<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 1997.
REGISTRATION NO. 333-3860
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 13
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>
12800 MIDDLEBROOK ROAD, SUITE 200
GERMANTOWN, MARYLAND 20874
(301) 601-8700
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
12800 MIDDLEBROOK ROAD, SUITE 200
GERMANTOWN, MARYLAND 20874
(301) 601-8700
(Address of principal place of business or intended principal place of business)
ROBERT A. VESCHI, PRESIDENT AND CHIEF EXECUTIVE OFFICER
e-NET, INC.
12800 MIDDLEBROOK ROAD, SUITE 200
GERMANTOWN, MARYLAND 20874
(301) 601-8700
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
THOMAS T. PROUSALIS, JR., ESQ. BERT L. GUSRAE, ESQ.
1919 Pennsylvania Avenue, N.W. David A. Carter, P.A.
Suite 800 355 W. Palmetto Park Road
Washington, D.C. 20006 Boca Raton, Fl 33432
(202) 296-9400 (561) 750-6999
(202) 296-9403 Fax (561) 367-0960 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>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SECURITY OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 Par Value.... 1,725,000 $ 5.00 $8,625,000 $ 2,614
Warrants........................ 1,725,000 $ .125 $ 215,625 $ 65
Common Stock Underlying
Warrants....................... 1,725,000 $ 5.25 $9,056,250 $ 2,744
Representative's Common Stock
Option......................... 150,000 -- -- --
Common Stock Underlying
Representative's Common Stock
Option......................... 150,000 $ 8.25 $1,237,500 $ 375
Representative's Warrant
Option......................... 150,000 -- -- --
Warrants Underlying
Representative's Warrant
Option......................... 150,000 $ .20625 $ 30,938 $ 9
Common Stock Underlying
Representative's Warrant
Option......................... 150,000 8.25 $1,237,500 $ 375
Common Stock, $.01 Par Value.... 250,000 $ 5.00 $1,250,000 $ 379
Total Registration and Fee.... $21,652,813 $ 6,561
</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 FEBRUARY 11, 1997
PROSPECTUS
[LOGO]
1,500,000 SHARES OF COMMON STOCK
1,500,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
e-Net, Inc. (the "Company" or "e-Net") is offering 1,500,000 shares of
Common Stock, $.01 par value per share (the "Common Stock") and 1,500,000
Redeemable Common Stock Purchase Warrants (the "Warrants"). The Common Stock and
the Warrants (collectively, the "Securities") are being offered separately and
not as units, and each are separately transferable. Each Warrant entitles the
holder to purchase one share of Common Stock at $5.25 per share (subject to
adjustment) during the five-year period commencing on the date of this
Prospectus. The Warrants are redeemable by the Company for $.05 per Warrant, on
not less than thirty (30) days nor more than sixty (60) days written notice if
the closing bid price for the Common Stock equals or exceeds $10.00 per share
during any thirty (30) consecutive trading day period ending not more than
fifteen (15) days prior to the date that the notice of redemption is mailed, and
provided there is then a current effective registration statement under the
Securities Act of 1933, as amended (the "Act") with respect to the issuance and
sale of Common Stock upon the exercise of the Warrants. Any redemption of the
Warrants during the one-year period commencing on the date of this Prospectus
shall require the written consent of Barron Chase Securities, Inc., the
representative of the Underwriters (the "Representative"). See "Description of
Securities" and "Underwriting."
Prior to this offering, there has been no public market for the Common Stock
or the Warrants. The initial public offering prices of the Common Stock and
Warrants and the exercise price and other terms of the Warrants have been
determined through negotiations between the Company and the Representative and
are not related to the Company's assets, book value, financial condition or any
other recognized criteria of value. Although the Company has applied for the
inclusion of the Common Stock and the Warrants on the Nasdaq SmallCap Market
("Nasdaq") under the symbols "ETEL" and "ETELW," respectively, there can be no
assurances that such securities will be accepted for inclusion or that an active
trading market in the Company's securities will develop or be sustained.
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS SPECULATIVE AND INVOLVES A
HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION FROM THE PUBLIC
OFFERING PRICE OF THE COMMON STOCK AND SHOULD BE CONSIDERED ONLY BY
INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. SEE "RISK FACTORS," ON PAGES 7-14 AND
"DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO THE
PRICE TO PUBLIC DISCOUNTS(1) COMPANY(2)(3)
<S> <C> <C> <C>
Per Share.............................. $5.00 $.50 $4.50
Per Warrant............................ $.125 $.0125 $.1125
Total(3)............................... $7,687,500 $768,750 $6,918,750
</TABLE>
(SEE "NOTES," NEXT PAGE)
The shares of Common Stock and the Warrants are being offered by the
Underwriters on a firm commitment basis, subject to prior sale, when, as and if
delivered to and accepted by the Underwriters, and subject to approval of
certain legal matters by their counsel and to certain other conditions. It is
expected that delivery of the certificates representing the Common Stock and the
Warrants will be made against payment therefor at the offices of the
Representative at 7700 West Camino Real, Suite 200, Boca Raton, Florida 33433 on
or about , 1997.
------------------------
[LOGO]
The date of this Prospectus is , 1997.
<PAGE>
NOTES
(1) Does not include additional underwriting compensation in the form of (i) a
non-accountable expense allowance equal to three percent of the gross
proceeds of the offering of which $30,000 has been paid to date; (ii)
Representative's Purchase Warrants to purchase 150,000 shares of Common
Stock and 150,000 Warrants exercisable for a five-year period commencing
from the effective date of the offering at an exercise price of 165% of the
price at which the Common Stock and the Warrants are sold to the public,
subject to adjustment; and (iii) a financial advisory agreement for the
Representative to act as an investment banker for the Company for a period
of three (3) years at a fee of $108,000, payable at the closing of this
offering. In addition, the Company has granted to the Representative certain
registration rights with respect to registration of the shares of Common
Stock and the Warrants underlying the Representative's Purchase Warrants and
the shares of Common Stock issuable upon exercise of the Warrants issuable
upon exercise of the Representative's Purchase Warrants and to indemnify the
Underwriters against certain liabilities arising under the Securities Act of
1933, as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $1,000,000,
including the Representative's non-accountable expense allowance.
(3) The Company has granted the Representative an option (the "Representative's
Over-Allotment Option"), exercisable within 45 days from the date of this
Prospectus, to purchase up to 225,000 additional shares of Common Stock and
up to 225,000 additional Warrants at an exercise price of $5.25 solely to
cover over-allotments, if any. If the Representative's Over-Allotment Option
is exercised in full, the total Price to Public, Underwriting Discounts and
Proceeds to Company will be $8,840,625, $884,063 and $7,956,562,
respectively. See "Underwriting."
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") 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. The statements contained
in this Prospectus as to the contents of any contract or other document
identified as exhibits in this Prospectus are not necessarily complete, and in
each instance, reference is made to a copy of such contract or document filed as
an exhibit to the Registration Statement, each statement being qualified in any
and all respects by such reference. For further information with respect to the
Company and the securities offered hereby, reference is made to such
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, DC 20549.
Upon consummation of this offering, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934 and in accordance
therewith will file reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549; at its New York Regional Office,
Room 1400, 7 World Trade Center, New York, New York 10048; and at its Chicago
Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511, and copies of such material can be obtained from the Public
Reference Section at prescribed rates. The Company intends to furnish its
shareholders with annual reports containing audited financial statements and
such other reports as the Company deems appropriate or as may be required by
law.
The Company will provide without charge to each person who receives a
Prospectus, upon written or oral request of such person, a copy of any of the
information that were incorporated by reference in the Prospectus (not including
exhibits to the information that was incorporated by reference unless the
exhibits are themselves specifically incorporated by reference). Such requests
may be directed to Stockholder Relations, e-Net, Inc., 12800 Middlebrook Road,
Suite 200, Germantown, Maryland 20874, telephone (301) 601-8700.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OR
THE WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE OVER THE COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND MUST BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS,
INCLUDING NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS
OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE
OF THE REPRESENTATIVE'S OVER-ALLOTMENT OPTION, THE REPRESENTATIVE'S PURCHASE
OPTION AND THE WARRANTS; AND (II) ASSUMES A PUBLIC OFFERING PRICE OF $5.00 PER
SHARE OF COMMON STOCK AND $.125 PER WARRANT.
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,
private voice communications across the Internet and intranets, 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, which is comprised of and has been
approved for 40 claims, for a system and method for communicating high fidelity
and clear transmission of audio or voice over the Internet and intranets,
enabling free worldwide high fidelity and clear transmission of ordinary
telephone communications. 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 had agreed to allocate $1,000,000 of capital to develop and
exploit the market opportunities for the patent by December 31, 1996, or the
patent would be subject to repurchase by the inventors of the patent. The
Company has satisfied its commitment to allocate $1,000,000 towards the
technology as of December 31, 1996. 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 and intranets. 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 and intranets. 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 and intranets, which is in the final testing stage and projected to be
available to market by the end of the Company's fourth 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
3
<PAGE>
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.
In June 1996, the Company 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. In November 1996, the Company entered into an
agreement with this division of Sprint for a one year term at a value based on
products delivered.
Between October 1996 and January 1997, the Company entered into
non-exclusive agreements with Intermedia Communications, Incorporated ("ICIX"),
Sprint, American Communication Services, Inc. ("ACSI"), NationsBank and Retix
Corporation to "beta" test and evaluate the Company's Telecom-2000 product for
possible implementation and use for voice communications services over the
Internet and/or intranets. The testing and evaluation with these companies is
expected to last approximately six months. Although the Company believes that
its Telecom 2000 product is in the final testing and evaluation stage and
projected to be available to market by the end of the Company's fourth quarter
of fiscal 1997, the Company can make no assurances that it will be able to enter
into any agreements with such concerns for the sale of such product.
In January 1997, the Company's Telecom-2000 product was selected as one of
three finalists for the Internet/intranet product category in the ComNet 97 New
Product Achievement Awards Competition, sponsored by COMPUTERWORLD, at the
ComNet trade show and exposition in Washington, D.C. The Telecom-2000 product
was demonstrated to the public at ComNet during the three-day show and
exposition while on display at the Company's and Sprint's trade booths. The
Company also had representatives present in Sprint's booth where the
Telecom-2000 product was demonstrated through voice communication between the
Company's and Sprint's booths and between the Company's booth and anywhere off
the network that the participant wanted to call.
In January 1997, the Company entered into a mutual cooperation agreement
with MVSI, Inc., a Washington, D.C. area based technology products and services
company, under which MVSI intends to resell and OEM certain of the Company's
products for applications related to the robotic and instrument technologies and
industries.
In January 1997, the Company entered into an agreement with Lockheed Martin
Technical Services, Inc. ("Lockheed Martin"), a Bethesda, Maryland based defense
and aerospace technologies firm, to perform certain telecommunications
engineering and systems integration services on a subcontractor basis on defense
and aerospace technologies contracts. The agreement has an initial value of
approximately $500,000 for a one year term and, although no assurances can be
made, the agreement may be expanded in value and term during the current fiscal
year.
In March and April 1996, the Company borrowed $1,000,000 in a bridge loan
from four persons who are nonaffiliated with the Representative 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. 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. In addition, in February 1997, such persons agreed to the
cancellation of the Class A Warrants and Class B Warrants. See "Certain
Transactions" and "Description of Securities."
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 12800
4
<PAGE>
Middlebrook Rd, Suite 200, Germantown, Maryland 20874, Maryland 20874, and its
telephone number is (301) 601-8700. 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.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered......................... 1,500,000 Shares
Warrants Offered............................. 1,500,000 Warrants
Common Stock Outstanding:
Before the Offering........................ 4,250,000 Shares
After the Offering......................... 5,750,000 Shares
Warrants Outstanding:
Before the Offering........................ None
After the Offering......................... 1,500,000
Estimated Net Proceeds(1).................... $5,918,750
Use of Proceeds.............................. Administrative expenses, operating costs and
working capital, including software support
and development, capital equipment, marketing
and sales, and mergers and acquisitions.
Nasdaq Symbols(2):
Common Stock............................... ETEL
Warrants................................... ETELW
Risk Factors(3).............................. An investment in the Common Stock and the
Warrants offered hereby is speculative and
involves a high degree of risk. Investors
should carefully consider the risk factors
enumerated hereafter before investing in the
Common Stock and the Warrants. See "Risk
Factors" and "Dilution."
</TABLE>
- ------------------------
(1) After deducting the Underwriting discounts and commissions and estimated
offering expenses of $1,000,000 payable by the Company including a three
percent non-accountable expense allowance to the Representative. See
"Underwriting."
(2) Although the Company has applied for the inclusion of the Common Stock and
the Warrants on the Nasdaq SmallCap Market under these symbols, there can be
no assurances that such securities will be accepted for inclusion or that an
active trading market in the securities will develop or be sustained. See
"Risk Factors--Possible Failure to Qualify for Nasdaq SmallCap Market
Listing."
(3) See "Risk Factors--Regulations May Impose Certain Restrictions on
Marketability of Low-priced Securities."
5
<PAGE>
SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATE)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM FOR THE PERIOD
JUNE 8, 1995 JUNE 8, 1995
NINE (BEGINNING OF (BEGINNING OF
MONTHS ENDED OPERATIONS) TO OPERATIONS)
DECEMBER 31, 1996 DECEMBER 31, 1995 TO MARCH 31, 1996
----------------- ----------------- ------------------------
<S> <C> <C> <C>
Statement of Operations Data:
Revenue........................................ $438 $205 $294
(Loss) income from operations.................. (617 ) 83 90
(Loss) income before income taxes.............. (6,330 ) 83 (537 )
Net (loss) income.............................. (6,330 ) 83 (537 )
Pro forma net loss............................. (6,330 ) (83 ) (775 )
Pro forma loss per share....................... (1.59 ) (.03 ) (.26 )
Average number of common shares outstanding.... 3,972,727 3,000,000 3,017,808
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------
HISTORICAL PRO FORMA (1) AS ADJUSTED (2)
----------- ------------- ---------------
<S> <C> <C> <C>
Balance Sheet Data:
Working capital...................................... $ 662 $ 912 $ 6,831
Total assets......................................... 1,371 1,620 7,539
Total liabilities.................................... 1,162 137 137
Stockholders' equity................................. 208 1,483 7,402
</TABLE>
- ------------------------
(1) Pro forma balance sheet data illustrates the effect of the Company receiving
an additional loan of $250,000 in January 1997 and the conversion of
$1,275,081 debt to equity in February 1997. The pro forma effect of the
conversion on the statement of operations is not material.
(2) Adjusted to reflect the sale of the securities offered hereby, less
underwriting discounts and commissions 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. See "Business."
BRIDGE FINANCING COSTS WILL NEGATIVELY IMPACT EARNINGS
The Company did not report earnings for the year ending March 31, 1996 or
for the nine month period ended December 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 was accrued during the period from March 19, 1996
through the date upon which the bridge loan was converted to equity (June 24,
1996) with a corresponding credit 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. 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 Representative 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. 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. Also, in February 1997, such persons agreed to the cancellation of
the Class A and B Warrants.
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 December 31, 1996, the Company had a pro forma net tangible book
value of $1,483,457 or $.35 per share derived from the Company's balance sheet
as of December 31, 1996 which reflects the effect of a February 1997 conversion
of debt to equity and the total common stock outstanding at December 31, 1996.
After giving effect to the sale of the securities offered hereby, after
deducting underwriting discounts and estimated offering expenses, pro forma net
tangible book value would have been $7,402,207 or $1.29 per share. The result
will be an immediate increase in net tangible book value per share of $.94
(1,801%) to existing shareholders and an immediate dilution to new investors of
$3.71 (74%) 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."
7
<PAGE>
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 will 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. For the nine months ended December 31, 1996, the
Company derived 72% (Sprint) and 23% (Comsat) of its sales from two 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 purchased key-man life insurance on Mr.
Veschi in the amount of $2 million. The Company is 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 or intranet 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
8
<PAGE>
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 and
intranet 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 $250,000 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."
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 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, which is comprised of and has been
approved for 40 claims, for a system and method for communicating high fidelity
and clear transmission of audio or voice over the Internet and intranets,
enabling free worldwide transmission of ordinary telephone communications. 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 had agreed to
allocate $1,000,000 of capital 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 has satisfied its commitment to
allocate $1,000,000 towards the technology as of December 31, 1996. 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 and intranets.
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 and intranets. 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.
9
<PAGE>
The Company currently does not have any other patent or copyright
applications pending. However, the Company has numerous trademark applications
pending related to certain of its products and technologies. The Company may
file 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 and
intranet 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."
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 securities offered hereby has been arbitrarily
determined by negotiations between the Company and the Representative and bears
no relationship to the Company's earnings, book value or any other recognized
criteria of value. The offering price of $5.00 per share of Common Stock is
substantially in excess of the net tangible book value of $.05 per share,
derived from the Company's balance sheet as of December 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 Representative's
Purchase Option only if (i) there is a current prospectus relating to the
securities offered hereby under an effective registration statement filed with
10
<PAGE>
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 when facts or events have occurred which represent a
material change in the information contained in the registration statement. The
Company intends to qualify the sale of the 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 of the 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 the foregoing requirements. See "Description of
Securities," and "Underwriting."
LACK OF PRIOR MARKET FOR SECURITIES OF THE COMPANY
No prior market exists for the securities being offered hereby and no
assurance can be given that a market will develop subsequent to this offering.
The Representative may make a market in the securities of the Company upon the
closing of this offering, but there is no assurance that it will do so, or if a
market develops that it will be sustained. See "Description of Securities" and
"Underwriting."
WARRANTS SUBJECT TO REDEMPTION
The Company is offering 1,500,000 shares of Common Stock, $.01 par value per
share (the "Common Stock") and 1,500,000 Redeemable Common Stock Purchase
Warrants (the "Warrants"). The Common Stock and the Warrants (collectively, the
"Securities") are being offered separately and not as units, and each are
separately transferable. Each Warrant entitles the holder to purchase one share
of Common Stock at $5.25 per share (subject to adjustment) during the five-year
period commencing on the date of this Prospectus. The Warrants are redeemable by
the Company for $.05 per Warrant, on not less than thirty (30) days nor more
than sixty (60) days written notice if the closing bid price for the Common
Stock equals or exceeds $10.00 per share during any thirty (30) consecutive
trading day period ending not more than fifteen (15) days prior to the date that
the notice of redemption is mailed, provided there is then a current effective
registration statement under the Securities Act of 1933, as amended (the "Act")
with respect to the issuance and sale of Common Stock upon the exercise of the
Warrants. Any redemption of the Warrants during the one-year period commencing
on the date of this Prospectus shall require the written consent of the
Representative. See "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.
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<PAGE>
CONTRACTUAL OBLIGATIONS TO REPRESENTATIVE MAY REDUCE PROCEEDS AVAILABLE TO
THE COMPANY
The Company has also agreed to pay fees to the Representative, aggregating
up to five percent of the consideration involved in the transaction, if the
Representative 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 Representative
obtains or is 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 a ten percent underwriting discount,
the Company has also agreed to pay the Representative a nonaccountable expense
allowance of three percent of the gross proceeds of this offering. To the extent
the foregoing compensation is paid from the proceeds of this offering, the
amounts available to the Company, will be reduced. Also, the Company has agreed
to enter into a financial advisory agreement with the Representative to act as
an investment banker for the Company for a period of three (3) years at a fee of
$108,000, payable at the closing of this offering. See "Underwriting."
EXERCISE OF REPRESENTATIVE'S WARRANTS MAY HAVE DILUTIVE EFFECT ON MARKET
In connection with this offering, the Company will issue to the
Representative and/or persons related to the Representative, for nominal
consideration, warrants to purchase 150,000 shares of Common Stock and 150,000
Warrants from the Company. The Representative's Purchase Warrants will be
exercisable for a five year period commencing from the effective date of the
offering at an exercise price of 165% of the price at which the Common Stock and
Warrants are sold to the public subject to adjustment. The Representative's
Purchase Warrants may have certain dilutive effects because the holders thereof
will be given the opportunity to profit from a rise in the market price of the
underlying shares with a resulting dilution in the interest of the Company's
other shareholders. The terms on which the Company could obtain additional
capital during the life of the Representative's Purchase Warrants may be
adversely affected because the holders of the Representative's Purchase Warrants
might be expected to exercise them at a time when the Company would otherwise be
able to obtain comparable additional capital in a new offering of securities at
a price per share greater than the exercise price of the Representative's
Purchase Warrants. The Company has agreed that, at the request of the holders
thereof under certain circumstances, it will register under federal and state
securities laws the Representative's Purchase Warrants and/or the securities
issuable thereunder. Exercise of these registration rights may involve
substantial expense to the Company at a time when it could not afford cash
expenditures and may adversely affect the terms upon which the Company may
obtain additional funding and may adversely affect the price of the Common
Stock. See "Underwriting."
REGULATIONS MAY IMPOSE CERTAIN RESTRICTIONS ON MARKETABILITY OF LOW-PRICED
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 $5.00 per share, subject to certain
exceptions. Upon authorization of the securities offered hereby for quotation,
such securities will initially be exempt from the definition of "penny stock."
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
12
<PAGE>
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 5,750,000 shares of its common stock
issued and outstanding, of which 4,250,000 shares will be "restricted
securities." Therefore, during each three month period, beginning ,
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 up to 57,500 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 stockholders of the Company have agreed not to
sell, transfer, assign or otherwise dispose of any restricted securities of the
Company for a period of 24 months following the date of this Prospectus. 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."
POSSIBLE FAILURE TO QUALIFY FOR NASDAQ SMALLCAP MARKET LISTING
Although the Company has applied for listing of the Common Stock and the
Warrants on the Nasdaq SmallCap Market, there can be no assurance that such
application will be approved or that a trading market for the Common Stock and
the Warrants will develop or, if developed, will be sustained. Furthermore,
there can be no assurances that the securities purchased by the public hereunder
may be resold at their original offering price or at any other price. In order
to qualify for initial listing on the Nasdaq SmallCap Market, a company must,
among other things, have at least $4 million in total assets, $2 million net
worth, $1 million "public float," and a minimum bid price for its securities of
$3 per share. For continued listing on the Nasdaq SmallCap Market, a company
must maintain $2 million in total assets, a $200,000 market value of the public
float and $1 million in total capital and surplus. In addition, continued
inclusion requires two market-makers and a minimum bid of $1 per share;
provided, however, that if a company falls below such minimum bid price, it will
remain eligible for continued inclusion on the Nasdaq SmallCap Market if the
market value of the public float is at least $1 million and the Company has $2
million in capital and surplus. The failure to meet these maintenance criteria,
or proposed stiffer maintenance criteria, in the future may result in the
discontinuance of the inclusion of the Common Stock and Warrants on the Nasdaq
SmallCap Market.
If the Company is or becomes unable to meet the listing criteria (either
initially or on a continued basis) of the Nasdaq SmallCap Market and is never
traded or becomes delisted therefrom, trading, if any, in the Common Stock and
the Warrants would thereafter be conducted in the over-the-counter market in the
"pink sheets" or, if then available, on the "Electronic Bulletin Board"
administered by the National Association of Securities Dealers, Inc. (the
"NASD"). In such an event, the market price of the Common Stock and the Warrants
may be adversely impacted. As a result, an investor may find it difficult to
dispose of, or to obtain accurate quotations as to the market value of the
Common Stock and the Warrants.
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<PAGE>
USE OF PROCEEDS
After deducting the expenses of this offering, the Company will receive net
proceeds from the offering of approximately $5,918,750. 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 12.67
Employee Salaries and Overhead(2)...................... 1,000,000 16.90
OPERATING COSTS AND WORKING CAPITAL
Software Support and Development(3).................... 1,100,000 18.58
Capital Equipment(4)................................... 1,250,000 21.12
Marketing and Sales(5)................................. 1,000,000 16.90
Mergers and Acquisitions(6)............................ 250,000 4.22
Working Capital(7)..................................... 568,750 9.61
--------------- ---------
TOTAL.............................................. $ 5,918,750 100.00
--------------- ---------
--------------- ---------
</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. Also, includes financial advisory fees of
$108,000 for a three-year term payable to the Underwriter upon the closing
of this offering.
(3) Includes annual salaries for software and engineering support personnel.
(4) The Company intends to purchase and/or lease certain additional capital
equipment and product inventory 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.
(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 $250,000 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.
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<PAGE>
(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
Representative's Over-allotment Option or the Representative's Purchase Option),
the Company will realize gross proceeds of approximately $7,875,000. 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.
15
<PAGE>
DILUTION
As of December 31, 1996, the Company had pro forma net tangible book value
of $1,483,457 or $.35 per share, derived from the Company's balance sheet as of
December 31, 1996 adjusted to give effect to the February 1997 conversion of
debt to equity and the total common stock outstanding at December 31, 1996 and
the issuance of Common Stock in February 1997 related to the conversion of debt
to equity. 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 Common Stock offered hereby
at an assumed price of $5.00 per share after deducting underwriting discounts
and estimated offering expenses, pro forma net tangible book value would have
been $7,402,207 or $1.29 per share. The result will be an immediate increase in
net tangible book value per share of $.94 (1,801%) to existing shareholders and
an immediate dilution to new investors of $3.71 (74%) 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............. $ 5.00
Pro forma net tangible book value per share, before the offering... $ .35
Increase per share attributable to the sale by the Company of the
shares offered hereby............................................. $ .94
---------
Pro forma net tangible book value per share, after the offering...... $ 1.29
---------
Dilution per share to new investors.................................. $ 3.71
---------
---------
</TABLE>
The above table assumes no exercise of the 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 shares 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............................ 4,250,000 73.91% $ 2,280,000 23.31% $ 0.54
-----
-----
Public Stockholders............................. 1,500,000 26.09% $ 7,500,000 76.69% $ 5.00
------------- ----------- ------------- ----------- -----
-----
Total....................................... 5,750,000 100.00% $ 9,780,000 100.00% $ 1.70
------------- ----------- ------------- ----------- -----
------------- ----------- ------------- ----------- -----
</TABLE>
If the Over-allotment Option is exercised in full, the public stockholders
will have paid $8,625,000 and will hold 1,725,000 shares of Common Stock,
representing 79.09%percent of the total consideration and 28.87% percent of the
total number of outstanding shares of Common Stock. See "Description of
Securities" and "Underwriting."
16
<PAGE>
CAPITALIZATION
(DOLLARS IN THOUSANDS)
The following table sets forth the capitalization of the Company, as of
December 31, 1996 and as adjusted to reflect the sale of the securities offered
hereby. The table should be read in conjunction with the Financial Statements,
and the notes thereto.
<TABLE>
<CAPTION>
DECEMBER 31,
1996 PRO FORMA (2) AS ADJUSTED(1)
------------ ------------- --------------
<S> <C> <C> <C>
Long-term debt....................................................... $ 1,000 $ -- $ --
------------ ------------- -------
Stockholders' equity
Common Stock, $.01 par value, 50,000,000 shares authorized,
4,000,000 shares outstanding; pro forma 4,250,000 shares
outstanding reflecting the issuance of shares after the conversion
of debt to equity in February 1997; 5,750,000 shares outstanding,
as adjusted....................................................... 40 $ 42 $ 57
Additional paid-in capital......................................... 7,035 8,308 14,212
Retained deficit................................................... (6,867) (6,867) (6,867)
------------ ------------- -------
Total stockholders' equity....................................... 208 1,483 7,402
------------ ------------- -------
Total capitalization............................................. $ 1,208 $ 1,483 $ 7,402
------------ ------------- -------
------------ ------------- -------
</TABLE>
- ------------------------
(1) As adjusted to reflect the net proceeds of this offering. Assumes no
exercise of (i) the Warrants; (ii) the Representative's Over-allotment
Option to purchase up to 225,000 shares of Common Stock and 225,000
Warrants; or (iii) the Representative's Purchase Option to purchase up to
150,000 shares of Common Stock and 150,000 Warrants. See "Description of
Securities" and "Underwriting."
(2) The pro forma capitalization illustrates the effect of the conversion of
$1,275,081 debt to equity in February 1997 (which includes a $250,000 loan
received by the Company in January 1997).
