so adjusted, (ii) the number of shares of Common Stock
purchasable upon exercise of each Warrant after such adjustment, and, if the
Company shall have elected to adjust the number of Warrants, the number of
Warrants to which the registered holder of each Warrant shall then be entitled,
and the adjustment in Redemption Price resulting therefrom, and (iii) a brief
statement of the facts accounting for such adjustment. The Company will promptly
file such
13
<PAGE>
certificate with the Warrant Agent and cause a brief summary thereof to be sent
by ordinary first class mail to Stratton and to each registered holder of
Warrants at his last address as it shall appear on the registry books of the
Warrant Agent. No failure to mail such notice nor any defect therein or in the
mailing thereof shall affect the validity thereof except as to the holder to
whom the Company failed to mail such notice, or except as to the holder whose
notice was defective. The affidavit of an officer of the Warrant Agent or the
Secretary or an Assistant Secretary of the Company that such notice has been
mailed shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.
(f) For purposes of Section 9(a) and 9(b) hereof, the following
provisions (i) to (vii) shall also be applicable:
(i) The number of shares of Common Stock outstanding at any
given time shall include shares of Common Stock owned or held by or for the
account of the Company and the sale or issuance of such treasury shares or the
distribution of any such treasury shares shall not be considered a Change of
Shares for purposes of said sections.
(ii) No adjustment of the Purchase Price shall be made unless
such adjustment would require an increase or decrease of at least $.10 in such
price; provided that any adjustments which by reason of this subsection (ii) are
not required to be made shall be carried forward and shall be made at the time
of and together with the next subsequent adjustment which, together with any
adjustment(s) so carried forward, shall require an increase or decrease of at
least $.10 in the Purchase Price then in effect hereunder.
(iii) In case of (1) the sale by the Company for cash of any
rights or warrants to subscribe for or purchase, or any options for the purchase
of, Common Stock or any securities convertible into or exchangeable for Common
Stock without the payment of any further consideration other than cash, if any
(such convertible or exchangeable securities being herein called "Convertible
Securities"), or (2) the issuance by the Company, without the receipt by the
Company of any consideration therefor, of any rights or warrants to subscribe
for or purchase, or any options for the purchase of, Common Stock or Convertible
Securities, in each case, if (and only if) the consideration
14
<PAGE>
payable to the Company upon the exercise of such rights, warrants, or options
shall consist of cash, whether or not such rights, warrants, or options, or the
right to convert or exchange such Convertible Securities, are immediately
exercisable, and the price per share for which Common Stock is issuable upon the
exercise of such rights, warrants, or options or upon the conversion or exchange
of such Convertible Securities (determined by dividing (x) the minimum aggregate
consideration payable to the Company upon the exercise of such rights, warrants,
or options, plus the consideration received by the Company for the issuance or
sale of such rights, warrants, or options, plus, in the case of such Convertible
Securities, the minimum aggregate amount of additional consideration, if any,
other than such Convertible Securities, payable upon the conversion or exchange
thereof, by (y) the total maximum number of shares of Common Stock issuable upon
the exercise of such rights, warrants, or options or upon the conversion or
exchange of such Convertible Securities issuable upon the exercise of such
rights, warrants, or options) is less than the fair market value of the Common
Stock on the date of the issuance or sale of such rights, warrants, or options,
then the total maximum number of shares of Common Stock issuable upon the
exercise of such rights, warrants, or options or upon the conversion or exchange
of such Convertible Securities (as of the date of the issuance or sale of such
rights, warrants, or options) shall be deemed to be outstanding shares of Common
Stock for purposes of Sections 9(a) and 9(b) hereof and shall be deemed to have
been sold for cash in an amount equal to such price per share.
(iv) In case of the sale by the Company for cash of any
Convertible Securities, whether or not the right of conversion or exchange
thereunder is immediately exercisable, and the price per share for which Common
Stock is issuable upon the conversion or exchange of such Convertible Securities
(determined by dividing (x) the total amount of consideration received by the
Company for the sale of such Convertible Securities, plus the minimum aggregate
amount of additional consideration, if any, other than such Convertible
Securities, payable upon the conversion or exchange thereof, by (y) the total
maximum number of shares of Common Stock issuable upon the conversion or
exchange of such Convertible Securities) is less than the fair market value of
the Common Stock on the date of the sale of such Convertible Securities, then
the total maximum number of shares of Common Stock issuable upon the conversion
or exchange of such Convertible Securities (as of the
15
<PAGE>
date of the sale of such Convertible Securities) shall be deemed to be
outstanding shares of Common Stock for purposes of Sections 9(a) and 9(b) hereof
and shall be deemed to have been sold for cash in an amount equal to such price
per share.