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.
17
<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, private
voice communications across the Internet and intranets, 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. 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. 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, which is comprised of and has been
approved for 40 claims, for a system and method for communicating high fidelity
and clear transmission of audio or voice over the Internet and intranets,
enabling free worldwide high fidelity and clear transmission of ordinary
telephone communications. 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 had agreed to allocate $1,000,000 of capital to develop and
exploit the market opportunities of the technology by December 31, 1996, or the
patent would be subject to repurchase by the inventors of the patent. The
Company has satisfied its commitment to allocate $1,000,000 towards the patent
as of December 31, 1996. 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 and intranets. 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 and intranets. 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. 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 line of 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, private voice communications across the Internet and intranets,
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
individual consumer. Between October 1996 and
18
<PAGE>
January 1997, the Company entered into non-exclusive agreements with Intermedia
Communications, Incorporated ("ICIX"), Sprint, American Communication Services,
Inc. ("ACSI"), NationsBank and Retix Corporation to "beta" test and evaluate the
Company's Telecom-2000 product for possible implementation and use for voice
communications services over the Internet and/or intranets. The testing and
evaluation with these companies is expected to last approximately six months.
Although the Company believes that its Telecom 2000 product is in the final
testing and evaluation stage and projected to be available to market by the end
of the Company's fourth quarter of fiscal 1997, the Company can make no
assurances that it will be able to enter into any agreements with such concerns
for the sale of such product. 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
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. For the periods ended December 31,
1996 and March 31, 1996, the Company realized $107,200 and $74,500,
respectively, in sales of the IntelliCD product, representing approximately 24
percent and 25 percent, respectively, 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. For
the periods ended December 31, 1996 and March 31, 1996, the Company realized
$24,000 and $43,000, respectively, in sales of the e-Net NMS product,
representing approximately 5 percent and 15 percent, respectively, 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 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
19
<PAGE>
approximately $60,000 per unit, which includes a one year warranty and technical
service, training and support. For the periods ended December 31, 1996 and 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. For the periods ended December 31, 1996 and March 31, 1996, the
Company realized $307,284 and $176,376, respectively, in sales related to its
technology support services, representing approximately 70 percent and 60
percent, respectively, of its total sales.
The Company's plans for the next fiscal year center around continuing
efforts to complete the final 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.
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 $250,000 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 also intends to
distribute its products 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 to four persons, 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
20
<PAGE>
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 was 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 was expensed as of March 31, 1996 and $5,385,135 was expensed in fiscal
1997. In February 1997, such persons agreed to the cancellation of the Class A
and B Warrants.
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 stock split of its issued and
outstanding shares of common stock, Class A and Class B Warrants. In August
1996, the Company caused a 2:1 split of its issued and outstanding shares of
common stock, Class A Warrants and Class B Warrants. In February 1997, the
Company caused a 2:1 reverse stock split of its issued and outstanding shares of
Common Stock and canceled its outstanding Class A and Class B warrants. Also, in
February 1997, the Company converted a $1,250,000 loan obligation to 250,000
shares of Common Stock, resulting in 4,250,000 shares of Common Stock issued and
outstanding prior to this offering.
RESULTS OF OPERATIONS
NINE MONTHS ENDED DECEMBER 31, 1996 COMPARED WITH PERIOD ENDED DECEMBER 31,
1995
Revenue increased by 114% to $439,000 in the nine months ended December 31,
1996 from $205,000 in the period ended December 31, 1995. The increase in
revenue dollars was attributable to the increased delivery of the Company's
IntelliSeries Products and Help Desk Services. In the period ended December 31,
1996, revenue mix, as a percentage of revenue, among products and services was
5% and 95%, respectively. Revenue mix among products and services for the
corresponding period in 1995 was 21% and 79%, respectively.
Cost of product sales and service increased by 712% to $303,000 in the
nine-months ended December 31, 1996 or 69% as a percentage of revenue as
compared to $37,000 or 18% as a percentage of revenue in the corresponding
period in 1995. The dollar increase was largely attributable to the increased
business volume and the associated labor, overhead, consultant and subcontract
costs necessary to service the increased volume, as well as the foregoing
compensation during the startup phase (see pro forma adjustment on the Statement
of Operations for the period from beginning of operations to December 31, 1995).
The percentage increase was attributable to the elements discussed above.
General and administrative expense increased by 603% to $594,000 in the nine
months ended December 31, 1996 from $84,000 in the corresponding period in 1995.
The dollar and percentage increase were largely due to the hiring of
administrative and selling staff. The number of employees of the Company engaged
in general and administrative, selling, and research and development activities
increased from two at December 31, 1995 to ten at December 31, 1996. The Company
plans to make additional expenditures in the general and administrative and
selling organizations as necessary and does not expect the overall cost as a
percentage of revenue to decline in the next twelve months.
Research and development costs increased to $159,000 in the nine months
ended December 31, 1996 as compared to $0 in the corresponding period in 1995.
Research and development costs consist of hardware related development costs
associated with the Telecom-2000 product and the $50,000 purchase price for
certain prototype boards, proprietary software code and research and development
in May 1996. The Company also incurred $368,000 in capitalized software
development costs related to development of software for its Telecom-2000
product in the nine months ended December 31, 1996. The Company plans to
continue research and development activities, however, future software
development costs will be capitalized in accordance with generally accepted
accounting principles,
21
<PAGE>
subject to judgments to be made as to technological feasibility of the software
development efforts and recoverability. Upon release of software products,
ongoing development, maintenance and support costs will be expensed as incurred.
Interest and financing charges net total was $5,700,000 in the nine months
ended December 31, 1996 as compared to $0 in the corresponding period in 1995.
The increase in interest and financing charges was mainly due to $5,400,000 in
interest expense associated with a private placement and $300,000 of costs
associated with a planned initial public stock offering in 1996 which was
abandoned in September 1996. The Company signed a new letter of intent in
February 1997 for an initial public stock offering (see Liquidity and Capital
Resources below).
Loss from operations increased to $6,330,000 in the nine months ended
December 31, 1996 as compared to income from operations of $83,000 or 41% as a
percentage of revenue in the corresponding period in 1995. The dollar decrease
in income from operations was largely attributable to the increase in financing
costs associated with a private placement, research and development, and
selling, general and administrative costs as discussed above. In future periods,
gross margins may be affected by price competition or changes in sales channels,
increases in the costs of goods or changes in the mix of products sold.
A valuation allowance has been established equal to the amount of income
taxes pending evidence that the Company will be able to generate taxable net
income which will be offset by the tax net loss carryforward in future years.
Financing expense associated with the issuance of bridge units is non-deductible
and is being treated as a capital transaction for income tax reporting purposes.
The use of net operating losses by the Company in the future to offset taxable
income may be limited to the event of a change in control of the Company in
accordance with Section 382 of the Internal Revenue Code.
Net loss for the quarter ended December 31, 1996 was $6,300,000, or ($1.59)
per share, compared to net income of $83,000, or $.03 per share, for the period
ended December 31, 1995. Net loss for nine months ended December 31, 1996
included $5,700,000 in private placement and cost of stock offering interest and
financing charges as previously discussed.
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 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations to date have concentrated on continuing development
of its products, establishing acceptance of its software products in the
telecommunications industry, providing services to its existing customer base
and securing financing necessary to fund development, operations and expansion
of its business. Management believes cash flow provided by operations and
remaining proceeds received or to be received from MVSI, Inc. as described in
Note H will be sufficient to sustain operations for the remainder of fiscal
1997. Additional financing will be necessary to provide for continued product
development and operations in fiscal 1998.
22
<PAGE>
In February 1997, the Company signed a letter of intent for an initial
public offering of the Company's securities with this Underwriter. The net
proceeds of the offering should net the Company approximately $5.9 million.
These proceeds should provide adequate working capital for the Company to
self-fund operations, continued development expenditures and production
inventory costs over the next 12 months.
The Company received $500,000 in March 1996 and $500,000 in April 1996 under
bridge loan transactions wherein the Company issued 1,000,000 bridge 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" and "Description of Securities."
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. The Company has satisfied
its commitment to allocate $1,000,000 towards the technology as of December 31,
1996. In addition, the Company is also committed under an employment agreement
effective April 1, 1996 with an officer which provides 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 5,500 square feet for its principal
executive offices located at 12800 Middlebrook Road, Suite 200, Germantown,
Maryland 20874. 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 Texas facility to 5,500 square feet
following the closing of this offering. Base rental for the current premises are
approximately $7,900 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.
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.
23
<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 and intranets, 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, which is comprised of and has been
approved for 40 claims, for a system and method for communicating high fidelity
and clear transmission of audio or voice over the Internet and intranets,
enabling free worldwide high fidelity and clear transmission of ordinary
telephone communications. 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 had agreed to allocate $1,000,000 of capital to develop and
exploit the market opportunities for the patent by December 31, 1996, or the
patent would be subject to repurchase by the inventors of the patent. The
Company has satisfied its commitment to allocate $1,000,000 towards the
technology as of December 31, 1996. 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 and intranets. 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 and intranets. 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 and intranets, which is in the final testing stage and projected to be
available to market by the end of the Company's fourth 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.
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. In November 1996, the Company entered into an
agreement with this division of Sprint for a one year term at a value based on
products delivered.
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Between October 1996 and January 1997, the Company entered into
non-exclusive agreements with Intermedia Communication Incorporated ("ICIX"),
Sprint, American Communications Services, Inc. ("ACSI"), NationsBank and Retix
Corporation to "beta" test and evaluate the Company's Telecom-2000 product for
possible implementation and use for voice communications services over the
Internet and/or intranets. The testing and evaluation with these companies is
expected to last approximately six months. Although the Company believes that
its Telecom 2000 product is in the final testing and evaluation stage and
projected to be available to market by the end of the Company's fourth quarter
of fiscal 1997, the Company can make no assurances that it will be able to enter
into any agreements with such concerns for the sale of such product.
In January 1997, the Company's Telecom-2000 product was selected as one of
three finalists for the Internet/intranet product category in the ComNet 97 New
Product Achievement Awards Competition, sponsored by COMPUTERWORLD, at the
ComNet trade show and exposition in Washington, D.C. The Telecom-2000 product
was demonstrated to the public at ComNet during the three-day show and
exposition while on display at the Company's and Sprint's trade booths. The
Company also had representatives present in Sprint's booth where the
Telecom-2000 product was demonstrated through voice communication between the
Company's and Sprint's booths and between the Company's booth and anywhere off
the network that the participant wanted to call.
In January 1997, the Company entered into a mutual cooperation agreement
with MVSI, Inc., a Washington, D.C. area based technology products and services
company, under which MVSI intends to resell and OEM certain of the Company's
products for applications related to the robotic and instrument technologies and
industries.
In January 1997, the Company entered into an agreement with Lockheed Martin
Technical Services, Inc. ("Lockheed Martin"), a Bethesda, Maryland based defense
and aerospace technologies firm, to perform certain telecommunications
engineering and systems integration services as a subcontractor basis, on
defense and aerospace technologies contracts. The agreement has an initial value
of approximately $500,000 for a one year term and, although no assurances can be
made, the agreement may be expanded in value and term during the current fiscal
year.
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
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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.
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
and intranet 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, private voice transactions
across the Internet and intranets, 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.
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The Company believes that one of its key competitive advantages is its
technical experience and expertise. The Company's core development group
includes individuals who have developed and implemented telecommunications
network management software and other Internet and intranet related products and
services as they have emerged as a recognized application continuously for the
last 12 years.
PRODUCTS
The Company provides a 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 and intranets.
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 standard 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 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 and intranets, enabling free worldwide high
fidelity and clear transmission of ordinary telephone communications. 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 and intranets. 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 Telecom-2000 suite of hardware and
software that provides for communicating high fidelity and clear transmission of
audio or voice over the Internet and intranets. 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
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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. The
Telecom 2000 product is in final testing and, at March 31, 1996, the Company has
not realized any sales of this product. Telecom-2000 is projected to be
available to market by the end of the Company's fourth quarter of fiscal 1997.
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 at a price of
approximately $300 per unit, which includes a one year warranty and technical
service, training and support.
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 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.
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 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.
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
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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 technicians and 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.
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.
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 users 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 may 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
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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.
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 eight employees in marketing and
sales, and intends to add seven 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.
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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 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.
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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 fourth 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 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, which is comprised of and has been
approved for 40 claims, for a system and method for communicating high fidelity
and clear transmission of audio or voice over the Internet and intranets,
enabling free worldwide high fidelity and clear transmission of ordinary
telephone communications. 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 had agreed to allocate $1,000,000 of capital to develop and exploit
the market opportunities for the patent by December 31, 1996, or the patent
would be subject to repurchase by the inventors of the patent. The Company has
satisfied its commitment to allocate $1,000,000 towards the patent as of
December 31, 1996. 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 and intranets. 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 and intranets. The Company can make no
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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 currently does not have any other patent or copyright
applications pending. However, the Company has numerous 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 existence of this technology, the Company's
products may be vulnerable to break-ins and similar disruptive problems caused
by certain Internet and intranet 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
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<PAGE>
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 intends to rely 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 patented 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 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 and intranet-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 and telecommunications
companies. Almost all of the Company's current and potential competitors have
longer operating histories, greater name recognition, larger installed customer
bases and significantly greater financial, technical and marketing resources
than the Company. Such competition may materially 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
34
<PAGE>
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"), 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.
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<PAGE>
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 17 employees,
all of whom are full time employees. Of the total number of employees, seven are
engaged in software development, eight are engaged in marketing, sales and
customer support and two are engaged in administration and finance. Certain
software development activities and 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 20 additional employees, including nine in
software development, seven in marketing and sales and four 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 5,500 square feet for its principal
executive offices located at 12800 Middlebrook Road, Suite 200, Germantown,
Maryland 20874. 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 Austin facilities to 5,500 square feet
following the closing of this offering. Base rental for the current premises is
approximately $7,900 and $1,200 per month, respectively, and will be
approximately $7,900 per month each in the expanded facilities. The leases
require the Company to pay certain property taxes and certain operating
expenses. The Company believes that its current and anticipated facilities are
suitable and adequate for its operations.
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<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,
Director
Christina L. Swisher Vice President, Operations, Secretary
William L. Hooton Director
Clive Whittenbury, Ph.D. Director
William W. Rogers, Jr. Director
</TABLE>
Each of the directors of the Company hold office for a one-year period
expiring December 31, 1997. 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 and a
director of the Company since January 1995. Mr. Veschi is the founder of the
Company, which began its operations in June 1995. Mr. Veschi has significant
experience in executive management, operations and the engineering, design and
development of telecommunications and computer products and systems. From 1986
to 1990, Mr. Veschi was manager of systems engineering for International
Telemanagement, Inc., a Washington, D.C. metropolitan area based information,
data and network systems firm. From 1990 to 1994, Mr. Veschi was a group
president of I-Net, Inc., a Washington, D.C. metropolitan area based
information, data and network systems firm. From December 1994 to May 1995, for
approximately six months, Mr. Veschi was president and chief executive officer
of Octacom, Inc., a Washington, D.C. metropolitan area based information, data
and network systems firm, and a wholly-owned subsidiary of Octagon, Inc., an
Orlando, Florida metropolitan area based publicly held technical services firm.
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<PAGE>
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.
CHRISTINA L. SWISHER, 32, has been vice president of operations since
December 1996 and secretary of the Company since February 1997. Ms. Swisher has
significant experience in computer network management, systems and operations.
From 1991 to 1993, Ms. Swisher was a technical and graphics specialist with the
Air Force Association, a Washington, D.C. area based national services
organization, where she was responsible for technical and statistical analyses.
From 1993 to 1995, Ms. Swisher was a manager for computer network systems and
operations for I-Net, Inc., a Washington, D.C. metropolitan area based
information, data and network systems firm. Since 1995, Ms. Swisher has been
director of technical services with the Company, becoming vice president of
operations in December 1996. Since June 1995, Ms. Swisher has been instrumental
in the organization and development of the business of the Company.
WILLIAM L. HOOTON, 45, has been a director of the Company since January
1996. Mr. Hooton has substantial experience in the management, design,
operation, marketing and sales of image conversion systems, electronic imaging
system integration, data automation and high performance data storage
subsystems. From 1990 to 1993, Mr. Hooton was vice president of operations and
technical and business development of the Electronic Information Systems Group
of I-Net, Inc., a Washington, D.C. metropolitan area based information, data and
network systems firm. Since 1993, Mr. Hooton has been president and chief
executive officer of Q Corp., a Washington, D.C. metropolitan area high
technology consulting firm specializing in digital imaging systems and other
complex imagery in media. Since January 1996, Mr. Hooton has been a director of
the Company and has been instrumental in the organization and development of the
Company. Mr. Hooton holds a B.B.A. degree from the University of Texas.
CLIVE G. WHITTENBURY, PH.D., 61, has been a director of the Company since
June 1996. Dr. Whittenbury has substantial senior management, operations and
technical advisory experience. From 1972 to 1979, Dr. Whittenbury was a senior
vice president and, from 1976 to 1986, a director of Science Applications
International Corporation ("SAIC"), a La Jolla, California based major
international systems engineering firm with current annual revenues of
approximately $2 billion. Since 1979, Dr. Whittenbury has been executive vice
president and a director of the Erickson Group, Inc., a major international
diversified products firm. Since 1994, Dr. Whittenbury has been a director of
MVSI, Inc., a publicly held (Nasdaq -- "MVSI") McLean, Virginia based technology
products and services 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.
WILLIAM W. ROGERS, JR., 55, has been a director of the Company since January
1997. Mr. Rogers has substantial senior management, operations and technical and
engineering services experience. From 1972 to 1987, Mr. Rogers was a general
manager engaged in operations, technical and engineering services for Boeing
Computer Services, Inc. From 1987 to 1989, Mr. Rogers was president and chief
executive officer of International Telemanagement, Inc., a McLean, Virginia
based telecommunications and systems engineering and services company. From 1989
to 1991, Mr. Rogers was a vice president of Fluor-Daniels where he was
responsible for telecommunications and systems integration services. Since 1991,
Mr. Rogers has been a vice president with Computer Sciences Corporation, a
McLean, Virginia based technology products, systems and services company, where
he is responsible
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<PAGE>
for systems integration and related technical services. Since January 1997, Mr.
Rogers has been instrumental in the organization and development of the Company.
Mr. Rogers holds a B.A. degree from West Virginia University.
REMUNERATION
EXECUTIVE COMPENSATION
The following table sets forth annual remuneration of $100,000 or more paid
for the fiscal year ended March 31, 1996 and 1997 and proposed to be paid for
the fiscal year ended March 31, 1998 to certain officers and directors of the
Company:
<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>
Robert A. Veschi President, Chief Executive 1998 $ 175,000 $ 87,500 $ --
Officer, Director 1997 $ 175,000 $ 87,500 $ --
1996 $ -- $ 25,000 $ --
</TABLE>
- ------------------------
(1) The directors of the Company, with the exception of Mr. Veschi, are entitled
to annual remuneration of $24,000 pursuant to oral agreements between such
directors and the Company. The Company has purchased key-man term life
insurance on Mr. Veschi in the amount of $2 million. The Company is 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, the
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 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
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<PAGE>
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.
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.
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<PAGE>
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.
41
<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 2.12 1.57
Robert A. Veschi President, Chief Executive 1,375,000 32.35 23.91
Officer, Director
Christina L. Swisher Vice President, Secretary 120,000 2.82 2.09
William L. Hooton Director 50,000 1.18 .87
Clive Whittenbury, Ph.D. (3) Director 50,000 1.18 .87
William W. Rogers, Jr. Director 5,000 .12 .09
Edward Ratkovich, Maj. Gen., USAF (ret.) (4) Stockholder 500,000 11.76 8.70
Arthur Henley (5) Stockholder 475,000 11.18 8.26
Thomas T. Prousalis, Jr., Esq. (6) Stockholder 450,000 10.59 7.83
Robert Foise (7) Stockholder 250,000 5.88 4.35
MVSI, Inc.(8) Stockholder 250,000 5.88 4.35
All Officers and Directors as a Group (6 persons) 1,690,000 39.76 29.39
</TABLE>
- ------------------------
(1) c/o e-Net, Inc., 12800 Middlebrook Road, Suite 200, Germantown, Maryland
20874.
(2) Does not include the exercise of up to 1,500,000 Warrants offered herein.
Each Warrant entitles the holder to purchase one share of Common Stock at
$5.25 per share during the five-year period commencing on the date of this
Prospectus. The Warrants are redeemable upon certain conditions. Should the
Warrants be exercised, of which there is no assurance, the Company will
receive the proceeds therefrom, aggregating up to an additional $7,875,000.
See "Description of Securities."
(3) 511 Trinity Avenue, Yuba City, California 95991.
(4) 1030 Delf Drive, McLean, Virginia 22101. General Ratkovich is chairman of
the board, president and chief executive officer of MVSI, Inc., a principal
stockholder of the Company. See "Certain Transactions."
(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. See
"Certain Transactions."
(8) 8133 Leesburg Pike, Suite 750, Vienna, Virginia 22182. The shares of Common
Stock owned by MVSI, Inc. are being registered as part of this offering and
are restricted from sale for a period of 12 months from the date of this
offering, but may be released for sale during this period with the consent
of the Underwriter.
42
<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
4,250,000 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, a 2:1 reverse stock split
in July 1996, a 2:1 stock split in August 1996 and a 2:1 reverse stock split in
February 1997) 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. However, in June
1996, ATG Group, Inc. agreed to cancel its shares of the Company's Common Stock
in consideration of the cancellation of its $250,000 promissory note.
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. 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. In February 1997, such persons agreed to the cancellation of the
Class A and B Warrants.
In August 1996, the Company caused a 2:1 split of its issued and outstanding
shares of common stock, Class A Warrants and Class B Warrants, resulting in
8,000,000 shares of common stock, 2,000,000 Class A Warrants and 2,000,000 Class
B Warrants.
In February 1997, the Company caused a 2:1 reverse split of its issued and
outstanding securities, resulting in 4,000,000 shares of Common Stock. Also, in
February 1997, the Company canceled the outstanding Class A and B Warrants.
In August 1996, the Company entered into a letter of intent with MVSI, Inc.
("MVSI"), a Washington, D.C. area based Nasdaq-listed technology products and
services company, whereby the Company agreed to be acquired and become a
wholly-owned subsidiary of MVSI in an exchange of securities. Three principal
stockholders of the Company are stockholders of MVSI. A director of the Company
is a director of MVSI. Pursuant to the terms of the letter of intent, an initial
amount of $500,000 was loaned by MVSI to the Company for working capital. In
October 1996, the Company entered into an agreement to be acquired by MVSI,
which was subject to stockholder approval. An additional $500,000 was loaned to
the Company in November 1996. However, in January 1997, the parties mutually
agreed to terminate the acquisition, principally due to market conditions, and,
as part of a mutual cooperation agreement, MVSI loaned the Company an additional
$250,000 pursuant to the terms of a convertible debenture.
The terms of the convertible debenture in the principal sum of $1,275,081,
reflecting the total amount of the loan advances made to the Company by MVSI,
provide that the outstanding principal balance bear interest at 9% per annum. At
MVSI's option, the principal is convertible into shares of common stock of the
Company upon completion of an initial public offering of the Company's
securities, with the number of shares to be calculated using the initial price
per share of the offering. In February 1997, the convertible debenture was
converted by MVSI into 250,000 shares of the Company's common stock, resulting
in a total of 4,250,000 shares of Common Stock issued and outstanding prior to
the date of this prospectus. The 250,000 shares of Common Stock owned by MVSI
are being registered as part of this offering and are restricted from sale for a
period of 12 months from the date of this offering, but may be released for sale
during this period with the consent of the Representative.
43
<PAGE>
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, U.S. Patent No. 5,526,353, which is comprised of and has been
approved for 40 claims, for a system and method for communicating high fidelity
and clear transmission of audio or voice over the Internet and intranets,
enabling free worldwide transmission of ordinary telephone communications. 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 had agreed to
allocate $1,000,000 of capital to develop and exploit the market opportunities
of the patent by December 31, 1996, or the patent would be subject to repurchase
by the inventors of the patent. The Company has satisfied its commitment to
allocate $1,000,000 towards the patent as of December 31, 1996. 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 and intranets.
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 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.
44
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, $.01 par value. There are presently 4,250,000 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.
WARRANTS
Prior to this offering, there are no Warrants issued and outstanding. The
Warrants will be issued in registered form pursuant to an agreement dated the
date of this Prospectus (the "Warrant Agreement"), between the Company and
American Stock & Transfer Trust Company, New York, New York, as warrant agent
(the "Warrant Agent"). The following discussion of certain terms and provisions
of the Warrants is qualified in its entirety by reference to the Warrant
Agreement. A form of the certificate representing the Warrants which forms a
part of the Warrant Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus forms a part.
Each of the Warrants entitles the registered holder to purchase one share of
Common Stock. The Warrants are exercisable at a price of $5.25 (which exercise
price has been arbitrarily determined by the Company and the Underwriter)
subject to certain adjustments. The Warrants are entitled to the benefit of
adjustments in their exercise prices and in the number of shares of Common Stock
or other securities deliverable upon the exercise thereof in the event of a
stock dividend, stock split, reclassification, reorganization, consolidation or
merger.
The Warrants may be exercised at any time and continuing thereafter until
the close of five years from the date hereof, unless such period is extended by
the Company. After the expiration date, Warrant holders shall have no further
rights. Warrants may be exercised by surrendering the certificate evidencing
such Warrant, with the form of election to purchase on the reverse side of such
certificate properly completed and executed, together with payment of the
exercise price and any
45
<PAGE>
transfer tax, to the Warrant Agent. If less than all of the Warrants evidenced
by a warrant certificate are exercised, a new certificate will be issued for the
remaining number of Warrants. Payment of the exercise price may be made by cash,
bank draft or official bank or certified check equal to the exercise price.
Warrant holders do not have any voting or any other rights as shareholders
of the Company. The Company has the right at any time to redeem the Warrants, at
a price of $.05 per Warrant, by written notice to the registered holders
thereof, mailed not less than thirty (30) nor more than sixty (60) days prior to
the Redemption Date. The Company may exercise this right only if the closing bid
price for the Common Stock equals or exceeds $10 per share during a thirty (30)
consecutive trading day period ending no more than fifteen (15) days prior to
the date that the notice of redemption is mailed, provided there is then a
current registration statement under the Securities Act of 1933, as amended (the
"Act") with respect to the issuance and sale of Common Stock upon the exercise
of the Warrants. If the Company exercises its right to call Warrants for
redemption, such Warrants may still be exercised until the close of business on
the day immediately preceding the Redemption Date. If any Warrant called for
redemption is not exercised by such time, it will cease to be exercisable, and
the holder thereof will be entitled only to the repurchase price. Notice of
redemption will be mailed to all holders of Warrants or record at least thirty
(30) days, but not more than sixty (60) days, before the Redemption Date. The
foregoing notwithstanding, the Company may not call the Warrants at any time
that a current registration statement under the Act is not then in effect. Any
redemption of the Warrants during the one-year period commencing on the date of
this Prospectus shall require the written consent of the Underwriter.
The Warrant Agreement permits the Company and the Warrant Agent, without the
consent of Warrant holders, to supplement or amend the Warrant Agreement in
order to cure any ambiguity, manifest error or other mistake, or to address
other matters or questions arising thereafter that the Company and the Warrant
Agent deem necessary or desirable and that do not adversely affect the interest
of any Warrant holder. The Company and the Warrant Agent may also supplement or
amend the Warrant Agreement in any other respect with the written consent of
holders of not less than a majority in the number of Warrants then outstanding;
however, no such supplement or amendment may (i) make any modification of the
terms upon which the Warrants are exercisable or may be redeemed; or (ii) reduce
the percentage interest of the holders of the Warrants without the consent of
each Warrant holder affected thereby.