(v) In case the Company shall modify the rights of conversion,
exchange, or exercise of any of the securities referred to in subsection (iii)
above or any other securities of the Company convertible, exchangeable, or
exercisable for shares of Common Stock, for any reason other than an event that
would require adjustment to prevent dilution, so that the consideration per
share received by the Company after such modification is less than the market
price on the date prior to such modification, the Purchase Price to be in effect
after such modification shall be determined by multiplying the Purchase Price in
effect immediately prior to such event by a fraction, of which the numerator
shall be the number of shares of Common Stock outstanding multiplied by the
market price on the date prior to the modification plus the number of shares of
Common Stock which the aggregate consideration receivable by the Company for the
securities affected by the modification would purchase at the market price and
of which the denominator shall be the number of shares of Common Stock
outstanding on such date plus the number of shares of Common Stock to be issued
upon conversion, exchange, or exercise of the modified securities at the
modified rate. Such adjustment shall become effective as of the date upon which
such modification shall take effect.
(vi) On the expiration of any such right, warrant, or option or
the termination of any such right to convert or exchange any such Convertible
Securities, the Purchase Price then in effect hereunder shall forthwith be
readjusted to such Purchase Price as would have obtained (a) had the adjustments
made upon the issuance or sale of such rights, warrants, options, or Convertible
Securities been made upon the basis of the issuance of only the number of shares
of Common Stock theretofore actually delivered (and the total consideration
received therefor) upon the exercise of such rights, warrants, or options or
upon the conversion or exchange of such Convertible Securities and (b) had
adjustments been made on the basis of the Purchase Price as adjusted under
clause (a) for all transactions (which would have affected such adjusted
Purchase Price) made after the issuance or sale of such rights, warrants,
options, or Convertible Securities.
16
<PAGE>
(vii) In case of the sale for cash of any shares of Common
Stock, any Convertible Securities, any rights or warrants to subscribe for or
purchase, or any options for the purchase of, Common Stock or Convertible
Securities, the consideration received by the Company therefore shall be deemed
to be the gross sales price therefor without deducting therefrom any expense
paid or incurred by the Company or any underwriting discounts or commissions or
concessions paid or allowed by the Company in connection therewith.
(g) No adjustment to the Purchase Price of the Warrants or to the
number of shares of Common Stock purchasable upon the exercise of each Warrant
will be made, however,
(i) upon the sale or exercise of the Warrants, including without
limitation the sale or exercise of any of the Warrants or Common Stock
comprising the Purchase Option; or
(ii) upon the sale of any shares of Common Stock in the Company's
initial public offering, including, without limitation, shares sold upon the
exercise of any over-allotment option granted to the Underwriters in connection
with such offering; or
(iii) upon the issuance or sale of Common Stock or Convertible
Securities upon the exercise of any rights or warrants to subscribe for or
purchase, or any options for the purchase of, Common Stock or Convertible
Securities, whether or not such rights, warrants, or options were outstanding on
the date of the original sale of the Warrants or were thereafter issued or sold;
or
(iv) upon the issuance or sale of Common Stock upon conversion or
exchange of any Convertible Securities, whether or not any adjustment in the
Purchase Price was made or required to be made upon the issuance or sale of such
Convertible Securities and whether or not such Convertible Securities were
outstanding on the date of the original sale of the Warrants or were thereafter
issued or sold; or
(v) upon the issuance or sale of Common Stock or Convertible
Securities in a private placement unless the issuance or sale price is less than
85% of the fair market value of the Common Stock on the date of issuance, in
which case the adjustment
17
<PAGE>
shall only be for the difference between 85% of the fair market value and the
issue or sale price;
(vi) upon the issuance or sale of Common Stock or Convertible
Securities to shareholders of any corporation which merges and/or consolidates
into or is acquired by the Company or from which the Company acquires assets and
some or all of the consideration consists of equity securities of the Company,
in proportion to their stock holdings of such corporation immediately prior to
the acquisition but only if no adjustment is required pursuant to any other
provision of this Section 9;
(vii) upon the issuance or exercise of options granted to the
Company's directors, employees or consultants under a plan or plans adopted by
the Company's Board of Directors and approved by its stockholders (but only to
the extent that the aggregate number of shares excluded hereby and issued after
the date hereof shall not exceed ten percent (10%) of the Company's Common Stock
at the time of issuance);
(viii) upon the issuance of Common Stock to the Company's
directors, employees or consultants under a plan or plans which are qualified
under the Internal Revenue Code; or
(ix) upon the issuance of Common Stock in a bona fide public
offering pursuant to a firm commitment underwriting.