In order for the holder to exercise a Warrant, there must be an effective
registration statement, with a current prospectus on file with the Commission
covering the shares of Common Stock underlying the Warrants, and the issuance of
such shares to the holder must be registered, qualified or exempt under the laws
of the state in which the holder resides. If required, the Company will file a
new registration statement with the Commission with respect to the securities
underlying the Warrants prior to the exercise of such Warrants and will deliver
a prospectus with respect to such securities to all holders thereof as required
by Section 10(a)(3) of the Securities Act of 1933, as amended.
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)
46
<PAGE>
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.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for whom Barron Chase Securities, Inc. is acting as
Representative, have severally agreed to purchase from the Company an aggregate
of 1,500,000 shares of Common Stock ("Shares") and 1,500,000 Warrants
(collectively the "Securities").
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
UNDERWRITER SHARES WARRANTS
- ------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Barron Chase Securities, Inc.......................................
.........................................
.........................................
----------- -----------
Total.............................................................. 1,500,000 1,500,000
----------- -----------
----------- -----------
</TABLE>
The Securities are offered by the Underwriters subject to prior sale, when,
as and if delivered to and accepted by the Underwriters and subject to approval
of certain legal matters by counsel and certain other conditions. The
Underwriters are committed to purchase all of the Securities offered by this
Prospectus, if any are purchased.
The Company has been advised by the Representative that the Underwriters
propose initially to offer the Securities offered hereby to the public at the
offering prices set forth on the cover page of this Prospectus. The
Representative has advised the Company that the Underwriters propose to offer
the Securities through members of the National Association of Securities
Dealers, Inc. ("NASD"), and may allow a concession, in their discretion, to
certain dealers who are members of the NASD and who agree to sell the Securities
in conformity with the NASD Conduct Rules. Such concessions shall not exceed the
amount of the underwriting discount that the Underwriters are to receive.
The Company has granted to the Representative options, exercisable for 45
days from the date of this Prospectus, to purchase up to an additional 225,000
Shares and an additional 225,000 Warrants at the public offering price less the
underwriting discount set forth on the cover page of this Prospectus (the
"Over-Allotment Option"). The Representative may exercise this option solely to
cover over-allotments in the sale of the Securities being offered by this
Prospectus.
Officers and directors of the Company may introduce the Representative to
persons to consider this offering and purchase Securities either through the
Representative, other Underwriters, or through participating dealers. In this
connection, the officers and directors will not receive any commissions or any
other compensation.
The Company has agreed to pay the Representative a commission of ten percent
(10%) of the gross proceeds of the offering (the "Underwriting Discount"),
including the gross proceeds from the sale of the Over-Allotment Option, if
exercised. In addition, the Company has agreed to pay to the Representative a
non-accountable expense allowance of three percent (3%) of the gross proceeds of
this offering, including proceeds from any Securities purchased pursuant to the
Over-Allotment Option. The Representative's expenses in excess of the
non-accountable expense allowance will be paid by the Representative. To the
extent that the expenses of the Representative are less than the amount of the
non-accountable expense allowance received, such excess shall be deemed to be
additional compensation to the Representative. The Representative has informed
the Company that it does not expect sales to discretionary accounts to exceed
five (5%) of the total number of Securities offered by the Company hereby.
The Company has agreed to engage the Representative as a financial advisor
for a period of three (3) years from the consummation of this offering, at a fee
of $108,000, all of which is payable to the
47
<PAGE>
Representative on the closing date. Pursuant to the terms of a financial
advisory agreement, the Representative has agreed to provide, at the Company's
request, advice to the Company concerning potential merger and acquisition and
financing proposals, whether by public financing or otherwise.
Prior to the offering, there has been no public market for the shares of
Common Stock or Warrants of the Company. Consequently, the initial public
offering price for the Securities, and the terms of the Warrants (including the
exercise price of the Warrants), have been determined by negotiations between
the Company and the Representative. Among the factors considered in determining
the public offering price were the history of, and the prospect for, the
Company's business, an assessment of the Company's management, its past and
present operations, the Company's development and the general condition of the
securities market at the time of the offering. The initial public offering price
does not necessarily bear any relationship to the Company's assets, book value,
earnings or other established criterion of value. Such price is subject to
change as a result of market conditions and other factors, and no assurance can
be given that a public market for the Shares and/or Warrants will develop after
the close of the public offering, or if a public market in fact develops, that
such public market will be sustained, or that the Shares and/or Warrants can be
resold at any time at the offering or any other price.
At the closing of the offering, the Company will issue to the Representative
for nominal consideration, Common Stock Representative Warrants and Warrant
Representative Warrants (the "Representative's Warrants") to purchase up to
150,000 Shares and 150,000 Warrants ("Underlying Warrants"). The
Representative's Warrants will be exercisable for a five year period commencing
on the date of this Prospectus. The initial exercise price of each Common Stock
Representative Warrant shall be $8.25 per share (165% of the public offering
price). The initial exercise price of each Warrant Representative Warrant shall
be $.20625 per Underlying Warrant (165% of the public offering price). Each
Underlying Warrant will be exercisable for a five (5) year period commencing on
the date of this Prospectus to purchase one Share of Common Stock at an exercise
price of $8.25 per share of Common Stock. The Representative's Warrants will not
be transferable by the holder for one year from the date of this Prospectus,
except (i) to officers of the Representative, other Underwriters and members of
the selling group and officers and partners thereof; (ii) by will; or (iii) by
operation of law.
The Representative's Warrants contain provisions providing for appropriate
adjustment in the event of any merger, consolidation, recapitalization,
reclassification, stock dividend, stock split or similar transaction. The
Representative's Warrants contain net issuance provisions permitting the holders
thereof to elect to exercise the Representative's Warrants in whole or in part
and instruct the Company to withhold from the securities issuable upon exercise,
a number of securities, valued at the current fair market value on the date of
exercise, to pay the exercise price. Such net exercise provision has the effect
of requiring the Company to issue shares of Common Stock without a corresponding
increase in capital. A net exercise of the Representative's Warrants will have
the same dilutive effect on the interests of the Company's shareholders as will
a cash exercise. The Representative's Warrants do not entitle the holders
thereof to any rights as a shareholder of the Company until such
Representative's Warrants are exercised and shares of Common Stock are purchased
thereunder.
The Representative's Warrants and the securities issuable thereunder may not
be offered for sale except in compliance with the applicable provisions of the
Securities Act of 1933. The Company has agreed that if it shall cause a
post-effective amendment, a new registration statement, or similar offering
document to be filed with the Commission, the holders shall have the right, for
seven years from the date of this Prospectus, to include in such registration
statement or offering statement the Representative's Warrants and/or the
securities issuable upon their exercise at no expense to the holders.
Additionally, the Company has agreed that, upon request by the holders of 50% or
more of the Representative's Warrants and registrable securities during the
period commencing one year from the date of this Prospectus and expiring four
years thereafter, the Company will, under certain circumstances, register the
Representative's Warrants and/or any of the securities issuable upon their
exercise.
48
<PAGE>
The Company has also agreed that if the Company participates in any merger,
consolidation or other such transactions which the Representative has brought to
the Company during a period of five years after the closing of this offering,
and which is consummated after the closing of this offering (including an
acquisition of assets or stock for which it pays, in whole or in part, with
shares or other securities), or if the Company retains the services of the
Representative in connection with any merger, consolidation or other such
transaction, then the Company will pay for the Representative's services an
amount equal to 5% of up to $1 million of value paid or received in the
transaction, 4% of the next $1 million of such value, 3% of the next $1 million
of such value, 2% of the next $1 million of such value and 1% of the next $1
million and of all such value above $4,000,000.
The Company has agreed to indemnify the Underwriters against any costs or
liabilities incurred by the Underwriters by reasons of misstatements or
omissions to state material facts in connection with the statements made in the
Registration Statement and the Prospectus. The Underwriters have in turn agreed
to indemnify the Company against any liabilities by reason of misstatements or
omissions to state material facts in connection with the statements made in the
Prospectus, based on information relating to the Underwriters and furnished in
writing by the Underwriters. To the extent that this section may purport to
provide exculpation from possible liabilities arising from the federal
securities laws, in the opinion of the Commission, such indemnification is
contrary to public policy and therefore unenforceable.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to copies
of each such agreement which are filed as exhibits to the Registration
Statement. See "Additional Information."
LEGAL PROCEEDINGS
e-Net, Inc. is not a party to any legal proceedings and, to the best of its
information, knowledge and belief, none is contemplated or has been threatened.
LEGAL MATTERS
The validity of the securities being offered hereby 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 Underwriters by David A.
Carter, P.A., 355 W. Palmetto Park Road, Boca Raton, FL 33432.
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 Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act of
1933, as amended, with respect to the securities being offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits thereto. For further information about the Company
and the securities offered hereby, reference is made to the Registration
Statement and to the exhibits filed as a part thereof. The statements contained
in this Prospectus as to the contents of any contract or other document
identified as exhibits in this Prospectus are not necessarily complete, and in
each instance, reference is made to a copy of such contract or document filed as
an exhibit to the Registration Statement, each statement being qualified in any
and all respects by such reference. The Registration Statement, including
exhibits, may be inspected without charge at the principal reference
49
<PAGE>
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Los Angeles, California Regional Office of the Commission,
5757 Wilshire Boulevard, Suite 500 East, Los Angeles, California 90036-3648, and
copies of all or any part thereof may be obtained from the Commission upon
payment of fees prescribed by the Commission from the Public Reference Section
of the Commission at its principal office in Washington, D.C. set forth above.
50
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS........................ F-2
FINANCIAL STATEMENTS
Balance Sheets.......................................................... F-3
Statements of Operations................................................ F-4
Statements of Cash Flows................................................ F-5
Statements of Stockholders' Equity...................................... F-6
F-7
-
Notes to Financial Statements........................................... F-13
</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.
Vienna, Virginia
April 12, 1996 (except for Notes B and G,
as to which the dates are June 24, 1996, and
July 31, 1996, respectively)
F-2
<PAGE>
e-NET, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1996 MARCH 31, 1996
----------------- --------------
<S> <C> <C>
(UNAUDITED)
CURRENT ASSETS
Cash and cash equivalents................................................... $ 668,880 $ 557,960
Accounts receivable......................................................... 130,041 53,677
Prepaid expenses and deposits............................................... 25,530 --
----------------- --------------
TOTAL CURRENT ASSETS.......................................................... 824,451 611,637
PROPERTY, PLANT AND EQUIPMENT, NET............................................ 178,594 134,285
SOFTWARE DEVELOPMENT COSTS.................................................... 367,598 --
----------------- --------------
$ 1,370,643 $ 745,922
----------------- --------------
----------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Stockholder/Officer notes payable........................................... $ -- $ 45,000
Accounts payable -- trade................................................... 45,033 5,326
Accrued liabilities......................................................... 110,263 22,787
Deferred revenue............................................................ -- 20,000
Capital lease obligation -- current portion................................. 6,971 --
----------------- --------------
TOTAL CURRENT LIABILITIES..................................................... 162,267 93,113
CONVERTIBLE DEBENTURE......................................................... 1,000,000 --
LONG-TERM DEBT................................................................ -- 500,000
----------------- --------------
TOTAL LIABILITIES............................................................. 1,162,267 593,113
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 50,000,000 shares authorized, 4,000,000 and
3,750,000 shares outstanding at December 31, 1996 and March 31, 1996,
respectively............................................................... 40,000 37,500
Stock subscriptions and notes receivable.................................... (100) (125,100)
Unamortized cost of bridge financing........................................ -- (2,885,135)
Additional paid-in capital.................................................. 7,035,100 3,662,600
Retained deficit............................................................ (6,866,624) (537,056)
----------------- --------------
TOTAL STOCKHOLDERS' EQUITY.................................................... 208,376 152,809
----------------- --------------
$ 1,370,643 $ 745,922
----------------- --------------
----------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
e-NET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
BEGINNING OF BEGINNING OF
NINE MONTHS OPERATIONS OPERATIONS
ENDED (JUNE 8, 1995) TO (JUNE 8,1995) TO
DECEMBER 31, 1996 DECEMBER 31, 1995 MARCH 31, 1996
----------------------- ----------------------- --------------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
SALES..................................... $ 438,517 $ 204,771 $ 293,876
OPERATING EXPENSES
Cost of product sales
and service............................ 303,309 37,333 88,360
Selling, general and administrative..... 593,971 84,445 115,171
Research and development................ 158,684 -- --
------------ ----------- -----------
(LOSS) INCOME FROM OPERATIONS............. (617,447) 82,993 90,345
INTEREST AND FINANCING CHARGES
Interest expense -- bridge financing.... (5,385,135) -- (614,865)
Cost of stock registration.............. (284,575) -- --
Interest expense........................ (15,581) -- (6,884)
Other expenses.......................... (41,849) -- (6,143)
Interest Income......................... 15,019 284 491
------------ ----------- -----------
(LOSS) INCOME BEFORE INCOME TAXES......... (6,329,568) 83,277 (537,056)
INCOME TAX PROVISION...................... -- -- --
------------ ----------- -----------
NET (LOSS) INCOME......................... $ (6,329,568) $ 83,277 $ (537,056)
------------ ----------- -----------
------------ ----------- -----------
PRO FORMA ADJUSTMENT TO REFLECT ADDITIONAL
COMPENSATION EXPENSE..................... -- (166,250) (237,500)
------------ ----------- -----------
PRO FORMA NET LOSS........................ $ (6,329,568) $ (82,973) $ (774,556)
------------ ----------- -----------
------------ ----------- -----------
PRO FORMA LOSS PER SHARE.................. $ (1.59) $ (.03) $ (.26)
------------ ----------- -----------
------------ ----------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING....... 3,972,727 3,000,000 3,017,808
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
e-NET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
BEGINNING OF PERIOD FROM
OPERATIONS BEGINNING OF
(JUNE 8, 1995) OPERATIONS
NINE MONTHS TO (JUNE 8, 1995)
ENDED DECEMBER 31, TO
DECEMBER 31, 1996 1995 MARCH 31, 1996
----------------- --------------- ---------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income........................................ $ (6,329,568) $ 83,277 $ (537,056)
----------------- --------------- ---------------
Adjustments to reconcile net (loss) income to net cash
from operating activities
Interest expense -- private placement.................. 5,385,135 -- 614,865
Depreciation and amortization.......................... 28,011 23,036 30,715
Changes in operating assets and liabilities
(Increase) in accounts receivable.................... (76,364) (75,537) (53,677)
Increase in prepaid expenses and deposits............ (25,530) -- --
Increase in accounts payable and accrued
liabilities......................................... 127,183 12,522 28,113
(Decrease) increase in deferred revenue.............. (20,000) -- 20,000
----------------- --------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................. (911,133) 43,298 102,960
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures..................................... (94,580) -- --
Capitalized software development costs................... (367,598) -- --
----------------- --------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES...................... (462,178) -- --
----------------- --------------- ---------------
----------------- --------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from shareholder/officer loans.................. -- 30,000 30,000
Payment of shareholder/officer loans..................... (12,050) (25,000) (25,000)
Payment of notes payable arising from asset
acquisition............................................. -- -- (50,000)
Proceeds from issuance of bridge notes payable........... 500,000 -- 500,000
Proceeds from issuance of long-term debt................. 1,000,000 -- --
Payments on capital leases............................... (3,719) -- --
----------------- --------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.................. 1,484,231 5,000 455,000
----------------- --------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................. 110,920 48,298 557,960
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD........... 557,960 -- --
----------------- --------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................. $ 668,880 $ 48,298 $ 557,960
----------------- --------------- ---------------
----------------- --------------- ---------------
SUPPLEMENTAL DISCLOSURES:
Income Taxes Paid........................................ $ -- $ -- $ --
----------------- --------------- ---------------
----------------- --------------- ---------------
Interest Paid............................................ $ 6,284 $ -- $ 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 during the period ended March
31, 1996.
The Company issued 3,250,000 shares of common stock for notes receivable of
$155,000 during the period ended March 31, 1996. In June 1996, notes receivable
of $125,000 were canceled upon the return of 250,000 shares of common stock.
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
e-NET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<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 $ (100) $ -- $ (29,900) $ -- $ --
Contribution of assets from
stockholder/officer.......... -- -- -- -- 75,000 -- 75,000
Sale of common stock
for note..................... 250,000 2,500 (125,000) -- 122,500 -- --
Issuance of common stock and
additional capital associated
with the financing cost from
the issuance of bridge
units........................ 500,000 5,000 -- (2,885,135) 3,495,000 -- 614,865
Net loss...................... -- -- -- -- -- (537,056) (537,056)
--------- ------- ------------- ----------- ---------- ----------- ------------
BALANCE, MARCH 31, 1996....... 3,750,000 37,500 (125,100) (2,885,135) 3,662,600 (537,056) 152,809
Bridge loan converted to
capital in June 1996......... -- -- -- 500,000 -- -- 500,000
Issuance of capital common
stock and additional
associated with the financing
costs from the issuance of
bridge units................. 500,000 5,000 -- (3,000,000) 3,495,000 -- 500,000
Cancellation of note
receivables in June 1996 upon
return of 250,000 shares of
common stock................. (250,000) (2,500) 125,000 -- (122,500) -- --
Amortization of the costs of
bridge financing............. -- -- -- 5,385,135 -- -- 5,385,135
Net Loss...................... -- -- -- -- -- (6,329,568) (6,329,568)
--------- ------- ------------- ----------- ---------- ----------- ------------
BALANCE, DECEMBER 31, 1996
(UNAUDITED).................. 4,000,000 $40,000 $ (100) $ -- $7,035,100 $(6,866,624) $ 208,376
--------- ------- ------------- ----------- ---------- ----------- ------------
--------- ------- ------------- ----------- ---------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS
UNAUDITED AS TO INTERIM PERIODS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND LIQUIDITY
e-Net, Inc. was incorporated on January 9, 1995, and the Company commenced
operations on June 8, 1995. The Company, with principal executive offices in
Germantown, Maryland, develops, markets, and supports open client, server and
integrated applications software that enables local, national and international
telephone communications, information exchange and commerce over the Internet
and private networks, principally located in the United States. The Company also
sells other products used in the management and billing of computer network,
telephone and computer usage.
The 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
remaining proceeds received or to be received from MVSI, Inc. as described in
Note H will be sufficient to sustain operations for the remainder of fiscal
1997. Additional financing will be necessary to provide for continued product
development and operations in fiscal 1998. While assurance cannot be given as to
its success, the Company has entered into a letter of intent in February 1997
with an underwriter for a firm commitment initial public offering of securities
as described in Note G.
INTERIM FINANCIAL STATEMENTS
The condensed financial statements as of December 31, 1996, and for the nine
months ended December 31, 1996, and the period from June 8, 1995, to December
31, 1995, are unaudited; however, in the opinion of management, all adjustments
necessary for a fair presentation of the financial position, results of
operations, and cash flows for these interim periods have been included. The
results for the interim periods are not necessarily indicative of the results to
be obtained for the full fiscal year. The significant accounting policies used
in the preparation of the accompanying financial statements are as follows:
REVENUE RECOGNITION
Revenue is recognized on the sale of software products upon shipment unless
future obligations exist wherein a portion of the revenue is deferred until the
obligation is satisfied. Revenue from services rendered is recognized either as
the services are rendered based upon fixed hourly rates or at contractually
determined fixed monthly fees.
For the period ended March 31, 1996, the Company derived 32%, 29%, 16% and
13% of its sales from four customers, respectively.
For the nine months ended December 31, 1996, the Company derived 72% and 23%
of its sales from two customers.
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, and December 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
F-7
<PAGE>
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED AS TO INTERIM PERIODS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
EARNINGS PER SHARE
Earnings per share for the periods from the beginning of operations to
December 31, 1995, and March 31, 1996, are based upon weighted-average shares
outstanding during the period from June 1995, the date operations commenced,
through March 31, 1996, adjusted retroactively, where applicable, for the effect
of a 600:1 stock split in January 1996 and a 2:1 reverse stock split in February
1997. The weighted average shares outstanding also include the weighted-average
effect (17,808 shares) of 500,000 shares of common stock issued in March 1996,
pursuant to the issuance of the Bridge Units. The weighted-average effect of
bridge units issued in April 1996 has been accounted for in computing earnings
per share for the nine-months ended December 31, 1996 and not reflected in prior
period calculations inasmuch as the issuance of these securities was accounted
for at fair vlaue as described in Note B. The effect of the issuance of 250,000
shares of Common Stock in March 1996 for a $125,000 promissory note has not been
reflected in weighted-average shares outstanding because the note was canceled
in June 1996 in exchange for the return of all such shares. The effect of
convertible debentures outstanding on an "if-converted" basis at December 31,
1996 is anti-dilutive and therefore excluded from weighted-average shares
outstanding.
SOFTWARE DEVELOPMENT COSTS
In accordance with the Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed," the Company capitalized certain costs incurred to develop computer
software. Software costs will be amortized over the estimated useful life of the
software once the product is available for general release to customers which
release management estimates will occur by October 1997. At December 31, 1996,
the Company has capitalized $367,598.
Critical to the recoverability of the capitalized software costs is the
completion of development of certain software products, bringing such products
to market in the near term, and the generation of related sales sufficient to
recover costs incurred to date and costs to complete development. Should
sufficient sales fail to materialize, the carrying amount of capitalized
software costs may be reduced accordingly in the future.
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 $125,000, represented by a full recourse promissory
note for the entire purchase price. In June 1996, this promissory note was
canceled in exchange for the return of the 250,000 shares of common stock.
In March 1996, the Company was loaned $500,000 by a nonaffiliated person.
Principal and interest computed at the rate of eight percent per annum become
due at the earlier of June 1, 1997, or the closing date of the proposed initial
public offering of securities of the Company which was expected
F-8
<PAGE>
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED AS TO INTERIM PERIODS
NOTE B -- SIGNIFICANT TRANSACTIONS (CONTINUED)
to occur in June 1996. As additional consideration for making such loan, the
Company issued 500,000 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 500,000 Bridge Units received in connection with the
loan. Inasmuch as these Bridge Units were issued in contemplation of a proposed
offering, financing expense related to the issuance of these securities of
$3,000,000 was recorded between the date of issuance and the anticipated
offering date, with a corresponding credit to paid-in capital. The value of
$3,000,000 attributed to issuance of the Bridge Units was computed using the
offering price of the Units offered in the Company's proposed 1996 public
offering less the amount of debt converted to paid in capital in June 1996. As
of March 31, 1996, the Company had accrued $614,865 of this financing expense.
The Company recorded the loan of $500,000 as a noncurrent liability at March 31,
1996. It is not practicable to estimate the fair value of this debt, as there
are no quoted market prices for debt with similar terms. In June 1996, the
bridge loans outstanding as of March 31, 1996, were converted and the
unamortized financing expense was charged to income at that time.
In April 1996, the Company was loaned $500,000 by three nonaffiliated
persons. Principal and interest computed at the rate of eight percent per annum
become due at the earlier of June 1, 1997, or the closing date of an initial
public offering of securities of the Company which was expected to occur in June
1996. As additional consideration for making such loan, the Company issued
500,000 Bridge Units identical to those issued in March 1996 as described above.
In June 1996, the loan principal was converted to paid-in capital and accounted
for as consideration for the 500,000 Bridge Units received in connection with
the loan. Inasmuch as these Bridge Units were issued in contemplation of the
proposed offering, financing expense related to the issuance of these securities
of $3,000,000 was recorded between the date of issuance and the date the loan
was converted to capital, with a corresponding credit to paid-in capital. The
value of $3,000,000 attributed to issuance of the Bridge Units was computed
using the offering price of the Units in the Company's proposed 1996 public
offering less the amount of debt converted to paid-in capital in June 1996.
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 a
future royalty computed quarterly equal to 5% of gross profit from products sold
related to the acquired Technology. Royalties will be expensed in the period in
which related sales are recognized. The assignment agreement provides for the
right of the individuals to repurchase the Technology if the Company fails to
make reasonable efforts to develop and exploit the market opportunities made
available by the Technology. The agreement provides that the Company allocate
$1,000,000 of paid-in capital to develop and exploit the market opportunities of
F-9
<PAGE>
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED AS TO INTERIM PERIODS
NOTE B -- SIGNIFICANT TRANSACTIONS (CONTINUED)
the Technology by December 31, 1996, or the Technology will be subject to
repurchase by the inventors of the Technology. The Company believes that it has
satisfied its commitment to allocate $1,000,000 towards the Technology by
December 31, 1996.
In January 1996, the Company signed a letter of intent to purchase certain
assets from an entity of which two of the three owners are also stockholders of
the Company. These assets are prototype boards, proprietary software code and
existing research and development relating to specific computer software
products. In May 1996, the Company completed the purchase for cash of $50,000.
Management allocated the entire purchase price of $50,000 to research and
development expense and therefore, recorded a charge to operations in fiscal
year 1997 for that amount. The entity from which the assets 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.
NOTE C -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 MARCH 31, 1996
----------------- --------------
<S> <C> <C>
(UNAUDITED)
Furniture and office equipment............................ $ 230,270 $ 125,000
Airplane.................................................. -- 40,000
----------------- --------------
230,270 165,000
Less accumulated depreciation............................. (51,676) (30,715)
----------------- --------------
Property and equipment -- net............................. $ 178,594 $ 134,285
----------------- --------------
----------------- --------------
</TABLE>
NOTE D -- STOCKHOLDER/OFFICER NOTES PAYABLE
Stockholder notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 MARCH 31, 1996
----------------- --------------
<S> <C> <C>
(UNAUDITED)
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
For the nine-month period ended December 31, 1996, no provision for income
taxes has been reflected due to uncertainty as to the realizability of tax
benefits associated with net operating losses to date. Financing expense
associated with the issuance of Bridge Units is non-deductible and is being
treated as a capital transaction for income tax reporting purposes.
F-10
<PAGE>
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED AS TO INTERIM PERIODS
NOTE E -- INCOME TAXES (CONTINUED)
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 0%. A
reconciliation between the U.S. 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 -- financing 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.
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>
The use of net operating losses of the Company in the future to offset
taxable income may be limited in the event of a change in control of the Company
in accordance with Section 382 of the Internal Revenue Code.
NOTE F -- COMMITMENTS AND CONTINGENT LIABILITIES
LEASE COMMITMENT
As of March 31, 1996, the Company leases office space under a month-to-month
operating lease which provides for monthly rent payments of $1,900.
F-11
<PAGE>
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED AS TO INTERIM PERIODS
NOTE F -- COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
In May and September 1996, the Company entered into two leases for office
space which provide for aggregate monthly rent payments of $7,530. At December
31, 1996, approximate future rental commitments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31,
- ---------------------------------------------------------------------------------
<S> <C>
1997............................................................................. $ 26,493
1998............................................................................. 107,124
1999............................................................................. 109,458
2000............................................................................. 100,306
2001............................................................................. 100,446
Thereafter....................................................................... 50,844
-----------
$ 494,671
-----------
-----------
</TABLE>
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
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 reflect the result of operations on
a PRO FORMA basis had the officer been employed by the Company for the entire
period at a compensation level equal to that contained in the above agreement.
NOTE G -- PROPOSED INITIAL PUBLIC OFFERING
In March 1996, the Company entered into a letter of intent with an
underwriter for a firm commitment initial public offering of securities. The
offering was abandoned in September 1996. The Company paid $100,000 to an
attorney who is also a stockholder of the Company in return for services
rendered in connection with the offering. In addition, the Company has expensed
$284,575 of costs incurred in connection with the offering, which costs do not
benefit the 1997 proposed offering described below.
F-12
<PAGE>
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED AS TO INTERIM PERIODS
NOTE G -- PROPOSED INITIAL PUBLIC OFFERING (CONTINUED)
In February 1997, the Company entered into a letter of intent with an
underwriter for a firm commitment initial public offering of securities
consisting of 1,500,000 shares of common stock and 1,500,000 warrants. In
connection with the proposed offering, a 2:1 reverse stock split was approved by
the Company. In addition, in connection with the proposed offering, the
$1,275,081 convertible debenture described in Note H was converted to 250,000
shares of common stock, and the outstanding Class A and Class B warrants were
canceled, resulting in 4,250,000 shares of common stock issued and outstanding
prior to the proposed offering.
NOTE H -- SUBSEQUENT EVENTS (UNAUDITED)
In August 1996, the Company entered into a letter of intent with MVSI, Inc.
("MVSI"), a Washington, D.C. area based Nasdaq-listed technology products and
services company, whereby the Company agreed to be acquired and become a
wholly-owned subsidiary of MVSI in an exchange of securities. Three principal
stockholders of the Company are stockholders of MVSI. A director of the Company
is a director of MVSI. Pursuant to the terms of the letter of intent, an initial
amount of $500,000 was loaned by MVSI to the Company for working capital. In
October 1996, the Company entered into an agreement to be acquired by MVSI,
which was subject to stockholder approval. An additional $500,000 was loaned to
the Company in November 1996. However, in January 1997, the parties mutually
agreed to terminate the acquisition, principally due to market conditions, and,
as part of a mutual cooperation agreement, MVSI loaned the Company an additional
$250,000 pursuant to the terms of a convertible debenture.
The terms of the convertible debenture in the principal sum of $1,275,081,
reflecting the total amount of the loan advances made to the Company by MVSI,
provide that the outstanding principal balance bear interest at 9% per annum. At
MVSI's option, the principal is convertible into shares of common stock of the
Company upon completion of an initial public offering of the Company's
securities, with the number of shares to be calculated using the initial price
per share of the offering. In February 1997, the convertible debenture was
converted by MVSI into 250,000 shares of the Company's common stock, resulting
in a total of 4,250,000 shares of Common Stock issued and outstanding prior to
the date of this prospectus. The 250,000 shares of Common Stock owned by MVSI
are being registered as part of this offering and are restricted from sale for a
period of 12 months from the date of this offering, but may be released for sale
during this period with the consent of the Representative.
F-13
<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........................................................... 15
Dilution.................................................................. 17
Capitalization............................................................ 18
Dividend Policy........................................................... 18
Management's Discussion and Analysis or Plan of Operation................. 19
Business.................................................................. 25
Management................................................................ 38
Principal Stockholders.................................................... 43
Certain Transactions...................................................... 44
Description of Securities................................................. 46
Underwriting.............................................................. 48
Legal Proceedings......................................................... 50
Legal Matters............................................................. 50
Experts................................................................... 50
Additional Information.................................................... 50
Index to Financial Statements............................................. F-1
Report of Independent Certified Public Accountants........................ F-2
</TABLE>
------------------------
UNTIL , 1997 (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.
1,500,000 SHARES
1,500,000 WARRANTS
[LOGO]
---------------------
PROSPECTUS
---------------------
[LOGO]
7770 W. Camino Real, Suite 200
Boca Raton, Florida 33433
(561) 347-1200
Atlanta, Georgia
Beverly Hills, California
Boston, Massachusetts
Chicago, Illinois
Clearwater, Florida
Denver, Colorado
East Boca Raton, Florida
Hoopeston, Illinois
La Jolla, California
Miami, Florida
Middletown, New Jersey
Minneapolis, Minnesota
Oklahoma City, Oklahoma
Orlando, Florida
Sarasota, Florida
Tampa, Florida
Tulsa, Oklahoma
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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.
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)............................. $ 6,561
NASD Registration and Filing Fee(1)............................ 2,665
Nasdaq Registration and Filing Fee............................. 10,000
Financial Printing............................................. 175,000
Transfer Agent Fees............................................ 10,000
Accounting Fees and Expenses................................... 75,000
Legal Fees and Expenses........................................ 375,000
Blue Sky Fees and Expenses..................................... 75,000
Underwriter's Nonaccountable Expense Allowance................. 265,219
Miscellaneous.................................................. 5,555
----------
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, a 2:1 reverse stock split in July 1996, a 2:1 stock split in
August 1996 and a 2:1 reverse stock split in February 1997, 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, a 2:1 reverse stock split
in July 1996, a 2:1 stock split in August 1996 and a 2:1 reverse stock split in
February 1997) 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. However, in June
1996, ATG Group, Inc. agreed to cancel its shares of the Company's Common Stock
in consideration of the cancellation of its $250,000 promissory note.
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. 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. In February 1997, such persons agreed to the cancellation of the
Class A and B Warrants.
In August 1996, the Company caused a 2:1 split of its issued and outstanding
shares of common stock, Class A Warrants and Class B Warrants, resulting in
8,000,000 shares of common stock, 2,000,000 Class A Warrants and 2,000,000 Class
B Warrants.
In February 1997, the Company caused a 2:1 reverse split of its issued and
outstanding securities, resulting in 4,000,000 shares of Common Stock. Also, in
February 1997, the Company canceled the outstanding Class A and B Warrants.
In August 1996, the Company entered into a letter of intent with MVSI, Inc.
("MVSI"), a Washington, D.C. area based Nasdaq-listed technology products and
services company, whereby the Company agreed to be acquired and become a
wholly-owned subsidiary of MVSI in an exchange of securities. Three principal
stockholders of the Company are stockholders of MVSI. A director of the Company
is a director of MVSI. Pursuant to the terms of the letter of intent, an initial
amount of $500,000 was loaned by MVSI to the Company for working capital. In
October 1996, the Company entered into an agreement to be acquired by MVSI,
which was subject to stockholder approval. An additional $500,000 was loaned to
the Company in November 1996. However, in January 1997, the parties mutually
agreed to terminate the acquisition, principally due to market conditions, and,
as part of a mutual cooperation agreement, MVSI loaned the Company an additional
$250,000 pursuant to the terms of a convertible debenture.
The terms of the convertible debenture in the principal sum of $1,250,000,
reflecting the total amount of the loan advances made to the Company by MVSI,
provide that the outstanding principal balance bear interest at 9% per annum. At
MVSI's option, the principal is convertible into shares of common stock of the
Company upon completion of an initial public offering of the Company's
securities, with the number of shares to be calculated using the initial price
per share of the offering. In February 1997, the convertible debenture was
converted by MVSI into 250,000 shares of the Company's common stock, resulting
in a total of 4,250,000 shares of Common Stock issued and outstanding prior to
the date of this prospectus. The 250,000 shares of Common Stock owned by MVSI
are being registered as part of this offering and are restricted from sale for a
period of 12 months from the date of this offering, but may be released for sale
during this period with the consent of the Underwriter.
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,
II-3
<PAGE>
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 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. 13 to the SB-2 Registration
Statement and related Prospectus:
<TABLE>
<C> <S>
1.0 Form of Underwriting Agreement.*
1.1 Agreement Among Underwriters.*
1.2 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 Warrant Certificate.
4.2 Form of Representative's 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.
10.4 Financial Advisory Agreement.*
10.5 Merger and Acquisition Agreement.*
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.
II-4
<PAGE>
The undersigned Registrant also undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement:
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the registration statement is on Form S-3 or Form S-8, and
the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the
registrant pursuant to section 13 or section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
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 February 11,
1997.
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 February 11, 1997
Alonzo E. Short, Jr., Lt. Gen., USA (ret.)
ROBERT A. VESCHI President, Chief Executive
------------------------------------------- Officer, Chief Financial February 11, 1997
Robert A. Veschi Officer, Controller, Director
CHRISTINA L. SWISHER
------------------------------------------- Vice President, Secretary February 11, 1997
Christina L. Swisher
WILLIAM L. HOOTON*
------------------------------------------- Director February 11, 1997
William L. Hooton
CLIVE WHITTENBURY, PH.D.
------------------------------------------- Director February 11, 1997
Clive Whittenbury, Ph.D.
WILLIAM W. ROGERS, JR.
------------------------------------------- Director February 11, 1997
William W. Rogers, Jr.
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.
February 10, 1997
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. 13 to the SB-2 Registration Statement
and related Prospectus:
<TABLE>
<C> <S>
1.0 Form of Underwriting Agreement.*
1.1 Agreement Among Underwriters.*
1.2 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 Warrant Certificate.
4.2 Form of Representative's 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.
10.4 Financial Advisory Agreement.*
10.5 Merger and Acquisition Agreement.*
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>
Exhibit 1.0
E-NET, INC.
1,500,000 SHARES OF COMMON STOCK AND
1,500,000 COMMON STOCK PURCHASE WARRANTS
UNDERWRITING AGREEMENT
Boca Raton, Florida
_____________, 1997
Barron Chase Securities, Inc.
7700 West Camino Real, Suite 200
Boca Raton, Florida 33433
Gentlemen:
e-Net, Inc. (the "Company"), on the basis of the representations,
warranties, covenants and conditions contained herein, hereby proposes to issue
and sell to such Underwriters as named in Schedule A (the "Underwriters") to the
Underwriting Agreement (the "Agreement"), for whom Barron Chase Securities, Inc.
is acting as a representative (the "Representative"), pursuant to the terms of
this Agreement, on a "firm commitment" basis, 1,500,000 shares of Common Stock
(the "Shares") at $5.00 per Share and 1,500,000 Redeemable Common Stock Purchase
Warrants (the "Warrants") at $.125 per Warrant. The Shares and the Warrants are
collectively referred to as the "Securities". Each Warrant is exercisable to
purchase one (1) share of Common Stock (the "Common Stock") at $5.25 per share
at any time during the period between the Effective Date and five (5) years from
the Effective Date. The date upon which the Securities and Exchange Commission
("Commission") shall declare the Registration Statement of the Company effective
shall be the "Effective Date". The Warrants are subject to redemption under
certain circumstances. In addition, the Company proposes to grant to the
Underwriters (or, at the option of the Representative, to the Representative,
individually) the option referred to in Section 2(b) to purchase all or any part
of an aggregate of 225,000 additional Shares and/or 225,000 additional Warrants
(the "Option Securities").
You have advised the Company that you and the other Underwriters desire to
purchase, severally, the Securities, and that you have been authorized by the
Underwriters to execute this Agreement on their behalf. The Company confirms
the agreements made by it with respect to the purchase of the Securities by the
several Underwriters on whose behalf you are signing this Agreement, as follows:
<PAGE>
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to, and agrees with each of the
Underwriters as of the Effective Date (as defined above), the Closing Date (as
hereinafter defined) and the Option Closing Date (as hereinafter defined) that:
(a) A registration statement (File No. 333-3860 on Form SB-2 relating to
the public offering of the Securities, including a preliminary form of the
prospectus, copies of which have heretofore been delivered to you, has been
prepared by the Company 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 Commission thereunder, and has been filed with the
Commission under the Act. The Company has prepared in the same manner and
proposes to file, prior to the Effective Date of such registration statement, an
additional amendment or amendments to such registration statement, including a
final form of Prospectus, copies of which shall be delivered to you.
"Preliminary Prospectus" shall mean each prospectus filed pursuant to the Rules
and Regulations under the Act prior to the Effective Date. The registration
statement (including all financial schedules and exhibits) as amended at the
time it becomes effective and the final prospectus included therein are
respectively referred to as the "Registration Statement" and the "Prospectus",
except that (i) if the prospectus first filed by the Company pursuant to Rule
424(b) of the Rules and Regulations shall differ from said prospectus as then
amended, the term "Prospectus" shall mean the prospectus first filed pursuant to
Rule 424(b), and (ii) 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) At the Effective Date and at all times subsequent thereto up to the
Option Closing Date, if any, and during such longer period as the Prospectus may
be required to be delivered in connection with sales by the Underwriters or
Selected Dealers: (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, in light of the
circumstances under which they are made, not misleading; provided, however, that
the Company makes no representations, warranties or agreement 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 the Underwriters
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specifically for use in the preparation thereof. It is understood that the
statements set forth in the Prospectus with respect to stabilization, under the
heading "Underwriting" and regarding the identity of counsel to the Underwriters
under the heading "Legal Matters" constitute the only information furnished in
writing by the Underwriters for inclusion in the Prospectus.
(c) Each of the Company and each subsidiary has been duly incorporated and
is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, with full power and authority (corporate and
other) to own its properties and conduct its business as described in the
Prospectus and is duly qualified to do business as a foreign corporation and is
in good standing in all other jurisdictions in which the nature of its business
or the character or location of its properties requires such qualification,
except where failure to so qualify will not materially affect the Company's
business, properties or financial condition.
(d) The authorized, issued and outstanding securities of the Company as of
the date of the Prospectus is as set forth in the Prospectus under
"Capitalization"; all of the issued and outstanding securities of the Company
have been, or will be when issued as set forth in the Prospectus, duly
authorized, validly issued and fully paid and non-assessable; the issuances and
sales of all such securities complied in all material respects with applicable
Federal and state securities laws; the holders thereof have no rights of
rescission against the Company with respect thereto, and are not subject to
personal liability by reason of being such holders; none of such securities were
issued in violation of the preemptive rights of any holders of any security of
the Company or similar contractual rights granted by the Company; 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 securities of the Company have been granted or
entered into by the Company; and all of the securities of the Company, issued
and to be issued as set forth in the Registration Statement, conform to all
statements relating thereto contained in the Registration Statement and
Prospectus.
(e) The Shares are duly authorized, and when issued, delivered and paid
for pursuant to this Agreement, will be duly authorized, validly issued, fully
paid and non-assessable 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 Securities 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 securities of the Company, except as described in the
Registration Statement.
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The Warrants have been duly authorized and, when issued, delivered and paid
for pursuant to this Agreement, will have been duly authorized, issued and
delivered and will constitute valid and legally binding obligations of the
Company enforceable in accordance with their terms 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 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,
free of pre-emptive rights and no personal liability will attach to the
ownership thereof. The Warrant exercise period and the Warrant exercise price
may not be changed or revised by the Company without the prior written consent
of the Representative. 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.
The Common Stock Representative Warrants, the Warrant Representative
Warrants, the Underlying Warrants, the shares of Common Stock issuable upon
exercise of the Common Stock Representative Warrants, and the shares of Common
Stock issuable upon exercise of the Underlying Warrants (all as defined in the
Representative's Warrant Agreement described in Section 12 herein), have been
duly authorized and, when issued, delivered and paid for, will be validly
issued, fully paid, non-assessable, free of pre-emptive rights and no personal
liability will attach to the ownership thereof, and will constitute valid and
legally binding obligations of the Company enforceable in accordance with their
terms and entitled to the benefits provided by the Representative's Warrant
Agreement.
(f) This Agreement, the Warrant Agreement, the Financial Advisory
Agreement, the Merger and Acquisition Agreement (the "M/A Agreement") and the
Representative's Warrant Agreement have been duly and validly authorized,
executed and delivered by the Company, and assuming due execution of this
Agreement by the other party hereto, constitute valid and binding obligations of
the Company enforceable against the Company in accordance with their terms,
except as enforceability may be limited by bankruptcy, insolvency or other laws
affecting the rights of creditors generally. The Company has full power and
lawful authority to authorize, issue and sell the Securities to be sold by it
hereunder on the terms and conditions set forth herein, and no consent,
approval, authorization or other order of any governmental authority is required
in connection with such authorization, execution and delivery or with the
authorization, issue and sale of the Securities or the securities to be issued
pursuant to the Representative's Warrant Agreement, except such as may be
required
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<PAGE>
under the Act or state securities laws, or as otherwise have been obtained.
(g) Except as described in the Prospectus, neither the Company nor any
subsidiary is in material violation, breach of or default 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 breach of, or
constitute a material default under, or result in the creation or imposition of
any lien, charge or encumbrance upon any of the property or assets of the
Company or each subsidiary or any of the terms or provisions of any indenture,
mortgage, deed of trust, loan agreement or other agreement or instrument to
which the Company or each subsidiary is a party or by which the Company or each
subsidiary may be bound or to which any of the property or assets of the Company
or each subsidiary is subject, nor will such action result in any material
violation of the provisions of the articles of incorporation or by-laws of the
Company or each subsidiary, as amended, or any statute or any order, rule or
regulation applicable to the Company or subsidiary of any court or of any
regulatory authority or other governmental body having jurisdiction over the
Company or each subsidiary.
(h) Subject to the qualifications stated in the Prospectus, the Company
and each subsidiary have good and marketable title to all properties and assets
described in the Prospectus as owned by each of them, free and clear of all
liens, charges, encumbrances or restrictions, except such as are not materially
significant or important in relation to its business; all of the material leases
and subleases under which the Company or each subsidiary is the lessor or
sublessor of properties or assets or under which the Company or each subsidiary
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,
neither the Company nor each subsidiary is in default in any material respect
with respect to any of the terms or provisions of any of such leases or
subleases, and no claim has been asserted by anyone adverse to rights of the
Company or each subsidiary 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 each subsidiary 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 each subsidiary
owns or leases 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, L.L.P., who have given their report on certain
financial statements filed and to be filed with the Commission as part of the
Registration Statement, and which are included in the Prospectus, are with
respect to the Company,
5
<PAGE>
independent public accountants as required by the Act and the Rules and
Regulations.
(j) The financial statements and schedules, together with related notes,
set forth in the Prospectus and the Registration Statement present fairly the
financial position and results of operations and changes in financial position
of the Company on the basis stated in the Registration Statement, at the
respective dates and for the respective periods to which they apply. Said
statements and related notes and schedules have been prepared in accordance with
generally accepted accounting principles applied on a basis which is consistent
during the periods involved. The Company's internal accounting controls and
procedures are sufficient to cause the Company and each subsidiary to prepare
financial statements which comply in all material respects with generally
accepted accounting principles applied on a basis which is consistent during the
periods involved. During the preceding five (5) year period, nothing has been
brought to the attention of the Company's management that would result in any
reportable condition relating to the Company's internal accounting procedures,
weaknesses or controls.
(k) Subsequent to the respective dates as of which information is set
forth in the Registration Statement and the Prospectus and to and including the
Option Closing Date, except as set forth in or contemplated by the Registration
Statement and the Prospectus, (i) neither the Company nor any subsidiary has
incurred and will not have incurred any material liabilities or obligations,
direct or contingent, and has not entered into and will not have entered into
any material transactions other than in the ordinary course of business and/or
as contemplated in the Registration Statement and the Prospectus; (ii) neither
the Company nor any subsidiary has and will not have paid or declared any
dividends or have made any other distribution on its capital stock; (iii) there
has not been any change in the capital stock of, or any incurrence of long-term
debt by, the Company or any subsidiary; (iv) neither the Company nor any
subsidiary has issued any options, warrants or other rights to purchase the
capital stock of the Company or any subsidiary; and (v) there has not been and
will not have been any material adverse change in the business, financial
condition or results of operations of the Company or any subsidiary, or in the
book value of the assets of the Company or any subsidiary, arising for any
reason whatsoever.
(l) Except as set forth in the Prospectus, there is not pending or, to the
knowledge of the Company or any subsidiary, threatened, any material action,
suit, proceeding, inquiry, arbitration or investigation against the Company or
any subsidiary, or any of the officers or directors of the Company or any
subsidiary, or any material action, suit, proceeding, inquiry, arbitration, or
investigation, which might result in any material adverse change in the
condition (financial or other), business
6
<PAGE>
prospects, net worth, or properties of the Company or any subsidiary.
(m) Except as disclosed in the Prospectus, each of the Company and each
subsidiary has filed all necessary federal, state and foreign income and
franchise tax returns and has paid all taxes shown as due thereon; and there is
no tax deficiency which has been or to the knowledge of the Company might be
asserted against the Company or any subsidiary that has not been provided for in
the financial statements.
(n) Except as set forth in the Prospectus, each of the Company and each
subsidiary has sufficient licenses, permits and other governmental
authorizations currently required for the conduct of its business or the
ownership of its property as described in the Prospectus and is in all material
respects in compliance therewith and owns or possesses adequate right 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 of
the Company's knowledge, none of the activities or business of the Company or
any subsidiary are in violation of, or cause the Company or any subsidiary 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 or locality, the violation of which would have a material adverse
impact upon the condition (financial or otherwise), business, property,
prospective results of operations, or net worth of the Company and any
subsidiary.
(o) Neither the Company nor any subsidiary has, 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.
(p) On the Closing Dates (herein 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 Securities to the several Underwriters
hereunder will have been fully paid or provided for by the Company and all laws
imposing such taxes will have been fully complied with.
(q) All contracts and other documents which are required to be described
in or filed as exhibits to the Registration Statement have been so described
and/or filed.
7
<PAGE>
(r) Except as described in the Registration Statement and Prospectus, no
holders of Common Stock or of any other securities of the Company have the right
to include such Common Stock or other securities in the Registration Statement
and Prospectus.
(s) Except as set forth in or contemplated by the Registration Statement
and the Prospectus, neither the Company nor any subsidiary has any material
contingent liabilities.
(t) The Company has no subsidiary corporations except as disclosed in the
Registration Statement and Prospectus, nor has it any equity interest in any
partnership, joint venture, association or other entity except as disclosed in
the Registration Statement or Prospectus. Except as described in the
Registration Statement and Prospectus, the Company owns all of the outstanding
securities of each of its subsidiaries.
(u) The Commission has not issued an order preventing or suspending the
use of any Preliminary Prospectus with respect to the offer and sale of the
Securities and each Preliminary Prospectus, as of its date, has conformed fully
in all material respects with the requirements of the Act and the Rules and
Regulations and did not include any untrue statement of a material fact or omit
to state a material fact necessary to make the statements therein not
misleading.
(v) Neither the Company, nor, to the Company's knowledge, any of its
officers, directors, employees or stockholders, have taken or will take,
directly or indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any of the securities of the
Company.
(w) Item 26 of Part II of the Registration Statement accurately discloses
all unregistered securities sold by the Company within the three year period
prior to the date as of which information is presented in the Registration
Statement. All of such securities were sold in transactions which were exempt
from the registration provisions of the Act and not in violation of Section 5
thereof.
(x) Other than as set forth in the Prospectus, the Company has not entered
into any agreement pursuant to which any person is entitled, either directly or
indirectly, to compensation from the Company for services as a finder in
connection with the proposed offering, and the Company agrees to indemnify and
hold harmless the Underwriters against any losses, claims, damages or
liabilities, joint or several, which shall include, but not be limited to, all
costs to defend against any such claim, so long as such claim arises out of
agreements made or allegedly made by the Company.
(y) Based upon written representations received by the
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Company, no officer, director or five percent (5%) or greater stockholder of the
Company or any subsidiary has any direct or indirect affiliation or association
with any member of the National Association of Securities Dealers, Inc.
("NASD"), except as disclosed to the Representative in writing, and no
beneficial owner of the Company's unregistered securities has any direct or
indirect affiliation or association with any NASD member except as disclosed to
the Representative in writing. The Company will advise the Representative and
the NASD if any five percent (5%) or greater shareholder of the Company or any
subsidiary is or becomes an affiliate or associated person of an NASD member
participating in the distribution.
(z) The Company and each subsidiary is in compliance in all material
respects with all federal, state and local laws and regulations respecting the
employment of its employees and employment practices, terms and conditions of
employment and wages and hours relating thereto. There are no pending
investigations involving the Company or any subsidiary by the U.S. Department of
Labor, or any other governmental agency responsible for the enforcement of such
federal, state or local laws and regulations. There is no unfair labor practice
charge or complaint against the Company or any subsidiary pending before the
National Labor Relations Board or any strike, picketing, boycott, dispute,
slowdown or stoppage pending or to the knowledge of the Company, threatened
against or involving the Company or any subsidiary or any predecessor entity.
No question concerning representation exists respecting the employees of the
Company or any subsidiary and no collective bargaining agreement or modification
thereof is currently being negotiated by the Company or any subsidiary. No
grievance or arbitration proceeding is pending under any expired or existing
collective bargaining agreements of the Company or any subsidiary, if any.
(aa) Neither the Company nor any subsidiary maintains, sponsors nor
contributes to, nor is it required to contribute to, any program or arrangement
that is an "employee pension benefit plan", an "employee welfare benefit plan",
or a "multi-employer plan" as such terms are defined in Sections 3(2), 3(1) and
3(37), respectively, of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") ("ERISA Plans"). Neither the Company nor any subsidiary
maintained or contributed to a defined benefit plan, as defined in Section 3(35)
of ERISA.
(ab) Based upon written representations received from the officers and
directors of the Company and each subsidiary, except as disclosed in the
Prospectus, during the past five years, none of the officers or directors of the
Company or any subsidiary have been:
(1) Subject of a petition under the Federal bankruptcy laws or
any state insolvency law filed by or
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against them, or by a receiver, fiscal agent or similar officer
appointed by a court for their business or property, or any
partnership in which either or them was a general partner at or within
two years before the time of such filing, or any corporation or
business association of which either of them was an executive officer
at or within two years before the time of such filing;
(2) Convicted in a criminal proceeding or a named subject of a
pending criminal proceeding (excluding traffic violations and other
minor offenses);
(3) The subject of any order, judgment, or decree not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining either of them
from, or otherwise limiting, any of the following activities:
(i) acting as a futures commission merchant, introducing
broker, commodity trading advisor, commodity pool operator, floor
broker, leverage transaction merchant, any other person regulated
by the Commodity Futures Trading Commission, or an associated
person of any of the foregoing, or as an investment adviser,
underwriter, broker or dealer in securities, or as an affiliated
person, director or employee of any investment company, bank,
savings and loan association or insurance company, or engaging in
or continuing any conduct or practice in connection with any such
activity;
(ii) engaging in any type of business practice; or
(iii) engaging in any activity in connection with the
purchase or sale of any security or commodity or in connection
with any violation of Federal or State securities law or Federal
Commodity laws.
(4) The subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated of any Federal or State
authority barring, suspending or otherwise limiting for more than
sixty (60) days either of their right to engage in any activity
described in paragraph (3)(i) above, or be associated with persons
engaged in any such activity;
(5) Found by any court of competent jurisdiction in a civil
action or by the Securities and Exchange Commission to have violated
any Federal or State
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securities law, and the judgment in such civil action or finding by
the Commission has not been subsequently reversed, suspended or
vacated; or
(6) Found by a court of competent jurisdiction in a civil action
or by the Commodity Futures Trading Commission to have violated any
Federal Commodities Law, and the judgment in such civil action or
finding by the Commodity Futures Trading Commission has not been
subsequently reversed, suspended or vacated.
(ac) Based upon written representations received from the officers and
directors of the Company, each of the officers and directors of the Company has
reviewed the sections in the Prospectus relating to their biographical data and
equity ownership position in the Company, and all information contained therein
is true and accurate.
2. PURCHASE, DELIVERY AND SALE OF THE SECURITIES.
(a) Subject to the terms and conditions of this Agreement and upon the
basis of the representations, warranties and agreements herein contained, the
Company hereby agrees to issue and sell to the Underwriters an aggregate of
1,500,000 Shares at $4.50 per Share and 1,500,000 Warrants at $.1125 per
Warrant, (the public offering price less ten percent (10%)), at the place and
time hereinafter specified, in accordance with the number of Shares and/or
Warrants set forth opposite the names of the Underwriters in Schedule A attached
hereto (the "Securities") plus any additional Securities which such Underwriters
may become obligated to purchase pursuant to the provisions of Section 9 hereof.
The Securities shall consist of 1,500,000 Shares and 1,500,000 Warrants to be
purchased from the Company, and the price at which the Underwriters shall sell
the Securities to the public shall be $5.00 per Share and $.125 per Warrant.
Delivery of the Securities against payment therefor shall take place at the
offices of Barron Chase Securities, Inc., 7700 West Camino Real, Suite 200, Boca
Raton, Florida 33433 (or at such other place as may be designated by the
Representative) at 10:00 a.m., Eastern Time, on such date after the Registration
Statement has become effective as the Representative shall designate, but not
later than ten (10) business days (holidays excepted) following the first date
that any of the Securities are released to you, such time and date of payment
and delivery for the Securities being herein called the "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 Underwriters (or, at the
option of the Representative, to the Representative, individually) to purchase
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all or any part of an aggregate of an additional 225,000 Shares and 225,000
Warrants at the same price per Share and Warrant as the Underwriters shall pay
for the Securities being sold pursuant to the provisions of subsection (a) of
this Section 2 (such additional Securities being referred to herein as the
"Option Securities"). This option may be exercised within forty-five (45) days
after the Effective Date of the Registration Statement upon notice by the
Underwriters to the Company advising as to the amount of Option Securities as to
which the option is being exercised, the names and denominations in which the
certificates for such Option Securities 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 Underwriters (or the Representative, individually) but shall
not be later than ten (10) full business days after the exercise of said option,
nor in any event prior to the Closing Date, and such time and date is referred
to herein as the "Option Closing Date". Delivery of the Option Securities
against payment therefor shall take place at the offices of the Representative.