(h) As used in this Section 9, the term "Common Stock" shall mean and
include the Company's Common Stock authorized on the date of the original issue
of the Units and shall also include any capital stock of any class of the
Company thereafter authorized which shall not be limited to a fixed sum or
percentage in respect of the rights of the holders thereof to participate in
dividends and in the distribution of assets upon the voluntary liquidation,
dissolution, or winding up of the Company; provided, however, that the shares
issuable upon exercise of the Warrants shall include only shares of such class
designated in the Company's Certificate of Incorporation as Common Stock on the
date of the original issue of the Units or (i), in the case of any
reclassification, change, consolidation, merger, sale, or conveyance of the
character referred to in Section 9(c) hereof, the stock, securities, or property
provided for in such section or (ii), in the case of any reclassification or
change in the outstanding shares of Common
18
<PAGE>
Stock issuable upon exercise of the Warrants as a result of a subdivision or
combination or a change in par value, or from par value to no par value, or from
no par value to par value, such shares of Common Stock as so reclassified or
changed.
(i) Any determination as to whether an adjustment in the Purchase
Price in effect hereunder is required pursuant to Section 9, or as to the amount
of any such adjustment, if required, shall be binding upon the holders of the
Warrants and the Company if made in good faith by the Board of Directors of the
Company.
(j) If and whenever the Company shall grant to the holders of Common
Stock, as such, rights or warrants to subscribe for or to purchase, or any
options for the purchase of, Common Stock or securities convertible into or
exchangeable for or carrying a right, warrant, or option to purchase Common
Stock, the Company shall concurrently therewith grant to each Registered Holder
as of the record date for such transaction of the Warrants then outstanding, the
rights, warrants, or options to which each Registered Holder would have been
entitled if, on the record date used to determine the stockholders entitled to
the rights, warrants, or options being granted by the Company, the Registered
Holder were the holder of record of the number of whole shares of Common Stock
then issuable upon exercise (assuming, for purposes of this section 9(j), that
exercise of warrants is permissible during periods prior to the Initial Warrant
Exercise Date) of his Warrants. Such grant by the Company to the holders of the
Warrants shall be in lieu of any adjustment which otherwise might be called for
pursuant to this Section 9.
10. FRACTIONAL WARRANTS AND FRACTIONAL SHARES.
(a) If the number of shares of Common Stock purchasable upon the
exercise of each Warrant is adjusted pursuant to Section 9 hereof, the Company
nevertheless shall not be required to issue fractions of shares, upon exercise
of the Warrants or otherwise, or to distribute certificates that evidence
fractional shares. In such event, the Company may at its option elect to round
up the number of shares to which the Holder is entitled to the nearest whole
share or to pay cash in respect of fractional shares in accordance with the
following: With respect to any fraction of a share called for upon any exercise
hereof, the Company shall pay to the Holder an amount in cash equal to such
fraction multiplied by
19
<PAGE>
the current market value of such fractional share, determined as follows:
(i) If the Common Stock is listed on a National Securities
Exchange or admitted to unlisted trading privileges on such exchange or listed
for trading on the NASDAQ Quotation System or the NASD Bulletin Board, the
current value shall be the last reported sale price of the Common Stock on such
exchange on the last business day prior to the date of exercise of this Warrant
or if no such sale is made on such day, the average of the closing bid and asked
prices for such day on such exchange; or
(ii) If the Common Stock is not listed or admitted to unlisted
trading privileges, the current value shall be the mean of the last reported bid
and asked prices reported by the National Quotation Bureau, Inc. or the NASD
Bulletin Board on the last business day prior to the date of the exercise of
this Warrant; or
(iii) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so reported, the
current value shall be an amount determined in such reasonable manner as may be
prescribed by the Board of Directors of the Company.
11. WARRANT HOLDERS NOT DEEMED STOCKHOLDERS. No holder of Warrants shall,
as such, be entitled to vote or to receive dividends or be deemed the holder of
Common Stock that may at any time be issuable upon exercise of such Warrants for
any purpose whatsoever, nor shall anything contained herein be construed to
confer upon the holder of Warrants, as such, any of the rights of a stockholder
of the Company or any right to vote for the election of directors or upon any
matter submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action (whether upon any recapitalization, issue or
reclassification of stock, change of par value or change of stock to no par
value, consolidation, merger, or conveyance or otherwise), or to receive notice
of meetings, or to receive dividends or subscription rights, until such Holder
shall have exercised such Warrants and been issued shares of Common Stock in
accordance with the provisions hereof.
12. RIGHTS OF ACTION. All rights of action with respect to this Agreement
are vested in the respective Registered Holders of
20
<PAGE>
the Warrants, and any Registered Holder of a Warrant, without consent of the
Warrant Agent or of the holder of any other Warrant, may, in his own behalf and
for his own benefit, enforce against the Company his right to exercise his
Warrants for the purchase of shares of Common Stock in the manner provided in
the Warrant Certificate and this Agreement.
13. AGREEMENT OF WARRANT HOLDERS. Every holder of a Warrant, by his
acceptance thereof, consents and agrees with the Company, the Warrant Agent and
every other holder of a warrant that:
(a) The warrants are transferable only on the registry books of the
Warrant Agent by the Registered Holder thereof in person or by his attorney duly
authorized in writing and only if the Warrant Certificates representing such
Warrants are surrendered at the office of the Warrant Agent, duly endorsed or
accompanied by a proper instrument of transfer satisfactory to the Warrant Agent
and the Company in their mutual discretion, together with payment of any
applicable transfer taxes; and
(b) The Company and the Warrant Agent may deem and treat the person
in whose name the Warrant Certificate is registered as the holder and as the
absolute, true, and lawful owner of the Warrants represented thereby for all
purposes, and neither the Company nor the Warrant Agent shall be affected by any
notice or knowledge to the contrary, except as otherwise expressly provided in
Section 7 hereof.
14. CANCELLATION OF WARRANT CERTIFICATES. If the Company shall purchase
or acquire any Warrant or Warrants, the Warrant Certificate or Warrant
Certificates evidencing the same shall thereupon be delivered to the Warrant
Agent and canceled by it and retired. The Warrant Agent shall also cancel
Common Stock following exercise of any or all of the Warrants represented
thereby or delivered to it for transfer, split up, combination, or exchange.
15. CONCERNING THE WARRANT AGENT. The Warrant Agent acts hereunder as
agent and in a ministerial capacity for the Company, and its duties shall be
determined solely by the provisions hereof. The Warrant Agent shall not, by
issuing and delivering Warrant Certificates or by any other act hereunder be
deemed to make any representations as to the validity, value, or authorization
of the
21
<PAGE>
Warrant Certificates or the Warrants represented thereby or of any securities or
other property delivered upon exercise of any Warrant or whether any stock
issued upon exercise of any Warrant is fully paid and nonassessable.
The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be made
any adjustment of the Purchase Price or the Redemption Price provided in this
Agreement, or to determine whether any fact exists which may require any such
adjustments, or with respect to the nature or extent of any such adjustment,
when made, or with respect to the method employed in making the same. It shall
not (i) be liable for any recital or statement of facts contained herein or for
any action taken, suffered, or omitted by it in reliance on any warrant
Certificate or other document or instrument believed by it in good faith to be
genuine and to have been signed or presented by the proper party or parties,
(ii) be responsible for any failure on the part of the Company to comply with
any of its covenants and obligations contained in this Agreement or in any
Warrant Certificate, or (iii) be liable for any act or omission in connection
with this Agreement except for its own negligence or wilful misconduct.