The Option granted hereunder may be exercised only to cover overallotments in
the sale by the Underwriters of the Securities referred to in subsection (a)
above. In the event the Company declares or pays a dividend or distribution on
its Common Stock, whether in the form of cash, shares of Common Stock or any
other consideration, prior to the Option Closing Date, such dividend or
distribution shall also be paid on the Option Closing Date.
(c) The Company will make the certificates for the Securities to be sold
hereunder available to you for inspection at least two (2) full business days
prior to the Closing Date at the offices of the Representative, and such
certificates shall be registered in such names and denominations as you may
request. Time shall be of the essence and delivery at the time and place
specified in this Agreement is a further condition to the obligations of the
Company to each Underwriter.
Definitive certificates in negotiable form for the Securities to be
purchased by the Underwriters hereunder will be delivered by the Company to you
for the accounts of the several Underwriters against payment of the respective
purchase prices by the several Underwriters, by certified or bank cashier's
checks in New York Clearing House funds, payable to the order of the Company or
by wire transfer in New York Clearing House funds.
In addition, in the event the Underwriters (or the Representative
individually) exercises the option to purchase from the Company all or any
portion of the Option Securities pursuant to the provisions of subsection (b)
above, payment for such Securities shall be made payable in New York Clearing
House funds at the offices of the Representative, or by wire transfer, at the
time and date of delivery of such Securities as required by the provisions of
subsection (b) above, against receipt of the certificates for such Securities by
the Representative for the respective accounts
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of the several Underwriters registered in such names and in such denominations
as the Representative may request.
It is understood that the Representative, individually and not as
Representative of the several Underwriters, may (but shall not be obligated to)
make any and all payments required pursuant to this Section 2 on behalf of any
Underwriters whose check or checks shall not have been received by the
Representative at the time of delivery of the Securities to be purchased by such
Underwriter or Underwriters. Any such payment by the Representative shall not
relieve any such Underwriter or Underwriters of any of its or their obligations
hereunder. It is also understood that the Representative individually, rather
than all of the Underwriters, may (but shall not be obligated to) purchase the
Option Securities referred to in subsection (b) of this Section 2, but only to
cover overallotments.
It is understood that the several Underwriters propose to offer the
Securities to be purchased hereunder to the public upon the terms and conditions
set forth in the Registration Statement, after the Registration Statement is
declared effective by the Commission.
3. COVENANTS OF THE COMPANY. The Company covenants and agrees with the
several Underwriters that:
(a) The Company, upon notification from the Commission that the
Registration Statement has become effective, will so advise you 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 you shall not
previously been advised and furnished with a copy or to which you or your
counsel shall have objected in writing, acting reasonably, or which is not in
compliance with the Act and the Rules and Regulations. At any time prior to the
later of (i) the completion by the Underwriters of the distribution of the
Securities as contemplated hereby; or (ii) 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 your request, any
amendments or supplements to the Registration Statement or Prospectus which may
be necessary or advisable in connection with the distribution of the Securities
and as mutually agreed by the Company and the Representative.
After the Effective Date and as soon as the Company is advised thereof, the
Company will advise you, and confirm the advice in writing, 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
amendment of the Registration Statement or for supplementing of the Prospectus
or for additional information with respect thereto, of
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the issuance by the Commission or any state or regulatory body of any stop order
or other order 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 Securities 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 you copies of each Preliminary
Prospectus and Definitive 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 Underwriters and Selected Dealers to use the Prospectus
in connection with the sale of the Securities for such period as in the opinion
of counsel to the Underwriters 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 Underwriters or Selected
Dealers, of any event of which the Company has knowledge and which materially
affects the Company or the securities of the Company, or which in the opinion of
counsel for the Company or counsel for the Underwriters, should be set forth in
an amendment to 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 Securities, or in case it shall be necessary to amend or
supplement the Prospectus to comply with law or with the Act and the Rules and
Regulations, the Company will notify you promptly and forthwith prepare and
furnish to you copies of such amended Prospectus or of such supplement to be
attached to the Prospectus, in such quantities as you 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 Underwriters.
The Company will comply with the Act, the Rules and Regulations thereunder,
the Securities Exchange Act of 1934 (the "1934 Act"), and the rules and
regulations thereunder in connection with the offering and issuance of the
Securities.
(b) The Company will act in good faith and use its best efforts and
cooperate with you and your counsel to qualify to register the Securities for
sale under the securities or "blue sky" laws of such jurisdictions as the
Representative may designate and
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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 to service of process in any jurisdiction in any
action other than one arising out of the offering or sale of the Securities.
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 Underwriters may reasonably request.
(c) If the sale of the Securities provided for herein is not consummated,
the Company shall pay all costs and expenses incident to the performance of the
Company's obligations hereunder, including, but not limited to, all such
expenses itemized in Section 8(a) and 8(c) hereof, and either (i) the
out-of-pocket expenses of the Representative, not to exceed the $30,000
previously paid if the Representative elects to terminate the offering for any
reason; or (ii) the out-of-pocket expenses of the Representative if the Company
elects to terminate the offering for any reason. For the purposes of this
sub-paragraph, the Representative shall be deemed to have assumed such expenses
when they are billed or incurred, regardless of whether such expenses have been
paid. The Representative shall not be responsible for any expenses of the
Company or others, or for any charges or claims relative to the proposed public
offering if it is not consummated.
(d) The Company will deliver to you at or before the Closing Date two
signed copies of the Registration Statement, including all financial statements
and exhibits filed therewith, and of each amendment or supplement thereto. The
Company will deliver to or upon the order of the several Underwriters, from time
to time until the Effective Date of 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 Underwriters may reasonably request.
The Company will deliver to the Underwriters 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 several
Underwriters may from time to time reasonably request.
(e) For so long as the Company is a reporting company under either Section
12 or 15 of the 1934 Act, the Company, at its expense, will furnish to the
Representative during the period ending five (5) years from the Effective Date,
(i) as soon as practicable after the end of each fiscal year, 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
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or report thereon of independent accountants; (ii) as soon as they are
available, a copy of all reports (financial or other) mailed to security
holders; (iii) as soon as they are available, a copy of all non-confidential
documents, including annual reports, periodic reports and financial statements,
furnished to or filed with the Commission under the Act and the 1934 Act; (iv)
copies of each press release, news item and article with respect to the
Company's affairs released by the Company; and (v) such other information as you
may from time to time reasonably request.
(f) In the event 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 make generally available to its stockholders and to
the registered holders of its Warrants and deliver to you as soon as it is
practicable, but in no event later than the first day of the sixteenth full
calendar month following the Effective Date, an earnings statement (which need
not be audited) covering a period of at least twelve consecutive months
beginning with the Effective Date of the Registration Statement, which shall
satisfy the requirements of Section 11(a) of the Act.
(h) On the Closing Date, the Company shall have taken the necessary action
to become a reporting company under Section 12 of the 1934 Act, and the Company
will make all filings required to, and will have obtained approval for, the
listing of the Shares and Warrants on The Nasdaq Small Cap Market System, and
will use its best efforts to maintain such listing for at least seven (7) years
from the date of this Agreement.
(i) For such period as the Company's securities are registered under the
1934 Act, the Company will hold an annual meeting of stockholders for the
election of Directors within 180 days after the end of each of the Company's
fiscal years and, within 150 days after the end of each of the Company's fiscal
years will provide the Company's stockholders with the audited financial
statements of the Company as of the end of the fiscal year just completed prior
thereto. Such financial statements shall be those required by Rule 14a-3 under
the 1934 Act and shall be included in an annual report pursuant to the
requirements of such Rule.
(j) The Company will apply the net proceeds from the sale of the
Securities substantially in accordance with its statement under the caption "Use
of Proceeds" in the Prospectus, and will file such reports with the Commission
with respect to the sale of the Securities and the application of the proceeds
therefrom as may be required by Sections 12, 13 and/or 15 of the 1934 Act and
pursuant to Rule 463 under the Act.
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(k) The Company will, promptly upon your request, 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
reasonable opinion of counsel to the Underwriters and the Company may be
reasonably necessary or advisable in connection with the distribution of the
Securities and will use its best efforts to cause the same to become effective
as promptly as possible.
(l) On the Closing Date, the Company shall execute and deliver to you the
Representative's Warrant Agreement. The Representative's Warrant Agreement and
Warrant Certificates will be substantially in the form of the Representative's
Warrant Agreement filed as an Exhibit to the Registration Statement.
(m) The Company will reserve and keep available for issuance that maximum
number of its authorized but unissued securities which are issuable upon
exercise of the Representative's Warrants outstanding from time to time.
(n) All beneficial owners of the Company's securities (including Warrants,
Options and Common Stock of the Company), as of the Effective Date, shall agree
in writing, in a form satisfactory to the Representative, not to sell, transfer
or otherwise dispose of any of such securities or underlying securities for a
period of twenty-four (24) months from the Effective Date, or any longer period
required by any State, without the prior written consent of the Representative.
All sales of the Company's securities by officers and/or directors of the
Company shall be effected through the Representative.
(o) The Company will obtain, on or before the Closing Date, key person
life insurance on the life of Robert A. Veschi in an amount of not less than
$2,000,000, and will use its best efforts to maintain such insurance for a
period of at least five (5) years from the Effective Date.
(p) Prior to the Closing Date, the Company shall, at its own expense,
undertake to list the Company's securities in the appropriate recognized
securities manual or manuals published by Standard & Poor's Corporation and such
other manuals as the Representative may designate, such listings to contain the
information required by such manuals and the Uniform Securities Act. The
Company hereby agrees to use its best efforts to maintain such listing for a
period of not less than five (5) years. The Company shall take such action as
may be reasonably requested by the Representative to obtain a secondary market
trading exemption in such states as may be reasonably requested by the
Representative.
(q) During the one hundred eighty (180) day period commencing on the
Closing Date, the Company will not, without the prior
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written consent of the Representative, grant options or warrants to purchase the
Company's Common Stock at a price less than the initial per share public
offering price.
(r) Prior to the Closing Date, neither the Company nor any subsidiary will
issue, directly or indirectly, without your prior consent, any press release or
other communication or hold any press conference with respect to the Company or
its activities or the offering of the Securities other than routine customary
advertising of the Company's products and services, and except as required by
any applicable law or the directives of any relevant regulatory authority in any
relevant jurisdiction.
(s) At the Closing Date, the Company will engage the Representative as a
non-exclusive financial advisor to the Company for a period of thirty-six (36)
months commencing on the first day of the month following the Company's receipt
of the proceeds of this offering, at an aggregate fee of $108,000, all of which
shall be payable to the Representative on the Closing Date. The financial
advisory agreement will provide that the Representative shall, at the Company's
request, provide advice and consulting services to the Company concerning
potential merger and acquisition proposals and the obtaining of short or
long-term financing for the Company, whether by public financing or otherwise.
(t) The Company shall employ the services of a firm of independent
certified public accountants in connection with the preparation of the financial
statements to be included in any registration statement or similar disclosure
document to be filed by the Company hereunder, or any amendment or supplement
thereto. 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 quarterly report
and the mailing of quarterly financial information to stockholders.
(u) The Company shall retain American Stock Transfer & Trust Company as
the transfer agent for the securities of the Company, or such other transfer
agent as you may agree to in writing. In addition, the Company shall direct
such transfer agent to furnish the Representative with daily transfer sheets as
to each of the Company's securities as prepared by the Company's transfer agent
and copies of lists of stockholders and warrantholders as reasonably requested
by the Underwriter, for a five (5) year period commencing from the Closing Date.
(v) The Company shall cause the Depository Trust Company, or such other
depository of the Company's securities, to deliver a "special security position
report" to the Representative on a daily and weekly basis at the expense of the
Company, for a five (5) year period from the Effective Date.
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(w) Following the Effective Date, the Company shall, at its sole cost and
expense, prepare and file such Blue Sky applications with such jurisdictions as
the Representative shall designate and the Company may reasonably agree.
(x) On the Effective Date and for a period of three (3) years thereafter,
the Company's Board of Directors shall consist of a minimum of five (5) persons,
two (2) of whom shall be independent and not otherwise affiliated with the
Company or associated with any of the Company's affiliates. The Representative
shall have the opportunity to invite an observer to attend Board of Directors
meetings of the Company at the expense of the Company.
(y) On the Closing Date, the Company shall execute and deliver to you a
non-exclusive M/A Agreement with the Representative in a form satisfactory to
the Representative, providing:
(1) that the Representative will be paid a finder's fee, of from five
percent (5%) of the first $1,000,000 ranging in $1,000,000 increments down
to one percent (1%) of the excess, if any, over $4,000,000 of the
consideration involved in any transaction introduced in writing by the
Representative (including mergers, acquisitions, joint ventures, and any
other business for the Company introduced by the Representative)
consummated by the Company, as an "Introduced, Consummated Transaction", by
which the Representative introduced the other party to the Company during a
period ending five (5) years from the date of the M/A Agreement; and
(2) that any such finder's fee due to the Representative will be paid
in cash or stock as mutually agreed at the closing of the particular
Introduced, Consummated Transaction for which the finder's fee is due.
(z) After the Closing Date, the Company shall prepare and publish
"tombstone" advertisements of at least 5 x 5 inches in publications to be
designated by the Representative at a total cost not to exceed $15,000.
(aa) For such period as any Warrants are outstanding, the Company shall use
its best efforts to cause post-effective amendments to the Registration
Statement or a new 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 each of
the Underwriters and each dealer as many copies of each such Prospectus as such
Underwriter or such dealer may reasonably request. Such post-effective
amendments or new Registration Statements shall also register the
Representative's Warrants and all the securities underlying the Representative's
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<PAGE>
Warrants. The Company shall not call for redemption of 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. In addition, the Warrants shall not be
redeemable during the first year after the Effective Date without the written
consent of the Representative.
(ab) Until such time as the securities of the Company are listed or quoted
on either the New York Stock Exchange or the American Stock Exchange, the
Company shall engage the Company's legal counsel to deliver to the
Representative a written opinion detailing those states in which the Shares and
Warrants of the Company may be traded in non-issuer transactions under the Blue
Sky laws of the fifty states ("Secondary Market Trading Opinion"). The initial
Secondary Market Trading Opinion shall be delivered to the Representative on the
Effective Date, and the Company shall continue to update such opinion and
deliver same to the Representative on a timely basis, but in any event at the
beginning of each fiscal quarter, for a five (5) year period, if required.
(ac) As promptly as practicable after the Closing Date, the Company will
prepare, at its own expense, hard cover "bound volumes" relating to the
offering, and will distribute such volumes to the individuals designated by the
Representative or counsel to the Representative.
4. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Securities which they have
agreed to purchase hereunder from the Company are subject, as of the date hereof
and as of the Closing Date and the Option Closing Date, to the continuing
accuracy of, and compliance with, the representations and warranties of the
Company herein, to the accuracy of statements of officers of the Company made
pursuant to the provisions hereof, to the performance by the Company of its
obligations hereunder, and to the following conditions:
(a) (i) The Registration Statement shall have become effective not later
than 5:00 p.m., Eastern Time, on the date of this Agreement, or at such later
time or on such later date as you may agree to in writing; (ii) at or prior to
the Closing Date, no stop order suspending the effectiveness of the Registration
Statement shall have been issued by the Commission and no proceeding for that
purpose shall have been initiated or pending, or shall be threatened, or to the
knowledge of the Company, contemplated by the Commission; (iii) no stop order
suspending the effectiveness of the qualification or registration of the
Securities under the securities or "blue sky" laws of any jurisdiction (whether
or not a jurisdiction which you shall have specified) shall be threatened or to
the knowledge of the Company contemplated by the authorities of any such
jurisdiction or shall have been issued and in effect; (iv) any request for
additional
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<PAGE>
information on the part of the Commission or any such authorities shall have
been complied with to the satisfaction of the Commission and any such
authorities, and to the satisfaction of counsel to the Underwriters; and (v)
after the date hereof no amendment or supplement to the Registration Statement
or the Prospectus shall have been filed unless a copy thereof was first
submitted to the Underwriters and the Underwriters did not object thereto.
(b) At the Closing Date, since the respective dates as of which
information is presented in the Registration Statement and the Prospectus, (i)
there shall not have been any material change in the capital stock or other
securities of the Company or any subsidiary or any material adverse change in
the long-term debt of the Company or any subsidiary except as set forth in or
contemplated by the Registration Statement, (ii) there shall not have been any
material adverse change in the general affairs, business, properties, condition
(financial or otherwise), management, or results of operations of the Company or
any subsidiary, whether or not arising from transactions in the ordinary course
of business, in each case other than as set forth in or contemplated by the
Registration Statement or Prospectus; (iii) neither the Company nor any
subsidiary shall have sustained any material interference with its business or
properties from fire, explosion, flood or other casualty, whether or not covered
by insurance, or from any labor dispute or any court or legislative or other
governmental action, order or decree, which is not set forth in the Registration
Statement and Prospectus; and (iv) 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, in light of the circumstance under
which they are made, not misleading.
(c) Except as set forth in the Prospectus, there is not pending or, to the
knowledge of the Company or any subsidiary, threatened, any material action,
suit, proceeding, inquiry, arbitration or investigation against the Company or
any subsidiary, or any of the officers or directors of the Company or any
subsidiary, or any material action, suit, proceeding, inquiry, arbitration, or
investigation, which might result in any material adverse change in the
condition (financial or other), business prospects, net worth, or properties of
the Company or any subsidiary.
(d) Each of the representations and warranties of the Company contained
herein shall be true and correct as of this date and at the Closing Date as if
made at the Closing Date, and all covenants
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and agreements herein contained to be performed on the part of the Company and
all conditions herein contained to be fulfilled or complied with by the Company
at or prior to the Closing Date shall have been duly performed, fulfilled or
complied with.
(e) At each Closing Date, you shall have received the opinion, together
with copies of such opinion for each of the other several Underwriters, dated as
of each Closing Date, from Thomas T. Prousalis, Jr., Esq., counsel for the
Company, in form and substance satisfactory to counsel for the Underwriters, to
the effect that:
(i) the Company and each subsidiary has been duly incorporated and is
validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, with full 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 for jurisdictions in
which the failure to so qualify would not have a material adverse effect on
the Company and each subsidiary as a whole;
(ii) the authorized capitalization of the Company is as set forth
under "Capitalization" in the Prospectus; all shares of the Company's
outstanding stock and other securities requiring authorization for issuance
by the Company's Board of Directors have been duly authorized, validly
issued, are fully paid and non-assessable and conform to the description
thereof contained in the Prospectus; the outstanding shares of Common Stock
of the Company and other securities 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, to such counsel's knowledge,
other rights to subscribe for or to purchase securities of the Company,
nor, to such counsel's knowledge, are there any restrictions upon the
voting or transfer of any of the securities of the Company, except as
disclosed in the Prospectus; the Common Stock, the Shares, the Warrants,
and the securities contained in the Representative's Warrant Agreement
conform to the respective descriptions thereof contained in the Prospectus;
the Common Stock, the Shares, the Warrants, the shares of Common Stock to
be issued upon exercise of the Warrants and the securities contained in the
Representative's Warrant Agreement, have been duly authorized and, when
issued, delivered and paid for, will be duly authorized, validly issued,
fully paid, non-assessable, free of pre-emptive 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
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exemption from registration under the Act and applicable state securities
laws and no shareholders of the Company have any rescission rights against
the Company with respect to the Company's securities; a sufficient number
of shares of Common Stock has been reserved for issuance upon exercise of
the Warrants and the Representative Warrants, and to the best of such
counsel's knowledge, neither the filing of the Registration Statement nor
the offering or sale of the Securities as contemplated by this Agreement
gives rise to any registration rights or other rights, other than those
which have been waived or satisfied or described in the Registration
Statement;
(iii) this Agreement, the Representative's Warrant Agreement, the
Warrant Agreement, the Financial Advisory Agreement and the M/A Agreement
have been duly and validly authorized, executed and delivered by the
Company and, assuming the due authorization, execution and delivery of this
Agreement by the Representative, are the valid and legally binding
obligations of the Company, enforceable in accordance with their terms,
except (a) as such enforceability may be limited by applicable bankruptcy,
insolvency, moratorium, reorganization or similar laws from time to time in
effect which effect creditors' rights generally; and (b) no opinion is
expressed as to the enforceability of the indemnity provisions or the
contribution provisions contained in this Agreement;
(iv) the certificates evidencing the outstanding securities of the
Company, the Shares, the Common Stock and the Warrants are in valid and
proper legal form;
(v) to the best of such counsel's knowledge, except as set forth in
the Prospectus, there is not pending or, to the knowledge of the Company,
threatened, any material action, suit, proceeding, inquiry, arbitration or
investigation against the Company or any subsidiary or any of the officers
of directors of the Company or any subsidiary, nor any material action,
suit, proceeding, inquiry, arbitration, or investigation, which might
materially and adversely affect the condition (financial or otherwise),
business prospects, net worth, or properties of the Company or any
subsidiary;
(vi) the execution and delivery of this Agreement, the
Representative's Warrant Agreement, the Warrant Agreement, the Financial
Advisory Agreement and the M/A 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 violation
of, or constitute a default under (a) the Articles of Incorporation or
By-Laws of the Company and each subsidiary; (b) to the best of such
counsel's knowledge, any material obligations, agreement,
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covenant or condition contained in any bond, debenture, note or other
evidence of indebtedness or in any 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 (c) to the best of such counsel's knowledge, any
material order, rule, regulation, writ, injunction, or decree of any
government, governmental instrumentality or court, domestic or foreign;
(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) comply as to form in all material respects with the
applicable requirements of the Act and the Rules and Regulations; and
(viii) 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
Securities 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
Representative's Warrants or the Securities underlying the Representative's
Warrants, other than registrations or qualifications of the Securities
under applicable state or foreign securities or Blue Sky laws and
registration under the Act.
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, upon opinions of counsel
satisfactory to you and counsel to the Underwriters. The opinion of such
counsel to the Company shall state that the opinion of any such other counsel is
in form satisfactory to such counsel and that the Representative and they are
justified in relying thereon.
Such counsel shall also include a statement to the effect that such counsel
has participated in the preparation of the Registration Statement and the
Prospectus and nothing has come to the attention of such counsel to lead such
counsel to believe that the Registration Statement or any amendment thereto at
the time it
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became effective contained any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are made, 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 required to be
stated therein or necessary in order to make statements therein, in light of the
circumstances under which they are 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 and statistical data contained therein, as to which such
counsel need express no opinion).
(f) You and the several Underwriters shall have received on each Closing
Date a certificate dated as of each Closing Date, signed by the Chief Executive
Officer and the Chief Financial Officer of the Company and such other officers
of the Company as the Underwriters may request, certifying that:
(i) No Order suspending the effectiveness of the Registration
Statement or stop order regarding the sale of the Securities in effect and
no proceedings for such purpose are pending or are, to their knowledge,
threatened by the Commission;
(ii) They do not know of any litigation instituted or, to their
knowledge, threatened against the Company or any subsidiary or any officer
or director of the Company or any subsidiary of a character required to be
disclosed in the Registration Statement which is not disclosed therein;
they do not know of any contracts which are required to be summarized in
the Prospectus which are not so summarized; and they do not know of any
material contracts required to be filed as exhibits to the Registration
Statement which are not so filed;
(iii) They have each carefully examined the Registration Statement
and the Prospectus and, to the best of their knowledge, neither the
Registration Statement nor the Prospectus nor any amendment or supplement
to either of the foregoing contains an untrue statement of any material
fact or omits to state any material fact required to be stated therein or
necessary to make the statement therein, in light of the circumstances
under which they are made, not misleading; and since the Effective Date, to
the best of their knowledge, there has occurred no event required to be set
forth in an amended or supplemented Prospectus which has not been so set
forth;
(iv) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any
material adverse change in the
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condition of the Company or any subsidiary, financial or otherwise, or in
the results of its operations, except as reflected in or contemplated by
the Registration Statement and the Prospectus and except as so reflected or
contemplated since such date, there has not been any material transaction
entered into by the Company or any subsidiary;
(v) The representations and warranties set forth in this Agreement
are true and correct in all material respects and the Company has complied
with all of its agreements herein contained;
(vi) Neither the Company nor any subsidiary is delinquent in the
filing of any federal, state and municipal tax return or the payment of any
federal, state or municipal taxes; they know of no proposed redetermination
or re-assessment of taxes, adverse to the Company or any subsidiary, and
the Company and each subsidiary has paid or provided by adequate reserves
for all known tax liabilities;
(vii) They know of no material obligation or liability of the Company
or any subsidiary, contingent or otherwise, not disclosed in the
Registration Statement and Prospectus;
(viii) This Agreement, the Representative's Warrant Agreement, the
Warrant Agreement, the Financial Advisory Agreement and the M/A Agreement,
the consummation of the transactions therein contemplated, and the
fulfillment of the terms thereof, will not result in a breach by the
Company of any terms of, or constitute a default under, its Articles of
Incorporation or By-Laws, any indenture, mortgage, lease, deed or trust,
bank loan or credit agreement or any other material agreement or
undertaking of the Company or any subsidiary including, by way of
specification but not by way of limitation, any agreement or instrument to
which the Company or any subsidiary is now a party or pursuant to which the
Company or any subsidiary has acquired any right and/or obligations by
succession or otherwise;
(ix) The financial statements and schedules filed with and as part of
the Registration Statement present fairly the financial position of the
Company as of the dates thereof all in conformity with generally accepted
principles of accounting applied on a consistent basis throughout the
periods involved. Since the respective dates of such financial statements,
there have been no material adverse change in the condition or general
affairs of the Company, financial or otherwise, other than as referred to
in the Prospectus;
(x) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, except as may otherwise
be indicated therein,
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neither the Company nor any subsidiary has, prior to the Closing Date,
either (i) issued any securities or incurred any material liability or
obligation, direct or contingent, for borrowed money, or (ii) entered into
any material transaction other than in the ordinary course of business.
The Company has not declared, paid or made any dividend or distribution of
any kind on its capital stock;
(xi) They have reviewed the sections in the Prospectus relating to
their biographical data and equity ownership position in the Company, and
all information contained therein is true and accurate; and
(xii) Except as disclosed in the Prospectus, during the past five
years, they have not been:
(1) Subject of a petition under the Federal bankruptcy laws or
any state insolvency law filed by or against them, or by a receiver,
fiscal agent or similar officer appointed by a court for their
business or property, or any partnership in which either or them was
a general partner at or within two years before the time of such
filing, or any corporation or business association of which either of
them was an executive officer at or within two years before the time
of such filing;
(2) Convicted in a criminal proceeding or a named subject of a
pending criminal proceeding (excluding traffic violations and other
minor offenses);
(3) The subject of any order, judgment, or decree not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining either of them
from, or otherwise limiting, any of the following activities:
(i) acting as a futures commission merchant, introducing
broker, commodity trading advisor, commodity pool operator, floor
broker, leverage transaction merchant, any other person regulated
by the Commodity Futures Trading Commission, or an associated
person of any of the foregoing, or as an investment adviser,
underwriter, broker or dealer in securities, or as an affiliated
person, director or employee of any investment company, bank,
savings and loan association or insurance company, or engaging in
or continuing any conduct or practice in connection with any such
activity;
(ii) engaging in any type of business practice; or
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(iii) engaging in any activity in connection with the
purchase or sale of any security or commodity or in connection
with any violation of Federal or State securities law or Federal
Commodity laws.
(4) The subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated of any Federal or State
authority barring, suspending or otherwise limiting for more than
sixty (60) days either of their right to engage in any activity
described in paragraph (3)(i) above, or be associated with persons
engaged in any such activity;
(5) Found by any court of competent jurisdiction in a civil
action or by the Securities and Exchange Commission to have violated
any Federal or State securities law, and the judgment in such civil
action or finding by the Commission has not been subsequently
reversed, suspended or vacated; or
(6) Found by a court of competent jurisdiction in a civil action
or by the Commodity Futures Trading Commission to have violated any
Federal Commodities Law, and the judgment in such civil action or
finding by the Commodity Futures Trading Commission has not been
subsequently reversed, suspended or vacated.