The Warrant Agent may at any time consult with counsel satisfactory to
it (who may be counsel for the Company) and shall incur no liability or
responsibility for any action taken, suffered or omitted by it in good faith in
accordance with the opinion or advice of such counsel.
Any notice, statement, instruction, request, direction, order, or
demand of the Company shall be sufficiently evidenced by an instrument signed by
the President, any Vice President, its Secretary, or Assistant Secretary,
(unless other evidence in respect thereof is herein specifically prescribed).
The Warrant Agent shall not be liable for any action taken, suffered or omitted
by it in accordance with such notice, statement, instruction, request,
direction, order, or demand reasonably believed by it to be genuine.
The Company agrees to pay the Warrant Agent reasonable compensation
for its services hereunder and to reimburse it for its reasonable expenses
hereunder; it further agrees to indemnify the Warrant Agent and save it harmless
against any and all losses,
22
<PAGE>
expenses, and liabilities, including judgments, costs, and counsel fees, for
anything done or omitted by the Warrant Agent in the execution of its duties and
powers hereunder except losses, expenses, and liabilities arising as a result of
the Warrant Agent's negligence or wilful misconduct.
The Warrant Agent may resign its duties and be discharged from all
further duties and liabilities hereunder (except liabilities arising as a result
of the Warrant Agent's own negligence or wilful misconduct), after giving thirty
(30) days prior written notice to the Company. At least fifteen (15) days prior
to the date such resignation is to become effective, the Warrant Agent shall
cause a copy of such notice of resignation to be mailed to the Registered Holder
of each Warrant Certificate at the Company's expense. Upon such resignation, or
any inability of the Warrant Agent to act as such hereunder, the Company shall
appoint a new warrant agent in writing. If the Company shall fail to make such
appointment within a period of fifteen (15) days after it has been notified in
writing of such resignation by the resigning Warrant Agent, then the Registered
Holder of any Warrant Certificate may apply to any court of competent
jurisdiction in the State of New York for the appointment of a new warrant
agent. Any new warrant agent, whether appointed by the Company or by such a
court, shall be a bank or trust company having a capital and surplus, as shown
by its last published report to its stockholders, of not less than $10,000,000
or a stock transfer company. After acceptance in writing of such appointment by
the new warrant agent is received by the Company, such new warrant agent shall
be vested with the same powers, rights, duties, and responsibilities as if it
had been originally named herein as the Warrant Agent, without any further
assurance, conveyance, act, or deed; but if for any reason it shall be necessary
or expedient to execute and deliver any further assurance, conveyance, act, or
deed, the same shall be done at the expense of the Company and shall be legally
and validly executed and delivered by the resigning Warrant Agent. Not later
than the effective date of any such appointment the Company shall file notice
thereof with the resigning Warrant Agent and shall forthwith cause a copy of
such notice to be mailed to the Registered Holder of each Warrant Certificate.
Any corporation into which the Warrant Agent or any new warrant agent
may be converted or merged or any corporation resulting from any consolidation
to which the Warrant Agent or any
23
<PAGE>
new warrant agent shall be a party or any corporation succeeding to the trust
business of the Warrant Agent shall be a successor warrant agent under this
Agreement without any further act, provided that such corporation is eligible
for appointment as successor to the Warrant Agent under the provisions of the
preceding paragraph. Any such successor warrant agent shall promptly cause
notice of its succession as warrant agent to be mailed to the Company and to the
Registered Holder of each Warrant Certificate.
The Warrant Agent, its subsidiaries and affiliates, and any of its or
their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same manner
and to the same extent and with like effects as though it were not the Warrant
Agent. Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company if so authorized by the Company or for any other legal
entity.
16. MODIFICATION OF AGREEMENT. The Warrant Agent and the Company may by
supplemental agreement make any changes or corrections in this Agreement (i)
that they shall deem appropriate to cure any ambiguity or to correct any
defective or inconsistent provision or manifest mistake or error herein
contained; or (ii) that they may deem necessary or desirable and which shall not
adversely affect the interests of the holders of Warrant Certificates; PROVIDED,
HOWEVER, that this Agreement shall not otherwise be modified, supplemented, or
altered in any respect except with the consent in writing of the Registered
Holders of Warrant Certificates representing not less than fifty percent (50%)
of the Warrants then outstanding; and PROVIDED, FURTHER, that no change in the
number or nature of the securities purchasable upon the exercise of any Warrant,
or the Purchase Price therefor, or the acceleration of the Warrant Expiration
Date, shall be made without the consent in writing of the Registered Holder of
the Warrant Certificate representing such Warrant, other than such changes as
are specifically prescribed by this Agreement as originally executed or are made
in compliance with applicable law.