(g) The Underwriters shall have received from Grant Thornton, L.L.P.,
independent auditors to the Company, certificates or letters, one dated and
delivered on the Effective Date and one dated and delivered on the Closing Date,
in form and substance satisfactory to the Underwriters, stating that:
(i) they are independent certified public accountants with respect to
the Company within the meaning of the Act and the applicable Rules and
Regulations;
(ii) the financial statements and the schedules included in the
Registration Statement and the Prospectus were examined by them and, in
their opinion, comply as to form in all material respects with the
applicable accounting requirements of the Act, the Rules and Regulations
and instructions of the Commission with respect to Registration
Statements on Form SB-2;
(iii) on the basis of inquiries and procedures conducted by them (not
constituting an examination in accordance with generally accepted auditing
standards), including a reading of the latest available unaudited interim
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financial statements or other financial information of the Company (with an
indication of the date of the latest available unaudited interim financial
statements), inquiries of officers of the Company who have responsibility for
financial and accounting matters, review of minutes of all meetings of the
shareholders and the Board of Directors of the Company and other specified
inquiries and procedures, nothing has come to their attention as a result of the
foregoing inquiries and procedures that causes them to believe that:
(a) during the period from (and including) the date of the
financial statements in the Registration Statement and the Prospectus
to a specified date not more than five days prior to the date of such
letters, there has been any change in the Common Stock, long-term debt
or other securities of the Company (except as specifically
contemplated in the Registration Statement and Prospectus) or any
material decreases in net current assets, net assets, shareholder's
equity, working capital or in any other item appearing in the
Company's financial statements as to which the Underwriters may
request advice, in each case as compared with amounts shown in the
balance sheet as of the date of the financial statement in the
Prospectus, except in each case for changes, increases or decreases
which the Prospectus discloses have occurred or will occur;
(b) during the period from (and including) the date of the
financial statements in the Registration Statement and the Prospectus
to such specified date there was any material decrease in revenues or
in the total or per share amounts of income or loss before
extraordinary items or net income or loss, or any other material
change in such other items appearing in the Company's financial
statements as to which the Underwriters may request advice, in each
case as compared with the fiscal period ended as of the date of the
financial statement in the Prospectus, except in each case for
increases, changes or decreases which the Prospectus discloses have
occurred or will occur;
(c) the unaudited interim financial statements of the Company
appearing in the Registration Statement and the Prospectus (if any) do
not comply as to form in all material respects with the applicable
accounting requirements of the Act and the Rules and Regulations or
are not fairly presented in conformity with generally accepted
accounting principles and practices on a basis substantially
consistent with the audited financial statements included in the
Registration Statements or the Prospectus.
(iv) they have compared specific dollar amounts, numbers of shares,
percentages of revenues and earnings, statements
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and other financial information pertaining to the Company set forth in the
Prospectus in each case to the extent that such amounts, numbers,
percentages, statements and information may be derived from the general
accounting records, including work sheets, of the Company and excluding any
questions requiring an interpretation by legal counsel, with the results
obtained from the application of specified readings, inquiries and other
appropriate procedures (which procedures do not constitute an examination
in accordance with generally accepted auditing standards) set forth in the
letter and found them to be in agreement; and
(v) they have not during the immediately preceding five (5) year
period brought to the attention of the Company's management any reportable
condition related to the Company's internal accounting procedures,
weaknesses and/or controls.
Such letters shall also set forth such other information as may be
requested by counsel for the Underwriters. Any changes, increases or decreases
in the items set forth in such letters which, in the judgment of the several
Underwriters, are materially adverse with respect to the financial position or
results of operations of the Company shall be deemed to constitute a failure of
the Company to comply with the conditions of the obligations to the several
Underwriters hereunder.
(h) Upon exercise of the option provided for in Section 2(b) hereof, the
obligation of the several Underwriters (or, at its option, the Representative,
individually) to purchase and pay for the Option Securities 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 your 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 counsel to the Underwriters.
(ii) At the Option Closing Date, there shall have been delivered to
you the signed opinion from Thomas T. Prousalis, Jr., Esq., counsel for the
Company, dated as of the Option Closing Date, in form and substance
satisfactory to counsel to the Underwriters, which opinion shall be
substantially the same in scope and substance as the opinion furnished to
you at the Closing Date pursuant to Section 4(e) hereof, except that such
opinion, where appropriate, shall cover the Option Securities.
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(iii) At the Option Closing Date, there shall have been delivered to
you a certificate of the Chief Executive Officer and Chief Financial
Officer of the Company, dated the Option Closing Date, in form and
substance satisfactory to counsel to the Underwriters, substantially the
same in scope and substance as the certificate furnished to you at the
Closing Date pursuant to Section 4(f) hereof.
(iv) At the Option Closing Date, there shall have been delivered to
you a letter in form and substance satisfactory to you from Grant Thornton,
L.L.P., independent auditors to the Company, dated the Option Closing Date
and addressed to the several Underwriters confirming the information in
their letter referred to in Section 4(g) 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.
(v) All proceedings taken at or prior to the Option Closing Date in
connection with the sale and issuance of the Option Securities shall be
satisfactory in form and substance to the Underwriters, and the
Underwriters and counsel to the Underwriters shall have been furnished with
all such documents, certificates, and opinions as you may 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.
(i) 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 the Closing Date,
for members of the NASD to execute transactions (as principal or agent) in the
Common Stock and no proceedings for the taking of such action shall have been
instituted or shall be pending, or, to the knowledge of the several Underwriters
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. The Company shall
advise the Representative of any NASD affiliations of any of its officers,
directors, or stockholders or their affiliates in accordance with paragraph 1(y)
of this Agreement.
(j) At the Effective Date, you shall have received from counsel to the
Company, dated as of the Effective Date, in form and substance satisfactory to
counsel for the Underwriter, a written Secondary Market Trading Opinion
detailing those states in which the Shares and Warrants may be traded in
non-issuer transactions under the Blue Sky laws of the fifty (50) states after
the Effective Date, in accordance with paragraph 3(ab) of this Agreement.
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(k) The authorization and issuance of the Securities and delivery thereof,
the Registration Statement, the Prospectus, and all corporate proceedings
incident thereto shall be satisfactory in all respects to counsel for the
several Underwriters, and such counsel shall be furnished with such documents,
certificates and opinions as they may reasonably request to enable them to pass
upon the matters referred to in this sub-paragraph.
(l) Prior to the Effective Date, the Representative shall have received
clearance from the NASD as to the amount of compensation allowable or payable to
the Representative, as described in the Registration Statement.
(m) If any of the conditions herein provided for in this Section shall not
have been fulfilled as of the date indicated, this Agreement and all obligations
of the several Underwriters under this Agreement may be canceled at, or at any
time prior to, the Closing Date and/or the Option Closing Date by the
Representative and/or the Underwriters 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 several
Underwriters to the Company.
5. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY. The obligation of the
Company to sell and deliver the Securities is subject to the following
conditions:
(i) The Registration Statement shall have become effective not later
than 5:00 p.m., Eastern Time, on the date of this Agreement, or on such
later time or date as the Company and the Representative may agree in
writing; and
(ii) At the Closing Date and the Option Closing Date, no stop orders
suspending the effectiveness of the Registration Statement shall have been
issued under the Act or any proceedings therefore 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 Closing Date but are not fulfilled after the
Closing Date and prior to the Option Closing Date, then only the obligation of
the Company to sell and deliver the Securities on exercise of the option
provided for in Section 2(b) hereof shall be affected.
6. INDEMNIFICATION. (a) The Company indemnifies and holds harmless each
Underwriter and each person, if any, who controls the Underwriter within the
meaning of the 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 attorneys'
fees), to which the Underwriter or such controlling person may
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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 (i) the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, (ii) any blue sky
application or other document executed by the Company specifically for that
purpose or based upon written information furnished by the Company and filed in
any state or other jurisdiction in order to qualify any or all of the Securities
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 liable in any such cases to the extent, but only to the
extent, that any such losses, claim, damages 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 Underwriters
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. Notwithstanding the foregoing, the Company shall have no
liability under this section if such untrue statement or omission made in a
Preliminary Prospectus is cured in the Prospectus and the Prospectus is not
delivered to the person or persons alleging the liability upon which
indemnification is being sought. This indemnity will be in addition to any
liability which the Company may otherwise have.
(b) Each Underwriter, severally, but not jointly, indemnifies and holds
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 all 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
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therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statements 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, in reliance upon and in conformity with written information
furnished to the Company by you or by any Underwriter through you specifically
for use in the preparation thereof. Notwithstanding the foregoing, the
Underwriters shall have no liability under this section if such untrue statement
or omission made in a Preliminary Prospectus is cured in the Prospectus and the
Prospectus is not delivered to the person or persons alleging the liability upon
which indemnification is being sought through no fault of the Underwriter. This
indemnity agreement will be in addition to any liability which the Underwriter
may otherwise have.
(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 if the indemnified party is an Underwriter
or a person who controls such Underwriter within the meaning of the Act, the
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 Underwriter or such
controlling person and the indemnifying party and in the reasonable judgment of
the Representative, it is advisable for the Representative or such Underwriters
or controlling persons to be represented by separate
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counsel (in which case the indemnifying party shall not have the right to assume
the defense of such action on behalf of the Underwriter or such controlling
person, 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 all such Underwriters and
controlling persons, which firm shall be designated in writing by you). No
settlement of any action against an indemnified party shall be made without the
consent of the indemnifying party, which shall not be unreasonably withheld in
light of all factors of importance to such indemnifying party.
7. CONTRIBUTION. In order to provide for just and equitable contribution
under the Act in any case in which (i) each Underwriter makes claim for
indemnification pursuant to Section 6 hereof 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, or (ii) contribution under the Act may be required on the part of any
Underwriter, then the Company and each person who controls the Company, in the
aggregate, and any such 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) in either
such case (after contribution from others) in such proportions that all such
Underwriters are responsible in the aggregate for that portion of such losses,
claims, damages or liabilities represented by the percentage that the
underwriting discount per Share 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 (a) if such
allocation is not permitted by applicable law then the relative fault of the
Company and the Underwriter and controlling persons, 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 Underwriters agree that it would not be just and
equitable if the respective obligations of the Company and the Underwriters to
contribute pursuant to this Section 7 were to be determined by pro rata or per
capita allocation of the
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aggregate damages (even if the Underwriters and their controlling persons in the
aggregate were treated as one entity for such purpose) or by any other method of
allocation that does not take account of the equitable considerations referred
to in the first sentence of this Section; and (b) that the contribution of each
contributing Underwriter shall not be in excess of its proportionate share
(based on the ratio of the number of Securities purchased by such Underwriter to
the number of Securities purchased by all contributing Underwriters) of the
portion of such losses, claims, damages or liabilities for which the
Underwriters are responsible. No person ultimately determined to be guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not ultimately
determined to be guilty of such fraudulent misrepresentation. As used in this
paragraph, the term "Underwriter" includes any officer, director, or other
person who controls the Underwriter within the meaning of Section 15 of the Act,
and the word "Company" includes any officer, director, or person who controls
the Company within the meaning of Section 15 of the Act. 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, its officers, directors and controlling persons
to the full extent permitted by law. This foregoing 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 Securities to the Underwriters 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 National Association of Securities
Dealers, Inc. ("NASD") in connection with the filing required by the NASD
relating to the offering of the Securities contemplated hereby; all state filing
fees, expenses and disbursements and legal fees of counsel to the Company who
shall serve as Blue Sky counsel to the Company in connection with the filing of
applications to register the Securities under the state securities or blue sky
laws; the cost of printing and furnishing to the several Underwriters copies of
the Registration Statement, each Preliminary Prospectus, the Prospectus, this
Agreement, the Selected Dealers
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Agreement, the Agreement Among Underwriters, Underwriters Questionnaire,
Underwriters Power of Attorney and the Blue Sky Memorandum; the cost of printing
the certificates evidencing the securities comprising the Securities; the cost
of preparing and delivering to the Underwriters and its counsel bound volumes
containing copies of all documents and appropriate correspondence filed with or
received from the Commission and the NASD and all closing documents; and the
fees and disbursements of the transfer agent for the Company's securities. The
Company shall pay any and all taxes (including any original issue, transfer,
franchise, capital stock or other tax imposed by any jurisdiction) on sales to
the Underwriters 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. The Company shall also engage the Company's counsel
to provide the Representative with a written Secondary Market Trading Opinion in
accordance with paragraphs 3(ab) and 4(j) of this Agreement.
(b) In addition to the foregoing expenses, the Company shall at the
Closing Date pay to the Representative a non-accountable expense allowance equal
to three percent (3%) of the gross proceeds received from the sale of the
Securities, of which an advance of $30,000 has been paid to date. In the event
the overallotment option is exercised, the Company shall pay to the
Representative at the Option Closing Date an additional amount equal to three
percent (3%) of the gross proceeds received upon exercise of the overallotment
option.
(c) Other than as disclosed in the Registration Statement, no person is
entitled either directly or indirectly to compensation from the Company, from
the Representative 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 Representative and the other Underwriters 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 attorneys' fees, to which the Representative or such other
Underwriter 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 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. SUBSTITUTION OF UNDERWRITERS. If any of the Underwriters shall for
any reason not permitted hereunder cancel their obligations to purchase the
Securities hereunder, or shall fail to take up and pay for the number of
Securities set forth opposite their respective names in Schedule A hereto upon
tender of such Securities in accordance with the terms hereof, then:
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(a) if the aggregate number of Securities which such Underwriter or
Underwriters agreed but failed to purchase does not exceed ten percent (10%) of
the total number of Securities, the other Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to purchase
the Securities which such defaulting Underwriter or Underwriters agreed but
failed to purchase.
(b) If any Underwriter or Underwriters so default and the agreed number of
Securities with respect to which such default or defaults occurs is more than
ten percent (10%) of the total number of Securities, the remaining Underwriters
shall have the right to take up and pay for (in such proportion as may be agreed
upon among them) the Securities which the defaulting Underwriter or Underwriters
agreed but failed to purchase. If such remaining Underwriters do not, at the
Closing Date, take up and pay for the Securities which the defaulting
Underwriter or Underwriters agreed but failed to purchase, the time for delivery
of the Securities shall be extended to the next business day to allow the
several Underwriters the privilege of substituting within twenty-four hours
(including non-business hours) another Underwriter or Underwriters satisfactory
to the Company. If no such Underwriter or Underwriters shall have been
substituted as aforesaid, within such twenty-four period, the time of delivery
of the Securities may, at the option of the Company, be again extended to the
next following business day, if necessary, to allow the Company the privilege of
finding within twenty-four hours (including non-business hours) another
Underwriter or Underwriters to purchase the Securities which the defaulting
Underwriter or Underwriters agreed but failed to purchase. If it shall be
arranged for the remaining Underwriters or substituted Underwriters to take up
the Securities of the defaulting Underwriter or Underwriters as provided in this
Section, (i) the Company or the Representative shall have the right to postpone
the time of delivery for a period of not more than seven (7) business days, in
order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees promptly to file any amendments to the
Registration Statement or supplements to the Prospectus which may thereby be
made necessary; and (ii) the respective numbers of Securities to be purchased by
the remaining Underwriters or substituted Underwriters shall be taken at the
basis of the underwriting obligation for all purposes of this Agreement.
If in the event of a default by one or more Underwriters and the remaining
Underwriters shall not take up and pay for all the Securities agreed to be
purchased by the defaulting Underwriters or substitute another Underwriter or
Underwriters as aforesaid, and the Company shall not find or shall not elect to
seek another Underwriter or Underwriters for such Securities as aforesaid, then
this Agreement shall terminate.
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If, following exercise of the option provided in Section 2(b) hereof, any
Underwriter or Underwriters shall for any reason not permitted hereunder cancel
their obligations to purchase Option Securities at the Option Closing Date, or
shall fail to take up and pay for the number of Option Securities, which they
become obligated to purchase at the Option Closing Date upon tender of such
Option Securities in accordance with the terms hereof, then the remaining
Underwriters or substituted Underwriters may take up and pay for the Option
Securities of the defaulting Underwriters in the manner provided in Section 9(b)
hereof. If the remaining Underwriters or substituted Underwriters shall not
take up and pay for all Option Securities, the Underwriters shall be entitled to
purchase the number of Option Securities for which there is no default or, at
their election, the option shall terminate, the exercise thereof shall be of no
effect.
As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section. In the event of termination,
there shall be no liability on the part of any non-defaulting Underwriter to the
Company, provided that the provisions of this Section 9 shall not in any event
affect the liability of any defaulting Underwriter to the Company arising out of
such default.
10. EFFECTIVE DATE. The Agreement shall become effective upon its
execution except that you may, at your option, delay its effectiveness until
11:00 a.m., Eastern time, on the first full business day following the execution
of this Agreement; or at such earlier time after the effective date of the
Registration Statement as you in your discretion shall first commence the public
offering by the Underwriters of any of the Securities. The time of the public
offering shall mean the time after the effectiveness of the Registration
Statement when the Securities are first generally offered by you to the other
Underwriters and Selected Dealers. This Agreement may be terminated by you at
any time before it becomes effective as provided above, except that Sections
3(c), 6, 7, 8, 13, 14, 15, 16, 17 and 18 shall remain in effect notwithstanding
such termination.
11. TERMINATION. (a) This Agreement, except for Sections 3(c), 6, 7, 8,
13, 14, 15, 16, 17, and 18 hereof, may be terminated at any time prior to the
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 you if in your
judgment it is impracticable to offer for sale or to enforce contracts made by
the Underwriters for the resale of the Securities agreed to be purchased
hereunder by reason of: (i) the Company having sustained a material adverse
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; (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
39
<PAGE>
or New York or Florida state authorities; (v) an outbreak of major international
hostilities or other national or international calamity having occurred; (vi)
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 Representative to have a material adverse impact on the business,
financial condition or financial statements of the Company or the market for the
securities offered hereby; (vii) any material adverse change in the financial or
securities markets beyond normal market fluctuations having occurred since the
date of this Agreement; (viii) any material adverse change having occurred,
since the respective dates as of which information is given in the Registration
Statement and Prospectus, in the earnings, business prospects or general
condition of the Company, financial or otherwise, whether or not arising in the
ordinary course of business; (ix) a pending or threatened legal or governmental
proceeding or action relating generally to the Company's business, or a
notification having been received by the Company of the threat of any such
proceeding or action, which could, in the reasonable judgment of the
Representative, materially adversely affect the Company; (x) except as
contemplated by the Prospectus, the Company is merged 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;
or (xi) the Company shall not have complied in all material respects with any
term, condition or provisions on their part to be performed, complied with or
fulfilled (including but not limited to those set forth in this Agreement)
within the respective times therein provided.
(b) If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section, the Company shall be
promptly notified by you, by telephone, telegram or facsimile, confirmed by
letter.
12. REPRESENTATIVE'S WARRANT AGREEMENT. At the Closing Date, the Company
will issue to the Representative and/or persons related to the Representative,
for an aggregate purchase price of $10, and upon the terms and conditions set
forth in the form of Representative's Warrant Agreement annexed as an exhibit to
the Registration Statement, Representative Warrants to purchase up to an
aggregate of 150,000 Shares and 150,000 Warrants, in such denominations as the
Representative shall designate. In the event of conflict in the terms of this
Agreement and the Representative's Warrant Agreement, the language of the form
of Representative's Warrant Agreement shall control.
13. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company and its principal officers, where appropriate, and the
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation made by or on behalf of the
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Underwriters, the Company or any of its officers or directors or any controlling
person and will survive delivery of and payment for the Securities and the
termination of this Agreement.
14. NOTICE. All communications hereunder will be in writing and, except
as otherwise expressly provided herein, will be mailed, delivered or telegraphed
and confirmed:
If to the Underwriters: Robert T. Kirk, President
Barron Chase Securities, Inc.
7700 West Camino Real, Suite 200
Boca Raton, Florida 33433
Copy to: David A. Carter, P.A.
355 West Palmetto Park Road
Boca Raton, Florida 33432
If to the Company: Robert A. Veschi, President
e-Net, Inc.
12800 Middlebrook Road
Suite 200
Germantown, Maryland 20874
Copy to: Thomas T. Prousalis, Jr., Esq.
1919 Pennsylvania Avenue, N.W.
Suite 800
Washington, D.C. 20006
15. PARTIES IN INTEREST. This Agreement herein set forth is made solely
for the benefit of the several Underwriters, the Company and, to the extent
expressed, any person controlling the Company or of the Underwriters, 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 of the Securities, as
such purchaser, from the several Underwriters. All of the obligations of the
Underwriters hereunder are several and not joint.
16. APPLICABLE LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Florida applicable to contracts made
and to be performed entirely within the State of Florida. The parties agree
that any action brought by any party against another party in connection with
any rights or obligations arising out of this Agreement shall be instituted
properly in a federal or state court of competent jurisdiction with venue only
in the Fifteenth Judicial Circuit Court in and for Palm Beach County, Florida or
the United States District Court for the Southern District of Florida, West Palm
Beach Division. A party to this Agreement named as a Defendant in any action
brought in connection with this Agreement in any court outside of the above
named designated county or
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district shall have the right to have the venue of said action changed to the
above designated county or district or, if necessary, have the case dismissed,
requiring the other party to refile such action in an appropriate court in the
above designated county or federal district.
17. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
18. ENTIRE AGREEMENT. This Agreement and the agreements referred to
within this Agreement constitute the entire agreement of the parties, and
supersedes all prior agreement, understanding, negotiations and discussions,
whether written or oral, of the parties hereto.
19. REPRESENTATIVE AS UNDERWRITER. In the event the Representative acts
as the sole Underwriter ("Underwriter") in connection with the underwriting of
the securities being offered pursuant to the Registration Statement, all
references to the Representative in this Agreement shall be replaced by
reference to the "Underwriter", and (i) any consents required to be obtained
from the Representative shall be required to be obtained solely from the
Underwriter; (ii) all compensation to be received by the Representative shall
instead be received by the Underwriter; and (iii) the provisions of section nine
(9) of this Agreement shall not apply.
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 several Underwriters in accordance with
its terms.
Very truly yours,
e-NET, INC.
BY:
-----------------------------------------
Robert A. Veschi, President
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
BARRON CHASE SECURITIES, INC.
BY:
-------------------------------
Robert T. Kirk, President
For itself and as Representative
of the several Underwriters
42
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SCHEDULE A
TO THE UNDERWRITING AGREEMENT
UNDERWRITER SHARES
Barron Chase Securities, Inc
---------
1,500,000
UNDERWRITER WARRANTS
Barron Chase Securities, Inc.
----------
1,500,000
43
+
<PAGE>
Exhibit 1.1
e-NET, INC.
1,500,000 Shares of Common Stock and
1,500,000 Common Stock Purchase Warrants
AGREEMENT AMONG UNDERWRITERS
Boca Raton, Florida
_____________, 1997
Barron Chase Securities, Inc.
7700 West Camino Real, Suite 200
Boca Raton, Florida 33433
Dear Sirs:
1. UNDERWRITING AGREEMENT. We understand that e-Net, Inc. (the
"Company"), proposes to enter into an underwriting agreement attached hereto as
Exhibit A (the "Underwriting Agreement") with Barron Chase Securities, Inc. (the
"Representative") and the other underwriters named in Schedule A to the
Underwriting Agreement (the "Underwriters"), acting severally and not jointly,
with respect to the purchase of an aggregate of 1,500,000 Shares of Common Stock
(the "Shares") and 1,500,000 Warrants (the "Warrants"). The Shares and Warrants
are hereinafter also referred to collectively as the "Securities". The
Securities and the terms under which they are to be offered for sale by the
several Underwriters are more particularly described in the Registration
Statement, Underwriting Agreement and Prospectus.
Unless the context indicates otherwise, the term Securities shall also
include an additional 225,000 Shares and an additional 225,000 Warrants (the
"Option Securities"), all or any part of which the Representative and/or the
Underwriters are entitled to purchase from the Company upon exercise of the
Representative's over-allotment option referred to in Section 2(b) of the
Underwriting Agreement.
This is to confirm that we agree to purchase, in accordance with the terms
hereof and of the Underwriting Agreement, the number of Securities set forth
opposite our name in Schedule A, plus such number of Securities, if any, which
we may become obligated to purchase pursuant to Section 2(b) of the Underwriting
Agreement and Section 4 hereof ("our Securities"). The ratio which the number
of our Securities bears to the total number of Securities purchased pursuant to
the Underwriting Agreement is herein called "our underwriting proportion".
2. REGISTRATION STATEMENT AND PROSPECTUS. We have heretofore received
and examined a copy of the registration statement, as amended to the date
hereof, and the related prospectus in respect of the Securities, as filed with
the Securities and Exchange Commission. The registration statement as
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<PAGE>
amended at the time it becomes effective, including financial statements and
exhibits, is hereafter referred to as the "Registration Statement", and the
prospectus in the form first filed with the Securities and Exchange Commission
pursuant to its Rule 424(b) after the Registration Statement becomes effective
is referred to as the "Prospectus".
We confirm that the information furnished to you by us for use in the
Registration Statement and in the Prospectus is correct and is not misleading
insofar as it relates to us. We consent to being named as an Underwriter in
such Registration Statement and we are willing to accept our responsibilities
under the Securities Act of 1933 (the "Act"), as a result thereof. We confirm
that we have authorized you to advise the Company on our behalf (a) as to the
statements to be included in any Preliminary Prospectus and in the Prospectus
under the heading "Underwriting" insofar as they relate to us and (b) that there
is no other information about us required to be stated in the Registration
Statement or Prospectus. We further confirm that, upon request by you as
Representative, we have furnished a copy of any amended Preliminary Prospectus
to each person to whom we have furnished a copy of any previous Prospectus, and
we confirm that we have delivered, and we agree that we will deliver, all
preliminary and final Prospectuses required for compliance with the provisions
of Rule 15c2-8 under the Securities Exchange Act of 1934 (the "1934 Act").
3. AUTHORITY OF THE REPRESENTATIVE. We authorize you, acting as
Representative of the Underwriters, to execute and deliver on our behalf, the
Underwriting Agreement, and to agree to any variation of its terms (except as to
the purchase price and the number of our Securities) which, in your judgment, is
not a variation which materially and adversely affects our rights and
obligations. We also authorize you, in your discretion and on our behalf, with
approval of counsel for the Underwriters, to approve the Prospectus and to
approve of, or object to, any further amendments to the Registration Statement,
or amendments or supplements to the Prospectus. We further authorize you to
exercise all the authority and discretion vested in the Underwriters and in you
by the provisions of the Underwriting Agreement and to take all such action as
you in your discretion may believe desirable to carry out the provisions of the
Underwriting Agreement and of this Agreement including the extension of any date
specified in the Underwriting Agreement, the exercise of any right of
cancellation or termination and to determine all matters relating to the public
advertisement of the Securities; provided, however, that, except with the
consent of Underwriters who shall have agreed to purchase in the aggregate 50%
or more of the Securities, no extension of the time by which the Registration
Statement is to become effective as provided in the Underwriting Agreement shall
be for a period in excess of two business days. We authorize you to take such
action as in your discretion may be necessary or desirable to effect the sale
and distribution of the Securities, including, without limiting the generality
of the foregoing, the right to determine the terms of any proposed offering, the
concession to Selected Dealers (as hereinafter
2
<PAGE>
defined) and the reallowance, if any, to other dealers and the right to make the
judgments provided for in the Underwriting Agreement.
4. AUTHORITY OF REPRESENTATIVE AS TO DEFAULTING UNDERWRITERS. Until the
termination of this Agreement, we authorize you to arrange for the purchase by
other persons, who may include you or any of the other Underwriters, of any
Securities not taken up by any defaulting Underwriter. In the event that such
arrangements are made, the respective amounts of the Securities to be purchased
by the non-defaulting Underwriters and by such other person or persons, if any,
shall be taken as the basis for all rights and obligations hereunder; but this
shall not in any way affect the liability of any defaulting Underwriter to the
other Underwriters for damages resulting from its default, nor shall any such
default relieve any other Underwriter of any of its obligations hereunder or
under the Underwriting Agreement except as herein or therein provided.
In the event of default by one or more Underwriters in respect of their
obligations (a) under the Underwriting Agreement to purchase the Securities
agreed to be purchased by them thereunder, (b) under this Agreement to take up
and pay for any Securities purchased or (c) to deliver any Securities sold or
over-allotted by you for the respective accounts of the Underwriters pursuant to
this Agreement, or to bear their respective share of expenses or liabilities
pursuant to this Agreement, and to the extent that arrangements shall not have
been made by you for any persons to assume the obligations of such defaulting
Underwriter or Underwriters, we agree to assume our proportionate share of the
obligations of each defaulting Underwriter (subject in the case of clause (a)
above to the limitations contained in the Underwriting Agreement) without
relieving any such defaulting Underwriter of its liability therefor.
5. OFFERING OF SECURITIES. We understand that you will notify us when
the public offering of the Securities is to be made and of the initial public
offering price. We hereby authorize you to fix the concession to dealers and
the reallowance to dealers and in your sole discretion after the public offering
to change the public offering price, the concession and the reallowance. The
offering price at any time in effect is hereinafter referred to as the "public
offering price". We agree that we will not offer any of the Securities for sale
at a price other than the public offering price or allow any discount therefrom
except as herein otherwise specifically provided.
We agree that public advertisement of the offering shall be made by you on
behalf of the Underwriters on such date as you shall determine. We have not
advertised the offering and will not do so until after such date. We understand
that any advertisement we may then make will be on our own responsibility and at
our own expense.
We authorize you to reserve and offer for sale to institutions and other
retail purchasers and to dealers (the "Selected Dealers")
3
<PAGE>
to be selected by you (such dealers may include any Underwriter ) such of our
Securities as you in your sole discretion shall determine. Any such offering to
Selected Dealers may be made pursuant to a Selling Agreement, in the form
attached hereto as Exhibit B, or otherwise , as you may determine. The form of
Selling Agreement attached hereto as Exhibit B is satisfactory to us.
We authorize you to make purchases and sales of the Securities from or to
any Selected Dealers or Underwriters at the public offering price less all or
any part of the concession and, with your consent, any Underwriter may make
purchases or sales of the Securities from or to any Selected Dealer or
Underwriter at the public offering price less all or any of the concession.
We understand that you will notify each Underwriter promptly upon the
release of the Securities for public offering as to the amount of Securities
reserved for sale to Selected Dealers and retail purchasers. Securities not so
reserved may be sold by each Underwriter for its own account, except that from
time to time you may, in your discretion, add to the Securities reserved for
sale to Selected Dealers and retail purchasers any Securities retained by an
Underwriter remaining unsold. We agree to notify you from time to time upon
request of the amount of our Securities retained by us remaining unsold. If all
the Securities reserved for offering to Selected Dealers and retail purchasers
are not promptly sold by you, any Underwriter may from time to time, with your
consent, obtain a release of all or any Securities of such Underwriter then
remaining unsold and Securities so released shall thereafter be deemed not to
have been reserved. Securities of any Underwriter so reserved which remain
unsold, or, if sold, have not been paid for at any time prior to the termination
of this Agreement may, in your discretion or upon the request of such
Underwriter, be delivered to such Underwriter for carrying purposes only, but
such Securities shall remain subject to redelivery to you upon demand for
disposition by you until this Agreement is terminated.
We agree that in connection with sales and offers to sell the Securities,
if any, made by us outside the United States or its territories or possessions,
(a) we will furnish to each person to whom any such offer or sale is made such
Prospectus, advertisement or other offering document containing information
relating to the Securities or the Company as may be required under the laws of
the jurisdiction in which such offer or sale is made and (b) we will furnish to
each person to whom any such offer is made a copy of the then current
Preliminary Prospectus and to each person to whom any such sale is made a copy
of the Prospectus referred to in the Underwriting Agreement (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto). Any Prospectus, advertisement or other offering document (other than
any such preliminary Prospectus or Prospectus) furnished by us to any person in
accordance with the preceding sentence and all such additional offering
material, if any, as we may furnish to any person (i) shall comply in all
respects with the laws of the jurisdiction in which it is so furnished, (ii)
shall be
4
<PAGE>
prepared and so furnished at our sole risk and expense, and (iii) shall not
contain information relating to the Securities or the Company which is
inconsistent in any respect with information contained in the then current
Preliminary Prospectus or in the Prospectus (as then amended or supplemented if
the Company shall have furnished any amendments or supplements thereto), as the
case may be.
We recognize the importance of a broad distribution of the Securities among
bona fide investors and we agree to use our best efforts to obtain such broad
distribution and to that end, to the extent we deem practicable, to give
priority to small orders.
We agree that we will not sell to any account over which we exercised
discretionary authority any of the Securities which we have agreed to purchase
pursuant to the Underwriting Agreement.
6. COMPENSATION TO REPRESENTATIVE. We authorize you to charge to our
account, as compensation for your services as Representative in connection with
this offering, including the purchase from the Company of the Securities and the
management of the offering, an amount equal to $ per Share and/or $
per Warrant in respect to each of our Securities.
7. PAYMENT AND DELIVERY. At or about 9:00 a.m., Eastern Time, on the
Closing Dates (including the first Closing Date and any Option Closing Date, as
defined in the Underwriting Agreement), we agree to deliver to you at your
office by wire transfer to the account of the Representative or by a certified
or official bank check payable in New York Clearing House funds to your order in
an amount equal to the initial public offering price, less the concession to the
Selected Dealers in respect of that portion of our Securities which has been
retained by or released to us for direct sales.
In the event that our funds are not received by you when required, you are
authorized, in your discretion, but shall not be obligated, to make payment for
our account pursuant to the Underwriting Agreement by advancing your own funds.
Any such payment by you shall not relieve us from any of our obligations
hereunder or under the Underwriting Agreement.
We authorize you to hold and deliver against payment any of our Securities
which have been sold or reserved for sale to Selected Dealers or retail
purchasers. Any of our Securities not sold or reserved by you as aforesaid,
will be available for delivery to us at your office as soon as practicable after
such Securities have been delivered to you.
Upon the termination of this Agreement, or prior thereto at your
discretion, you will deliver to us any of our Securities reserved by you for
sale to Selected Dealers or retail purchasers but not sold and paid for against
payment by us of an amount equal to the initial public offering price of such
Securities, less the concession to the Selected Dealers in respect thereof.
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<PAGE>
8. AUTHORITY TO BORROW. We authorize you to arrange loans for our account
and to execute and deliver any notes or other instruments in connection
therewith, and to pledge as security therefor all or any part of our Securities,
as you may deem necessary or advisable to carry out the purchase, carrying and
distribution of the Securities, and to advance your own funds, charging current
interest rates.
9. OVER-ALLOTMENT; STABILIZATION. We authorize you, for the account of
each Underwriter, prior to the termination of this Agreement, and for such
longer period as may be necessary to cover any short position incurred for the
accounts of the several Underwriters pursuant to this Agreement, (a) to
over-allot in arranging for sales of Securities to Selected Dealers and others
and, if necessary, to purchase Securities (whether pursuant to exercise of the
option set forth in Section 2(b) of the Underwriting Agreement or otherwise) at
such prices as you may determine for the purpose of covering such
over-allotments, and (b) for the purpose of stabilizing the market in the
Securities, to make purchases and sales of Securities on the open market or
otherwise, for long or short account, on a when-issued basis or otherwise, at
such prices, in such amounts and in such manner as you may determine; provided,
however, that at no time shall our net commitment, either for long or short
account, under this Section exceed 15% of the amount of our Securities. Such
purchases, sales and over-allotments shall be made for the respective accounts
of the several Underwriters as nearly as practicable to their respective
underwriting proportions. We agree to take up on demand at cost any Securities
so purchased for our account and deliver on demand any Securities so sold or
over-allotted for our account. We authorize you to sell for the account of the
Underwriters any Securities purchased pursuant to this Section, upon such terms
as you may deem advisable, and any Underwriter, including yourselves, may
purchase such Securities. You are authorized to charge the respective accounts
of the Underwriters with broker's commissions or dealer's mark-up on purchases
and sales effected by you.
If pursuant to the provisions of the preceding paragraph and prior to the
termination of this Agreement (or prior to such earlier date as you may have
determined) you purchase or contract to purchase for the account of any
Underwriter in the open market or otherwise any Securities which were retained
by, or released to, us for direct sale, or any Securities which may have been
issued in exchange for such Securities, we authorize you either to charge our
account with an amount equal to the concession to Selected Dealers with respect
thereto, which amount shall be credited against the cost of such Securities, or
to require us to repurchase such Securities at a price equal to the total cost
of such purchase, including transfer taxes and broker's commissions or dealer's
mark-up, if any. In lieu of such action you may, in your discretion, sell for
our account the Securities so purchased and debit or credit our account for the
loss or profit resulting from such sale.
You will notify us promptly if and when you engage in any stabilization
transaction pursuant to this Section or otherwise and
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<PAGE>
will notify us of the date of termination of stabilization. We agree to file
with you any reports required of us including "Not as Manager" reports pursuant
to Rule 17a-2 under the 1934 Act not later than five business days following the
date upon which stabilization was terminated, and we authorize you to file on
our behalf with the Securities and Exchange Commission any reports required by
such Rule.
10. LIMITATION ON TRANSACTIONS BY UNDERWRITERS. Except as permitted by
you, we will not during the term of this Agreement bid for, purchase, sell or
attempt to induce others to purchase or sell, directly or indirectly, any
Securities other than (i) as provided in the Underwriting Agreement and in this
agreement, (ii) purchases from or sales to dealers of the Securities at the
public offering price less all or any part of the reallowance to dealers or
(iii) purchases or sales by us of any Securities as broker or unsolicited orders
for the account of others.
We represent that we have not participated in any transaction prohibited by
the preceding paragraph and that we have at all times complied with the
provisions of Rule 10b-6 and Rule 10b-6A under the 1934 Act applicable to this
offering.
We may, with your prior consent, make purchases of the Securities from and
sales to other Underwriters at the public offering price, less all or any part
of the concession to dealers.
11. ALLOCATION AND PAYMENT OF EXPENSES. We understand that all expenses
of a general nature incurred by you, as Representative, in connection with the
purchase, carrying, marketing and sale of the Securities shall be borne by the
Underwriters in accordance with their respective share of the underwriting
obligations. We authorize you to charge our account with our share, based on
our underwriting obligation, of the aforesaid expenses including all transfer
taxes paid of our behalf on sales or transfers made for our account.
As promptly as possible after the termination of this Agreement, the
accounts arising pursuant hereto shall be settled and paid. Your ascertainment
of all expenses and the apportionment thereof shall be conclusive.
Notwithstanding any settlement or settlements hereunder, we will remain liable
for our share of all expenses and liabilities which may be incurred by or the
accounts of the Underwriters, including any expenses and liabilities referred to
in Sections 13 and 14 hereof, which shall be determined as provided in this
Section.
12. TERMINATION. Unless this Agreement or any provision hereof is earlier
terminated by you and except for provisions herein that contemplate obligations
surviving the termination hereof as noted in the next paragraph, this Agreement
will terminate at the close of business on the 45th day after the date hereof,
but in your discretion may be extended by you for a further period not exceeding
30 days with the consent of the Underwriters who have agreed to purchase in the
aggregate 50% or more of the
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Securities. No termination or suspension pursuant to this Section shall affect
your authority to cover any short position under this Agreement.
Upon termination of this Agreement, all authorizations, rights and
obligations hereunder shall cease, except (i) the mutual obligations to settle
accounts under Section 11, (ii) our obligation to pay any transfer taxes which
may be assessed and paid on account of any sales thereunder for our account,
(iii) our obligation with respect to purchases which may be made by you from
time to time thereafter to cover any short position incurred under this
Agreement, (iv) the provisions of Sections 13 and 14 and (v) the obligations of
any defaulting Underwriter, all of which shall continue until fully discharged.
13. LIABILITY OF REPRESENTATIVE AND UNDERWRITERS. Neither as
Representative nor individually shall you be under any liability whatsoever to
any other Underwriter nor shall you be under any liability in respect of any
matters connected herewith or action taken by you pursuant hereto, except for
the obligations expressly assumed by you in this Agreement. You shall be under
no liability for or in respect of the value for the Securities or the validity
of the form thereof, the Registration Statement, the Prospectus, or agreements
or other instruments executed by the Company or others; or for or in respect of
the delivery of the Securities; or for the performance by the Company or others
of any agreement on its or their part.
Nothing herein contained shall constitute the several Underwriters an
association, or partners with us or with each other, or, except as herein
expressly provided, render any Underwriter liable for the obligation of any
other Underwriter. The rights, obligations and liabilities of each of the
Underwriters are several, in accordance with their respective obligations, and
not joint. Notwithstanding any settlement of accounts under this Agreement, we
agree to pay our underwriting proportion of the amount of any claim demand or
liability which may be asserted against and discharged by the Underwriters or
any of them, based on the claim that the Underwriters constitute an association,
unincorporated business or other entity, and also to pay our underwriting
proportion of expenses approved by you incurred by the Underwriters, or any of
them, in contesting any such claims, demands or liabilities. If the
Underwriters shall be deemed to constitute a partnership for income tax
purposes, it is the intent of each Underwriter to be excluded from the
application of Subchapter K, Chapter 1, Subtitle A of the Internal Revenue Code
of 1954, as amended. Each Underwriter elects to be so excluded and agrees not
to take any position inconsistent with such election. Each Underwriter
authorizes you, in your discretion, to execute and file on behalf of the
Underwriters such evidence of election as may be required by the Internal
Revenue Service.
14. INDEMNIFICATION AND FUTURE CLAIMS.
(a) We agree to indemnify and hold harmless you and each
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other Underwriter, and each person, if any, who controls you and such other
Underwriter within the meaning of Section 15 of the Securities Act of 1933, and
to reimburse their expenses, to the extent and upon the terms that we agree to
indemnify and hold harmless the Company and to reimburse expenses as set forth
in the Underwriting Agreement. Our indemnity agreement set forth in this
Section remain in full force and effect regardless of any investigation made by
or on behalf of such other Underwriter or controlling person and shall survive
the delivery of and payment for the Securities and the termination of this
Agreement.
(b) In the event that at any time any claim or claims shall be asserted
against you, as Representative, or otherwise involving the Underwriters
generally, relating to the Registration Statement or any Preliminary Prospectus
or the Prospectus, as such may be from time to time amended or supplemented, the
public offering of the Securities or any of the transactions contemplated by
this Agreement, we authorize you to take such other action as you shall deem
necessary or desirable under the circumstances, including settlement of any such
claim or claims if such course of action shall be recommended by counsel
retained by you. We agree to pay to you on request, our underwriting proportion
of all expenses incurred by you (including, but not limited to, disbursements
and fees of counsel so retained) in investigating and defending against such
claim or claims and our underwriting proportion of any liability incurred by you
in respect of such claim or claims, whether such liability shall be the result
of a judgment or as a result of any such settlement.
15. TITLE TO SECURITIES. The Securities purchased by, or on behalf of,
the respective Underwriters shall remain the property of such Underwriters until
sold, and title to any such Securities shall not in any event pass to the
Representative by virtue of any of the provisions of this Agreement.
16. BLUE SKY MATTERS. It is understood that you assume no responsibility
with respect to the right of any Underwriter or other person to offer or to sell
Securities in any jurisdiction, not withstanding any information which you may
furnish as to the jurisdictions under the securities laws of which it is
believed the Securities may be sold.
17. APPLICABLE LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of Florida.
18. CAPITAL REQUIREMENTS. We confirm that the incurrence by us of our
obligation under this Agreement and under the Underwriting Agreement will not
place us in violation of the net capital requirements of Rule 15c3-1 under the
1934 Act or of any applicable rules relating to capital requirements of any
securities exchange to which we are subject.
19. MISCELLANEOUS. Any notice from you to us shall be deemed to have been
duly given if telefaxed, telephoned or telegraphed, and confirmed by mail to us
at the address set forth in the
9
<PAGE>
Underwriters Questionnaire furnished by us to you. Any notice from us to you
shall be deemed to have been duly given if telefaxed or telegraphed, and
confirmed by mail to you at 7700 West Camino Real, Suite 200, Boca Raton,
Florida 33433.
We understand that you are a member in good standing of the National
Association of Securities Dealers, Inc. ("NASD"). We hereby confirm that we are
actually engaged in the investment banking or securities business and are either
(i) a member in good standing of the NASD or (ii) a dealer with its principal
place of business located outside the United States, its territories and its
possession and not registered as a broker or dealer under the 1934 Act who
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 (except
that we may participate in sales to Selected Dealers and others under Section 5
of this Agreement). We hereby agree that if we are members of the NASD, we will
comply with all of the provisions of the NASD Conduct Rules. If we are a
foreign dealer, we agree to comply with Rule 2740 of the NASD Conduct Rules. If
we are a foreign dealer and not a member of the NASD, we agree to comply with
the NASD's interpretation with respect to free-riding and withholding, as though
we were a member of the NASD, with the provisions of Rules 2730 and 2750 of the
NASD Conduct Rules, and to comply with Rule 2420 of the NASD Conduct Rules as
that applies to a non-member foreign dealer. In connection with sales and
offers to sell Securities made by us outside the United States, its territories
and possessions (i) we will either furnish to each person to whom any such sale
or offer is made a copy of the then current Preliminary Prospectus or the
Prospectus, as the case may be, or inform such person that such Preliminary
Prospectus or Prospectus will be available upon request, and (ii) we will
furnish to each person to whom any such sale or offer is made such Prospectus,
advertisement or other offering document containing information relating to the
Securities or the Company as may be required under the law of the jurisdiction
in which such sale or offer is made. Any Prospectus, advertisement or other
offering document furnished by us to any person in accordance with the preceding
sentence and any such additional offering material as we may furnish to any
person (i) shall comply in all respects with the law of the jurisdiction in
which it is so furnished, (ii) shall be prepared and so furnished at our sole
risk and expenses and (iii) shall not contain information relating to the
Securities or the Company which is inconsistent in any respect with the
information contained in the then current preliminary Prospectus or in the
Prospectus, as the case may be.
We understand that, in consideration of your services in connection with
the public offering of the Securities, the Company has agreed with you
individually, and not as Representative of the Underwriters (a) to sell to you
the Representative's Warrants referred to in the Underwriting Agreement for the
sum of $10; (b) to pay to you a non-accountable expense allowance referred to in
the Underwriting Agreement; (c) to pay you a financial advisory fee referred to
in the Underwriting Agreement; and (d) to enter into
10
<PAGE>
the Merger and Acquisition Agreement (the "M/A Agreement") referred to in the
Underwriting Agreement. In addition, you may, at your sole discretion, elect to
exercise the over-allotment option individually. We confirm to you that we
shall make no claim to the Representative's Warrants (or any offering of the
Company's securities related thereto, or any right to participate in any
capacity in any offering resulting therefrom), any rights related thereto, the
Company's securities underlying the Representative's Warrants, the
non-accountable expense allowance, the financial advisory fee, or, to the
over-allotment option to the extent you elect to exercise such option
individually, or the M/A Agreement. You confirm to us that we shall have no
obligation or liabilities with respect to the purchase of the Representative's
Warrants, the exercise thereof, the Company's securities underlying the
Representative's Warrants (or any offering of the Company's securities related
thereto, unless we shall subsequently agree to become an underwriter for, or
otherwise participate in any such offering) or the non-accountable expense
allowance, the financial advisory agreement, the M/A Agreement, or, the
over-allotment option, to the extent you elect to exercise such option
individually.
Please confirm that the foregoing correctly states the understanding
between us by signing and returning to us a counterpart hereof.
Very truly yours,
By:
---------------------------
(Attorney-in-fact for each of the several Underwriters named in
Schedule A to the attached Underwriting Agreement.)
Confirmed as of the date first
above written:
BARRON CHASE SECURITIES, INC.
By:
-----------------------------
Robert T. Kirk, President
11
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POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby
irrevocably constitute and appoint Robert T. Kirk and/or Barron Chase
Securities, Inc., the true and lawful agent and attorney-in-fact of the
undersigned with respect to all matters arising in connection with the
undersigned's acting as one of the Underwriters of the proposed offering of an
aggregate of
1,500,000 Shares of Common Stock and
1,500,000 Common Stock Purchase Warrants
of
e-NET, INC.
(such securities being more fully described in the Registration Statement No.
333-3860 filed by e-Net, Inc. pursuant to the Securities Act of 1933) with full
power and authority to execute and deliver for and on behalf of the undersigned
all such agreements, consents and documents in connection therewith as said
agent and attorney-in-fact may deem advisable. The undersigned hereby gives to
said agent and attorney-in-fact full power and authority to act in the premises,
including, but not limited to, the power an authority to execute and deliver an
Agreement Among Underwriters relating to such financing, to agree to increase or
decrease the size of the offering to an amount as shall be approved by Barron
Chase Securities, Inc., as Representative of the Underwriters, and to appoint a
substitute or substitutes to act hereunder with the same power and authority as
said agent and attorney-in-fact would have if personally acting. The
undersigned hereby ratifies and confirms all that said agent and
attorney-in-fact, or any substitute or substitutes, may do by virtue hereof.
WITNESS the due execution hereof at
---------------------------------------
- ---------------------------------------------------
(Street) (City)
this day of , 1997.
--------- ------------------
--------------------------
Firm Name
By:
- --------------------------- ---------------------------
Witness - Partner, Officer or
Sole Proprietor
(indicate which)
12
<PAGE>
CORPORATE ACKNOWLEDGEMENT
STATE OF )
) ss.:
COUNTY OF )
On this day of , 1997, before me personally came
, to me know, who being by me duly sworn,
deposes and say that he resides at No.
: that he is the of
, the aforementioned corporation, which executed the foregoing
instrument; that he knows the seal of said corporation; that the seal affixed to
said instrument is such corporate seal; and that it was so affixed by order the
Board of Directors of said corporation; and that he signed his name thereto by
like order.
--------------------------
Notary Public
My Commission Expires:
PARTNERSHIP ACKNOWLEDGEMENT
STATE OF )
) ss.:
COUNTY OF )
On this day of , 1997, before me personally came
, one of the members of the firm of
, to me known and known to me to be the individual
who executed the foregoing instrument and acknowledged that he executed, and was
duly authorized to execute, the same as and for the act and deed of said firm.
--------------------------
Notary Public
My Commission Expires:
----------------------------------------------------
Unless prior to 5:00 p.m. Eastern Time, on the date immediately preceding
the proposed public offering date, the Syndicate Department of Barron Chase
Securities, Inc., 7700 West Camino Real, Suite 200, Boca Raton, Florida 33433
receives a telegram or letter from you revoking the Power of Attorney, the power
and authority granted by such Power of Attorney may be exercised in accordance
with the terms thereof.
13
<PAGE>
Exhibit 1.2
e-NET, INC.
1,500,000 Shares of Common Stock and
1,500,000 Common Stock Purchase Warrants
SELECTED DEALER AGREEMENT
Boca Raton, Florida
_____________, 1997
Gentlemen:
1. Barron Chase Securities, Inc. (the "Representative") and the other
Underwriters named in the Prospectus (collectively the "Underwriters"), acting
through us as the Representative, are severally offering for sale an aggregate
of 1,500,000 Shares of Common Stock (the "Shares") and 1,500,000 Warrants (the
"Warrants") (collectively the "Firm Securities") of e-Net, Inc. (the "Company"),
which we have agreed to purchase from the Company, and which are more
particularly described in the Registration Statement, Underwriting Agreement and
Prospectus. In addition, the several Underwriters have been granted an option
to purchase from the Company up to an additional 225,000 Shares and an
additional 225,000 Warrants (the "Option Securities") to cover overallotments in
connection with the sale of the Firm Securities. The Firm Securities and any
Option Securities purchased are herein called the "Securities". The Securities
and the terms under which they are to be offered for sale by the several
Underwriters are more particularly described in the Prospectus.
2. The Securities are to be offered to the public by the several
Underwriters at the price per Share and price per Warrant set forth on the cover
page of the Prospectus (the "Public Offering Price"), in accordance with the
terms of offering set forth in the Prospectus.
3. Some or all of the several Underwriters are severally offering,
subject to the terms and conditions hereof, a portion of the Securities for sale
to certain dealers who are actually engaged in the investment banking or
securities business and who are either (a) members in good standing of the
National Association of Securities Dealers, Inc. (the "NASD"), or (b) dealers
with their principal places of business located outside the United States, its
territories and its possessions and not registered as brokers or dealers under
the Securities Exchange Act of 1934, as amended (the "1934 Act"), who have
agreed not to make any sales within the United States, its territories or its
possessions or to persons who are nationals thereof or residents therein (such
dealers who shall agree to sell Securities hereunder being herein called
"Selected Dealers") at the public offering price, less a selling concession
1
<PAGE>
(which may be changed) of not in excess of $ per Share and/or $
per Warrant payable as hereinafter provided, out of which concession an amount
not exceeding $ per Share and/or $ per Warrant may be
reallowed by Selected Dealers to members of the NASD or foreign dealers
qualified as aforesaid. The Selected Dealers who are members of the NASD agree
to comply with all of the provisions of the NASD Conduct Rules. Foreign
Selected Dealers agree to comply with the provisions of Rule 2740 of the NASD
Conduct Rules, and, if any such dealer is a foreign dealer and not a member of
the NASD, such Selected Dealer also agrees to comply with the NASD's
Interpretation with Respect to Free-Riding and Withholding, and to comply, as
though it were a member of the NASD, with the provisions of Rules 2730 and 2750
of the NASD Conduct Rules, and to comply with Rule 2420 of the NASD Conduct
Rules as that Rule applies to non-member foreign dealers. Some or all of the
Underwriters may be included among the Selected Dealers. Each of the
Underwriters has agreed that, during the term of this Agreement, it will be
governed by the terms and conditions hereof whether or not such Underwriter is
included among the Selected Dealers.
4. Barron Chase Securities, Inc. shall act as Representative on behalf of
the Underwriters and shall have full authority to take such action as we may
deem advisable in respect to all matters pertaining to the public offering of
the Securities.
5. If you desire to act as a Selected Dealer, and purchase any of the
Securities, your application should reach us promptly by facsimile or telegraph
at the offices of Barron Chase Securities, Inc., 7700 West Camino Real, Suite
200, Boca Raton, Florida 33433. We reserve the right to reject subscriptions in
whole or in part, to make allotments, and to close the subscription books at any
time without notice. The Securities allotted to you will be confirmed, subject
to the terms and conditions of this Agreement.
6. The privilege of subscribing for the Securities is extended to you
only on behalf of such of the Underwriters, if any, as may lawfully sell the
Securities to Selected Dealers in your state or other applicable jurisdiction.
7. Any Securities to be purchased by you under the terms of this
Agreement may be immediately reoffered to the public in accordance with the
terms of offering as set forth herein and in the Prospectus, subject to the
securities or Blue Sky laws of the various states or other jurisdictions.
You agree to pay us on demand for the accounts of the several Underwriters
an amount equal to the Selected Dealer concession as to any Securities purchased
by you hereunder which, prior to the completion of the public offering as
defined in paragraph 8 below, we may purchase or contract to purchase for the
account of any Underwriter and, in addition, we may charge you with any broker's
2
<PAGE>
commission and transfer tax paid in connection with such purchase or contract to
purchase. Certificates for Securities delivered on such repurchases need not be
the identical certificates originally purchased.
You agree to advise us from time to time, upon request, of the number of
Securities purchased by you hereunder and remaining unsold at the time of such
request, and, if in our opinion any such Securities shall be needed to make
delivery of the Securities sold or overallotted for the account of one or more
of the Underwriters, you will, forthwith upon our request, grant to us for the
account or accounts of such Underwriter or Underwriters the right, exercisable
promptly after receipt of notice from you that such right has been granted, to
purchase, at the Public Offering Price less the selling concession or such part
thereof as we shall determine, such number of Securities owned by you as shall
have been specified in our request.