17. NOTICES. All notices, requests, consents, and other communications
hereunder shall be in writing and shall be deemed to have been made when
delivered or mailed first class registered or certified mail, postage prepaid as
follows: if to the Registered
24
<PAGE>
Holder of a Warrant Certificate, at the address of such holder as shown on the
registry books maintained by the Warrant Agent; if to the Company, 7-4
Metropolitan Court, Gaithersburg, Maryland 20878, Attention: Robert Veschi, or
at such other address as may have been furnished to the Warrant Agent in writing
by the Company; and if to the Warrant Agent, at its corporate office.
18. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without reference to
principles of conflict of laws.
19. BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of the Company and the Warrant Agent, and their respective successors
and assigns, and the holders from time to time of Warrant Certificates. Nothing
in this Agreement is intended or shall be construed to confer upon any other
person any right, remedy, or claim, in equity or at law, or to impose upon any
other person any duty, liability, or obligation.
20. TERMINATION. This Agreement shall terminate at the close of business
on the Warrant Expiration Date of all the Warrants or such earlier date upon
which all Warrants have been exercised, except that the Warrant Agent shall
account to the Company for cash held by it and the provisions of Section 15
hereof shall survive such termination.
21. COUNTERPARTS. This Agreement may be executed in several counterparts,
which taken together shall constitute a single document.
25
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
e-NET, INC.
By: ______________________________
Its
AMERICAN STOCK TRANSFER & TRUST COMPANY
By: ______________________________
Its
Authorized Officer
26
<PAGE>
EXHIBIT A
[Form of Face of Class A Warrant Certificate]
No. W Class A Warrants
VOID AFTER AUGUST , 2001
STOCK PURCHASE WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK
MVSI, INC.
THIS CERTIFIES THAT FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Class A Redeemable Common Stock Purchase Warrants ("Warrants") specified above.
Each Warrant initially entitles the Registered Holder to purchase, subject to
the terms and conditions set forth in this Certificate and the Warrant Agreement
(as hereinafter defined), one fully paid and nonassessable share of Common
Stock, $.01 par value ("Common Stock"), of e-NET, INC., a Delaware corporation
(the "Company"), at any time between the Initial Warrant Exercise Date (as
herein defined) and the Expiration Date (as hereinafter defined), upon the
presentation and surrender of this Warrant Certificate with the Subscription
Form on the reverse hereof duly executed, at the corporate office of AMERICAN
STOCK TRANSFER & TRUST COMPANY as Warrant Agent, or its successor (the "Warrant
Agent"), accompanied by payment of $7.50 (the "Purchase Price") in lawful money
of the United States of America in cash or by official bank or certified check
made payable to e-NET, Inc.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement") dated August __, 1996,
by and between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price or the number of shares of Common Stock subject to
purchase upon the exercise of each Warrant represented hereby are subject to
modifications or adjustment.
<PAGE>
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Common Stock will be issued. In
the case of the exercise of less than all the Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate or Warrant Certificates of
like tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
The term "Initial Warrant Exercise Date" shall mean August __, 1997.
The term "Expiration Date" shall mean 5:00 p.m. (New York time on
August __, 2001, or such earlier date as the Warrants shall be redeemed. If
such date shall in the State of New York be a holiday or a day on which the
banks are authorized to close, then the Expiration Date shall mean 5:00 p.m.
(New York time) the next following day which in the State of New York is not a
holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant to
the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended, with respect to such securities is
effective. The Company has covenanted and agreed that it will file a
registration statement and will use its best efforts to cause the same to become
effective and to keep such registration statement current while any of the
Warrants are outstanding. This Warrant shall not be exercisable by a Registered
Holder in any state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment with any transfer fee in addition
to any tax or other governmental charge imposed in connection therewith, for
registration of transfer of this Warrant Certificate at such office, a new
Warrant Certificate or Warrant Certificates representing an equal aggregate
number of Warrants will be issued to the transferee in exchange therefor,
subject to the limitations provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to
2
<PAGE>
vote or to receive dividends or other distributions, and shall not be entitled
to receive any notice of any proceedings of the Company, except as provided in
the Warrant Agreement.
This Warrant may be redeemed at the option of the Company, at a redemption
price of $.05 per Warrant at any time after two (2) years from the Effective
Date, provided the Market Price (as defined in the Warrant Agreement) for the
securities issuable upon exercise of such Warrant shall equal or exceed
$10.00 per share. Notice of redemption shall be given not later than the
thirtieth day before the date fixed for redemption, all as provided in the
Warrant Agreement. On and after the date fixed for redemption, the Registered
Holder shall have no rights with respect to this Warrant except to receive the
$.05 per Warrant upon surrender of this Certificate.
Prior to due presentment for registration of transfer hereof, the Company
and the Warrant Agent may deem and treat the Registered Holder as the absolute
owner hereof and of each Warrant represented hereby (notwithstanding any
notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of New York.
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
3
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
e-NET, INC.
By: ______________________________
Its
Date: ______________________________
[Seal]
COUNTERSIGNED:
AMERICAN STOCK TRANSFER & TRUST COMPANY,
as Warrant Agent
By: ______________________________
Its
Authorized Officer
4
<PAGE>
[Form of Reverse of Class A Warrant Certificate]
SUBSCRIPTION FORM
To Be Executed by the Registered Holder in Order to Exercise Warrants
THE UNDERSIGNED REGISTERED HOLDER hereby irrevocably elects to exercise
_____ Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in the name of
____________________________________________
(please insert taxpayer identification or other identifying number)
and be delivered to
____________________________________________
____________________________________________
____________________________________________
____________________________________________
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below:
____________________________________________
____________________________________________
____________________________________________
(Address)
_________________________________
(Date)
_________________________________
(Taxpayer Identification Number)
<PAGE>
SIGNATURE GUARANTEED
ASSIGNMENT
To Be Executed by the Registered Holder in Order to Assign Warrants
FOR VALUE RECEIVED, hereby sells, assigns, and transfers unto
____________________________________________
(please insert taxpayer identification or other identifying number)
____________________________________________
____________________________________________
____________________________________________
____________________________________________
(please print or type name and address)
of the Warrants represented by this Warrant Certificate, and hereby irrevocably
constitutes and appoints _________________________________ Attorney to transfer
this Warrant Certificate on the books of the Company, with full power of
substitution in the premises.
_________________________________
(Date)
SIGNATURE GUARANTEED
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY AN ELIGIBLE INSTITUTION (AS DEFINED IN RULE 17Ad-15 UNDER THE
SECURITIES AND EXCHANGE ACT OF 1934) WHICH MAY INCLUDE A COMMERCIAL BANK OR
TRUST COMPANY, SAVINGS ASSOCIATION, CREDIT UNION OR A MEMBER FIRM OF THE
AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE OR
MIDWEST STOCK EXCHANGE.
2
<PAGE>
EXHIBIT B
[Form of Face of Class B Warrant Certificate]
No. W Class B Warrants
VOID AFTER AUGUST , 2001
STOCK PURCHASE WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK
MVSI, INC.
THIS CERTIFIES THAT FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Class B Redeemable Common Stock Purchase Warrants ("Warrants") specified above.
Each Warrant initially entitles the Registered Holder to purchase, subject to
the terms and conditions set forth in this Certificate and the Warrant Agreement
(as hereinafter defined), one fully paid and nonassessable share of Common
Stock, $.01 par value ("Common Stock"), of e-NET, INC., a Delaware corporation
(the "Company"), at any time between the Initial Warrant Exercise Date (as
herein defined) and the Expiration Date (as hereinafter defined), upon the
presentation and surrender of this Warrant Certificate with the Subscription
Form on the reverse hereof duly executed, at the corporate office of AMERICAN
STOCK TRANSFER & TRUST COMPANY as Warrant Agent, or its successor (the "Warrant
Agent"), accompanied by payment of $8.00 (the "Purchase Price") in lawful money
of the United States of America in cash or by official bank or certified check
made payable to e-NET, Inc.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement") dated August __, 1996,
by and between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price or the number of shares of Common Stock subject to
purchase upon the exercise of each Warrant represented hereby are subject to
modifications or adjustment.
<PAGE>
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Common Stock will be issued. In
the case of the exercise of less than all the Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate or Warrant Certificates of
like tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
The term "Initial Warrant Exercise Date" shall mean August __, 1997.
The term "Expiration Date" shall mean 5:00 p.m. (New York time on
August __, 2001, or such earlier date as the Warrants shall be redeemed. If
such date shall in the State of New York be a holiday or a day on which the
banks are authorized to close, then the Expiration Date shall mean 5:00 p.m.
(New York time) the next following day which in the State of New York is not a
holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant to
the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended, with respect to such securities is
effective. The Company has covenanted and agreed that it will file a
registration statement and will use its best efforts to cause the same to become
effective and to keep such registration statement current while any of the
Warrants are outstanding. This Warrant shall not be exercisable by a Registered
Holder in any state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment with any transfer fee in addition
to any tax or other governmental charge imposed in connection therewith, for
registration of transfer of this Warrant Certificate at such office, a new
Warrant Certificate or Warrant Certificates representing an equal aggregate
number of Warrants will be issued to the transferee in exchange therefor,
subject to the limitations provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to
2
<PAGE>
vote or to receive dividends or other distributions, and shall not be entitled
to receive any notice of any proceedings of the Company, except as provided in
the Warrant Agreement.
This Warrant may be redeemed at the option of the Company, at a redemption
price of $.05 per Warrant at any time after two (2) years from the Effective
Date, provided the Market Price (as defined in the Warrant Agreement) for the
securities issuable upon exercise of such Warrant shall equal or exceed
$10.00 per share. Notice of redemption shall be given not later than the
thirtieth day before the date fixed for redemption, all as provided in the
Warrant Agreement. On and after the date fixed for redemption, the Registered
Holder shall have no rights with respect to this Warrant except to receive the
$.05 per Warrant upon surrender of this Certificate.
Prior to due presentment for registration of transfer hereof, the Company
and the Warrant Agent may deem and treat the Registered Holder as the absolute
owner hereof and of each Warrant represented hereby (notwithstanding any
notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of New York.
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
3
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
e-NET, INC.
By: ______________________________
Its
Date: ______________________________
[Seal]
COUNTERSIGNED:
AMERICAN STOCK TRANSFER & TRUST COMPANY,
as Warrant Agent
By: ______________________________
Its
Authorized Officer
4
<PAGE>
[Form of Reverse of Class B Warrant Certificate]
SUBSCRIPTION FORM
To Be Executed by the Registered Holder in Order to Exercise Warrants
THE UNDERSIGNED REGISTERED HOLDER hereby irrevocably elects to exercise
_____ Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in the name of
____________________________________________
(please insert taxpayer identification or other identifying number)
and be delivered to
____________________________________________
____________________________________________
____________________________________________
____________________________________________
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below:
____________________________________________
____________________________________________
____________________________________________
(Address)
_________________________________
(Date)
_________________________________
(Taxpayer Identification Number)
<PAGE>
SIGNATURE GUARANTEED
ASSIGNMENT
To Be Executed by the Registered Holder in Order to Assign Warrants
FOR VALUE RECEIVED, hereby sells, assigns, and transfers unto
____________________________________________
(please insert taxpayer identification or other identifying number)
____________________________________________
____________________________________________
____________________________________________
____________________________________________
(please print or type name and address)
of the Warrants represented by this Warrant Certificate, and hereby irrevocably
constitutes and appoints _________________________________ Attorney to transfer
this Warrant Certificate on the books of the Company, with full power of
substitution in the premises.
_________________________________
(Date)
SIGNATURE GUARANTEED
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY AN ELIGIBLE INSTITUTION (AS DEFINED IN RULE 17Ad-15 UNDER THE
SECURITIES AND EXCHANGE ACT OF 1934) WHICH MAY INCLUDE A COMMERCIAL BANK OR
TRUST COMPANY, SAVINGS ASSOCIATION, CREDIT UNION OR A MEMBER FIRM OF THE
AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE OR
MIDWEST STOCK EXCHANGE.
2