No expenses shall be charged to Selected Dealers. A single transfer tax,
if payable, upon the sale of the Securities by the respective Underwriters to
you will be paid when such Securities are delivered to you. However, you shall
pay any transfer tax on sales of Securities by you and you shall pay your
proportionate share of any transfer tax (other than the single transfer tax
described above) in the event that any such tax shall from time to time be
assessed against you and other Selected Dealers as a group or otherwise.
Neither you nor any other person is or has been authorized to give any
information or to make any representation in connection with the sale of the
Securities other than as contained in the Prospectus.
8. The first three paragraphs of Section 7 hereof will terminate when we
shall have determined that the public offering of the Securities has been
completed and upon telefax notice to you of such termination, but, if not
theretofore terminated, they will terminate at the close of business on the 30th
full business day after the date hereof; provided, however, that we shall have
the right to extend such provisions for a further period or periods, not
exceeding an additional 30 days in the aggregate upon facsimile notice to you.
9. For the purpose of stabilizing the market in the Securities, we have
been authorized to make purchases and sales of the Securities of the Company, in
the open market or otherwise, for long or short account, and, in arranging for
sales, to overallot.
10. On becoming a Selected Dealer, and in offering and selling the
Securities, you agree to comply with all the applicable requirements of the
Securities Act of 1933, as amended (the "1933 Act"), and the 1934 Act. You
confirm that you are familiar with
3
<PAGE>
Rule 15c2-8 under the 1934 Act relating to the distribution of preliminary and
final prospectuses for securities of an issuer (whether or not the issuer is
subject to the reporting requirements of Section 13 or 15(d) of the 1934 Act)
and confirm that you have complied and will comply therewith.
We hereby confirm that we will make available to you such number of copies
of the Prospectus (as amended or supplemented) as you may reasonably request for
the purposes contemplated by the 1933 Act or the 1934 Act, or the rules and
regulations thereunder.
11. Upon request, you will be informed as to the states and other
jurisdictions in which we have been advised that the Securities are qualified
for sale under the respective securities or Blue Sky laws of such states and
other jurisdictions, but neither we nor any of the Underwriters assume any
obligation or responsibility as to the right of any Selected Dealer to sell the
Securities in any state or other jurisdiction or as to the eligibility of the
Securities for sale therein. We will, if requested, file a Further State Notice
in respect of the Securities pursuant to Article 23-A of the General Business
Law of the State of New York.
12. No Selected Dealer is authorized to act as our agent or as agent for
the Underwriters, or otherwise to act on our behalf or on behalf of the
Underwriters, in offering or selling the Securities to the public or otherwise
or to furnish any information or make any representation except as contained in
the Prospectus.
13. Nothing will constitute the Selected Dealers an association or other
separate entity or partners with the Underwriters, or with each other, but you
will be responsible for your share of any liability or expense based on any
claim to the contrary. We and the several Underwriters shall not be under any
liability for or in respect of value, validity or form of the Securities, or the
delivery of the certificates for the Securities, or the performance by anyone of
any agreement on its part, or the qualification of the Securities for sale under
the laws of any jurisdiction, or for or in respect of any other matter relating
to this Agreement, except for lack of good faith and for obligations expressly
assumed by us or by the Underwriters in this Agreement and no obligation on our
part shall be implied herefrom. The foregoing provisions shall not be deemed a
waiver of any liability imposed under the 1933 Act.
14. Payment for the Securities sold to you hereunder is to be made at the
Public Offering Price less the above-mentioned selling concession on such time
and date as we may advise, at the office of Barron Chase Securities, Inc., 7700
West Camino Real, Suite 200, Boca Raton, Florida 33433, by wire transfer to the
account of the Representative or by a certified or official bank check in
current New York Clearing House funds, payable to the order of Barron Chase
4
<PAGE>
Securities, Inc., as Representative, against delivery of certificates for the
Securities so purchased. If such payment is not made at such time, you agree
to pay us interest on such funds at the prevailing broker's loan rate.
15. Notices to us should be addressed to us at the offices of Barron Chase
Securities, Inc., 7700 West Camino Real, Suite 200, Boca Raton, Florida 33433,
Attention: Robert T. Kirk. Notices to you shall be deemed to have been duly
given if telephoned, telefaxed, telegraphed or mailed to you at the address to
which this letter is addressed.
16. This Agreement shall be governed by and construed in accordance with
the laws of the State of Florida without giving effect to the choice of law or
conflicts of law principles thereof.
17. If you desire to purchase any Securities and act as a Selected Dealer,
please confirm your application by signing and returning to us your confirmation
on the duplicate copy of this letter enclosed herewith, even though you may have
previously advised us thereof by telephone or telegraph. Our signature hereon
may be by facsimile.
Very truly yours,
BARRON CHASE SECURITIES, INC.
As Representative of the Several
Underwriters
BY:
-------------------------------
Authorized Officer
5
<PAGE>
Robert T. Kirk, President
Barron Chase Securities, Inc.
7700 West Camino Real, Suite 200
Boca Raton, Florida 33433
We hereby subscribe for Shares and/or Warrants of
e-Net, Inc. in accordance with the terms and conditions stated in the foregoing
Selected Dealers Agreement and letter. We hereby acknowledge receipt of the
Prospectus referred to in the Selected Dealers Agreement and letter. We further
state that in purchasing said Shares and/or Warrants 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. ("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. As a member of the
NASD, we hereby agree to comply with all of the provisions of NASD Conduct
Rules. If we are a foreign Selected Dealer, we agree to comply with the
provisions of Rule 2740 of the NASD Conduct Rules, and if we are a foreign
dealer and not a member of the NASD, we agree to comply with the NASD's
interpretation with respect to free-riding and withholding, and agree to comply,
as though we were a member of the NASD, with provisions of Rules 2730 and 2750
of the NASD Conduct Rules, and to comply with Rule 2420 of the NASD Conduct
Rules as that Rule applies to non-member foreign dealers.
Firm:
--------------------------
By:
---------------------------
(Name and Position)
Address:
--------------------------
--------------------------
Telephone No.:
--------------------------
Dated: , 1997
6
<PAGE>
Exhibit 4.2
REPRESENTATIVE'S WARRANT AGREEMENT (the "Representative's Warrant
Agreement" or "Agreement"), dated as of , 1997,, between e-NET, INC.
(the "Company"), and BARRON CHASE SECURITIES, INC. (the "Representative").
W I T N E S S E T H:
WHEREAS, the Representative has agreed, pursuant to the underwriting
agreement (the "Underwriting Agreement") dated as of the date hereof between the
Company and the Representative, to act as the Representative of the Underwriters
in connection with the Company's proposed public offering of 1,500,000 shares of
the Company's Common Stock at $5.00 per share and 1,500,000 Warrants ("Public
Warrants") at $.125 per warrant (the "Public Offering"); and
WHEREAS, the Company proposes to issue to the Representative and/or persons
related to the Representative as those persons are defined in Rule 2710 of the
NASD Conduct Rules (the "Holder"), 150,000 warrants ("Common Stock
Representative Warrants") to purchase 150,000 shares of the Company's Common
stock (the "Shares") and 150,000 warrants ("Warrant Representative Warrants") to
purchase 150,000 Common Stock Purchase Warrants ("Underlying Warrants")
exercisable to purchase 150,000 shares of the Company's Common Stock. The
"Common Stock Representative Warrants" and the "Warrant Representative Warrants"
are collectively referred to as the "Warrants". The "Shares" and the
"Underlying Warrants" are collectively referred to as the "Warrant Securities";
and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Holders in consideration for, and as part of
the compensation in connection with, the Representative acting as Representative
pursuant to the Underwriting Agreement.
NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of TEN DOLLARS AND NO CENTS ($10.00), the
agreements herein set forth and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. GRANT AND PERIOD.
The Public Offering has been registered under a Registration Statement on
Form SB-2 (File No. 333-3860) and declared effective by the Securities and
Exchange Commission (the "SEC" or "Commission") on , 1997 (the
"Effective Date"). This Agreement, relating to the purchase of the Warrants, is
entered into pursuant to the Underwriting Agreement between the Company and the
Representative, as representative of the Underwriters, in connection with the
Public Offering.
1
<PAGE>
Pursuant to the Warrants, the Holders are hereby granted the right to
purchase from the Company, at any time during the period commencing on the
Effective Date and expiring five (5) years thereafter (the "Expiration Time"),
up to 150,000 Shares at an initial exercise price (subject to adjustment as
provided in Article 8 hereof) of $8.25 per share (165% of the public offering
price) and/or 225,000 non-redeemable Underlying Warrants at an initial exercise
price of $.20625 per warrant (165% of the public offering price) (the "Exercise
Price" or "Purchase Price"), subject to the terms and conditions of this
Agreement. Each Underlying Warrant is exercisable to purchase one (1) share of
Common Stock at $8.25 per share during the five (5) year period commencing on
the Effective Date.
Except as specifically otherwise provided herein, the Shares and the
Underlying Warrants constituting the Warrant Securities shall bear the same
terms and conditions as such securities described under the caption "Description
of Securities" in the Registration Statement, and as designated in the Company's
Articles of Incorporation and any amendments thereto, and the Underlying
Warrants shall be governed by the terms of the Warrant Agreement executed in
connection with the Company's public offering (the "Warrant Agreement"), except
as provided herein, and the Holders shall have registration rights under the
Securities Act of 1933, as amended (the "Act"), for the Warrants, the Shares,
the Underlying Warrants, and the shares of Common Stock underlying the
Underlying Warrants, as more fully described in paragraph seven (7) of this
Representative's Warrant Agreement. In the event of any extension or charge of
the expiration date or reduction or change of the exercise price of the Public
Warrants, the same such changes to the Underlying Warrants shall be
simultaneously effected, except that the Underlying Warrants shall expire no
later than five (5) years from the Effective Date.
2. WARRANT CERTIFICATES.
The warrant certificates (the "Warrant Certificate") delivered and to be
delivered pursuant to this Agreement shall be in the form set forth in the form
of Warrant Certificate, attached hereto and made a part hereof, with such
appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
3. EXERCISE OF WARRANT.
3.1 FULL EXERCISE.
(i) The Holder hereof may effect a cash exercise of the Common Stock
Representative Warrants and/or the Warrant Representative Warrants and/or
the Underlying Warrants by surrendering the Warrant Certificate, together
with a Subscription in the form of Exhibit "A" attached thereto, duly
2
<PAGE>
executed by such Holder to the Company, at any time prior to the Expiration
Time, at the Company's principal office, accompanied by payment in cash or
by certified or official bank check payable to the order of the Company in
the amount of the aggregate purchase price (the "Aggregate Price"), subject
to any adjustments provided for in this Agreement. The aggregate price
hereunder for each Holder shall be equal to the exercise price as set forth
in Section six (6) hereof multiplied by the number of Warrants, Underlying
Warrants or Shares that are the subject of each Holder's Warrant (as
adjusted as hereinafter provided).
(ii) The Holder hereof may effect a cashless exercise of the Common
Stock Representative Warrants and/or the Underlying Warrants by delivering
the Warrant Certificate to the Company together with a Subscription in the
form of Exhibit "B" attached thereto, duly executed by such Holder, in
which case no payment of cash will be required. Upon such cashless
exercise, the number of Shares to be purchased by each Holder hereof shall
be determined by dividing: (i) the number obtained by multiplying the
number of Shares that are the subject of each Holder's Warrant Certificate
by the amount, if any, by which the then Market Value (as hereinafter
defined) exceeds the Purchase Price; by (ii) the per share purchase price.
In no event shall the Company be obligated to issue any fractional
securities and, at the time it causes a certificate or certificates to be
issued, it shall pay the Holder in lieu of any fractional securities or
shares to which such Holder would otherwise be entitled, by the Company
check, in an amount equal to such fraction multiplied by the Market Value.
The Market Value shall be determined on a per Share basis as of the close
of the business day preceding the exercise, which determination shall be
made as follows: (a) if the Common Stock is listed for trading on a
national or regional stock exchange or is included on the NASDAQ National
Market or Small-Cap Market, the average closing sale price quoted on such
exchange or the NASDAQ National Market or Small-Cap Market which is
published in THE WALL STREET JOURNAL for the ten (10) trading days
immediately preceding the date of exercise, or if no trade of the Common
Stock shall have been reported during such period, the last sale price so
quoted for the next day prior thereto on which a trade in the Common Stock
was so reported; or (b) if the Common Stock is not so listed, admitted to
trading or included, the average of the closing highest reported bid and
lowest reported ask price as quoted on the National Association of
Securities Dealer's OTC Bulletin Board or in the "pink sheets" published by
the National Daily Quotation Bureau for the first day immediately preceding
the date of exercise on which the Common Stock is traded.
3.2 PARTIAL EXERCISE. The securities referred to in
3
<PAGE>
paragraph 3.1 above also may be exercised from time to time in part by
surrendering the Warrant Certificate in the manner specified in Section 3.1
hereof, except that with respect to a cash exercise, the Purchase Price payable
shall be equal to the number of securities being purchased hereunder multiplied
by the per security Purchase Price, subject to any adjustments provided for in
this Agreement. Upon any such partial exercise, the Company, at its expense,
will forthwith issue to the Holder hereof a new Warrant Certificate or Warrants
of like tenor calling in the aggregate for the number of securities (as
constituted as of the date hereof) for which the Warrant Certificate shall not
have been exercised, issued in the name of the Holder hereof or as such Holder
(upon payment by such Holder of any applicable transfer taxes) may direct.
4. ISSUANCE OF CERTIFICATES.
Upon the exercise of the Warrants and/or the Underlying Warrants, the
issuance of certificates for the shares of Common Stock and/or other securities
shall be made forthwith (and in any event within three (3) business days
thereafter) without charge to the Holder thereof including, without limitation,
any tax which may be payable in respect of the issuance thereof, and such
certificates shall (subject to the provisions of Sections 5 and 7 hereof) be
issued in the name of, or in such names as may be directed by, the Holder
thereof; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issuance and
delivery of any such certificates in a name other than that of the Holder and
the Company shall not be required to issue or deliver such certificates unless
or until the person or persons requesting the issuance thereof shall have paid
to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the shares of
Common Stock and/or other securities shall be executed on behalf of the Company
by the manual or facsimile signature of the then present Chairman or Vice
Chairman of the Board of Directors or President or Vice President of the Company
under its corporate seal reproduced thereon, attested to by the manual or
facsimile signature of the then present Secretary or Assistant Secretary of the
Company. Warrant Certificates shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
5. RESTRICTION ON TRANSFER OF WARRANTS.
The Holder of a Warrant Certificate, by acceptance thereof, covenants and
agrees that the Warrants may not be sold, transferred, assigned, hypothecated or
otherwise disposed of, in whole or in part, for a period of one (1) year from
the Effective Date of the Public Offering, except (a) to officers of the
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Representative or to officers and partners of the other Underwriters or Selected
Dealers participating in the Public Offering; (b) by will; or (c) by operation
of law.
6. EXERCISE PRICE.
6.1 INITIAL AND ADJUSTED EXERCISE PRICES.
The initial exercise price of each Common Stock Representative Warrant
shall be $8.25 per share (165% of the public offering price). The initial
exercise price of each Warrant Representative Warrant shall be $.20625 per
Underlying Warrant (165% of the public offering price). The initial exercise
price of each Underlying Warrant shall be $8.25 per share. The adjusted
exercise price shall be the price which shall result from time to time from any
and all adjustments of the initial exercise price in accordance with the
provisions of Section 8 hereof. The Warrant Representative Warrants and the
Underlying Warrants are exercisable during the five (5) year period commencing
on the Effective Date.
6.2 EXERCISE PRICE.
The term "Exercise Price" herein shall mean the initial exercise price or
the adjusted exercise price, depending upon the context.
7. REGISTRATION RIGHTS.
7.1 REGISTRATION UNDER THE SECURITIES ACT OF 1933.
The Warrants, the Shares, the Underlying Warrants and the shares of Common
Stock issuable upon exercise of the Underlying Warrants (collectively the
"Registrable Securities") have been registered under the Securities Act of 1933,
as amended (the "Act"). Upon exercise, in part or in whole, of the Warrants,
certificates representing the Shares, the Underlying Warrants and/or the shares
of Common Stock issuable upon exercise of the Underlying Warrants shall bear the
following legend in the event there is no current registration statement
effective with the Commission at such time as to such securities:
The securities represented by this certificate may not be offered or
sold except pursuant to (i) an effective registration statement under
the Act, (ii) to the extent applicable, Rule 144 under the Act (or any
similar rule under such Act relating to the disposition of
securities), or (iii) an opinion of counsel, if such opinion shall be
reasonably satisfactory to counsel to the issuer, that an exemption
from registration under such Act and applicable state securities laws
is available.
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7.2 PIGGYBACK REGISTRATION.
If, at any time commencing after the Effective Date of the offering and
expiring seven (7) years thereafter, the Company prepares and files a
post-effective amendment to the Registration Statement, or a new Registration
Statement under the Act, or files a Notification on Form 1-A or otherwise
registers securities under the Act, or files a similar disclosure document with
the Commission (collectively the "Registration Documents") as to any of its
securities under the Act (other than under a Registration Statement pursuant to
Form S-8), it will give written notice by registered mail, at least thirty (30)
days prior to the filing of each such Registration Document, to the
Representative and to all other Holders of the Registrable Securities of its
intention to do so. If the Representative and/or other Holders of the
Registrable Securities notify the Company within twenty (20) days after receipt
of any such notice of its or their desire to include any such Registrable
Securities in such proposed Registration Documents, the Company shall afford the
Representative and such Holders of such Registrable Securities the opportunity
to have any Registrable Securities registered under such Registration Documents
or any other available Registration Document.
Notwithstanding the provisions of this Section 7.2, the Company shall have
the right at any time after it shall have given written notice pursuant to this
Section 7.2 (irrespective of whether a written request for inclusion of any such
securities shall have been made) to elect not to file any such proposed
registration statement, or to withdraw the same after the filing but prior to
the effective date thereof.
7.3 DEMAND REGISTRATION.
(a) At any time commencing one (1) year after the Effective Date of the
Public Offering, and expiring four (4) years thereafter, the Holders of
Registrable Securities representing more than 50% of such securities at that
time outstanding shall have the right (which right is in addition to the
registration rights under Section 7.2 hereof), exercisable by written notice to
the Company, to have the Company prepare and file with the Commission, on one
occasion, a registration statement and/or such other documents, including a
prospectus, and/or any other appropriate disclosure document as may be
reasonably necessary in the opinion of both counsel for the Company and counsel
for the Representative and Holders, in order to comply with the provisions of
the Act, so as to permit a public offering and sale of their respective
Registrable Securities for nine (9) consecutive months (or such longer period of
time as permitted by the Act) by such Holders and any other Holders of any of
the Registrable Securities who notify the Company within ten (10) days after
being given notice from the Company of such request. A Demand Registration
shall not be counted as a Demand Registration hereunder until such Demand
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Registration has been declared effective by the SEC and maintained continuously
effective for a period of at least nine months or such shorter period when all
Registrable Securities included therein have been sold in accordance with such
Demand Registration, provided that a Demand Registration shall be counted as a
Demand Registration hereunder if the Company ceases its efforts in respect of
such Demand Registration at the request of the majority Holders making the
demand for a reason other than a material and adverse change in the business,
assets, prospects or condition (financial or otherwise) of the Company and its
subsidiaries taken as a whole.
(b) The Company covenants and agrees to give written notice of any
registration request under this Section 7.3 by the majority of the Holders to
all other registered Holders of any of the Registrable Securities within ten
(10) days from the date of the receipt of any such registration request.
(c) In addition to the registration rights under Section 7.2 and
subsection (a) of this Section 7.3, at any time commencing one (1) year after
the Effective Date of the offering, and expiring four (4) years thereafter, the
Holders of a majority of the Registrable Securities shall have the right,
exercisable by written request to the Company, to have the Company prepare and
file, on one occasion, with the Commission a registration statement or any other
appropriate disclosure document so as to permit a public offering and sale for
nine (9) consecutive months (or such longer period of time as permitted by the
Act) by any such Holder of Registrable Securities; provided, however, that the
provisions of Section 7.4(b) hereof shall not apply to any such registration
request and registration and all costs incident thereto shall be at the expense
of the Holder or Holders participating in the offering pro-rata.
(d) Any written request by the Holders made pursuant to this Section 7.3
shall:
(i) specify the number of Registrable Securities which the Holders
intend to offer and sell and the minimum price at which the Holders intend
to offer and sell such securities;
(ii) state the intention of the Holders to offer such securities for
sale;
(iii) describe the intended method of distribution of such
securities; and
(iv) contain an undertaking on the part of the Holders to provide all
such information and materials concerning the Holders and take all such
action as may be reasonably required to permit the Company to comply with
all applicable requirements of the Commission and to obtain acceleration of
the effective date of the registration statement.
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(e) In the event the Company receives from the Holders of any Registrable
Securities representing more than 50% of such securities at that time
outstanding, a request that the Company effect a registration on Form S-3 with
respect to the Registrable Securities and if Form S-3 is available for such
offering, the Company shall, as soon as practicable, effect such registration as
would permit or facilitate the sale and distribution of the Registrable
Securities as are specified in the request. All expenses incurred in connection
with a registration requested pursuant to this Section shall be borne by the
Company. Registrations effected pursuant to this Section 7.3(e) shall not be
counted as registrations pursuant to Section 7.3(a) and 7.3(c) hereof.
7.4 COVENANTS OF THE COMPANY WITH RESPECT TO REGISTRATION.
In connection with any registration under Section 7.2 or 7.3 hereof, the
Company covenants and agrees as follows:
(a) The Company shall use its best efforts to file a registration
statement within forty-five (45) days of receipt of any demand pursuant to
Section 7.3, and shall use its best efforts to have any such registration
statement declared effective at the earliest practicable time. The Company will
promptly notify each seller of such Registrable Securities and confirm such
advice in writing, (i) when such registration statement becomes effective, (ii)
when any post-effective amendment to such registration statement becomes
effective and (iii) of any request by the SEC for any amendment or supplement to
such registration statement or any prospectus relating thereto or for additional
information.
The Company shall furnish to each seller of such Registrable Securities
such number of copies of such registration statement and of each such amendment
and supplement thereto (in each case including each preliminary prospectus and
summary prospectus) in conformity with the requirements of the Act, and such
other documents as such seller may reasonably request in order to facilitate the
disposition of the Registrable Securities by such seller.
(b) The Company shall pay all costs (excluding transfer taxes, if any, and
fees and expenses of Holder(s)' counsel and the Holder's pro-rata portion of
the selling discount or commissions), fees and expenses in connection with all
registration statements filed pursuant to Sections 7.2 and 7.3(a) hereof
including, without limitation, the Company's legal and accounting fees, printing
expenses, blue sky fees and expenses. The Holder(s) will pay all costs, fees
and expenses in connection with any registration statement filed pursuant to
Section 7.3(c). If the Company shall fail to comply with the provisions of
Section 7.3(a), the Company shall, in addition to any other equitable or other
relief available to the Holder(s), be liable for any or all
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special and consequential damages sustained by the Holder(s) requesting
registration of their Registrable Securities.
(c) The Company shall prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be reasonably necessary to keep such registration statement
effective for at least nine months (or such longer period as permitted by the
Act), and to comply with the provisions of the Act with respect to the
disposition of all securities covered by such registration statement during such
period in accordance with the intended methods of disposition by the seller or
sellers of Registrable Securities set forth in such registration statement. If
at any time the SEC should institute or threaten to institute any proceedings
for the purpose of issuing a stop order suspending the effectiveness of any such
registration statement, the Company will promptly notify each seller of such
Registrable Securities and will use all reasonable efforts to prevent the
issuance of any such stop order or to obtain the withdrawal thereof as soon as
possible. The Company will use its good faith reasonable efforts and take all
reasonably necessary action which may be required in qualifying or registering
the Registrable Securities included in a registration statement for offering and
sale under the securities or blue sky laws of such states as reasonably are
required by the Holder(s), provided that the Company shall not be obligated to
execute or file any general consent to service of process or to qualify as a
foreign corporation to do business under the laws of any such jurisdiction. The
Company shall use its good faith reasonable efforts to cause such Registrable
Securities covered by such registration statement to be registered with or
approved by such other governmental agencies or authorities of the United States
or any State thereof as may be reasonably necessary to enable the seller or
sellers thereof to consummate the disposition of such Registrable Securities.
(d) The Company shall indemnify the Holder(s) of the Registrable
Securities to be sold pursuant to any registration statement and each person, if
any, who controls such Holders within the meaning of Section 15 of the Act or
Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange
Act"), against all loss, claim, damage, expense or liability (including all
expenses reasonably incurred in investigating, preparing or defending against
any claim whatsoever) to which any of them may become subject under the Act, the
Exchange Act or otherwise, arising from such registration statement but only to
the same extent and with the same effect as the provisions pursuant to which the
Company has agreed to indemnify the Representative as contained in the
Underwriting Agreement.
(e) If requested by the Company prior to the filing of any registration
statement covering the Registrable Securities, each of
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the Holder(s) of the Registrable Securities to be sold pursuant to a
registration statement, and their successors and assigns, shall severally, and
not jointly, indemnify the Company, its officers and directors and each person,
if any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which they may become
subject under the Act, the Exchange Act or otherwise, arising from written
information furnished by such Holder, or their successors or assigns, for
specific inclusion in such registration statement to the same extent and with
the same effect as the provisions contained in the Underwriting Agreement
pursuant to which the Representative has agreed to indemnify the Company, except
that the maximum amount which may be recovered from each Holder pursuant to this
paragraph or otherwise shall be limited to the amount of net proceeds received
by the Holder from the sale of the Registrable Securities.
(f) Nothing contained in this Agreement shall be construed as requiring
the Holder(s) to exercise their Warrants or Underlying Warrants prior to the
filing of any registration statement or the effectiveness thereof.
(g) The Company shall not permit the inclusion of any securities other
than the Registrable Securities to be included in any registration statement
filed pursuant to Section 7.3 hereof without the prior written consent of the
Holders of the Registrable Securities representing a majority of such
securities.
(h) The Company shall furnish to each Holder participating in the offering
and to each underwriter, if any, a signed counterpart, addressed to such Holder
or underwriter, of (i) an opinion of counsel to the Company, dated the effective
date of such registration statement (and, if such registration includes an
underwritten public offering, an opinion dated the date of the closing under the
underwriting agreement), and (ii) a "cold comfort" letter dated the effective
date of such registration statement (and, if such registration includes an
underwritten public offering, a letter dated the date of the closing under the
underwriting agreement) signed by the independent public accountants who have
issued a report on the Company's financial statements included in such
registration statement, in each case covering substantially the same matters
with respect to such registration statement (and the prospectus included
therein) and, in the case of such accountants' letter, with respect to events
subsequent to the date of such financial statements, as are customarily covered
in opinions of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities.
(i) The Company shall deliver promptly to each Holder
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participating in the offering requesting the correspondence and memoranda
described below and the managing underwriter copies of all correspondence
between the Commission and the Company, its counsel or auditors and all
memoranda relating to discussions with the Commission or its staff with respect
to the registration statement and permit each Holder and underwriter to do such
investigation, upon reasonable advance notice, with respect to information
contained in or omitted from the registration statement as it deems reasonably
necessary to comply with applicable securities laws or rules of the National
Association of Securities Dealers, Inc. ("NASD"). Such investigation shall
include access to books, records and properties and opportunities to discuss the
business of the Company with its officers and independent auditors, all to such
reasonable extent and at such reasonable times and as often as any such Holder
shall reasonably request.
(j) With respect to a registration statement filed pursuant to Section
7.3, the Company, if requested, shall enter into an underwriting agreement with
the managing underwriter, reasonably satisfactory to the Company, selected for
such underwriting by Holders holding a majority of the Registrable Securities
requested to be included in such underwriting. Such agreement shall be
satisfactory in form and substance to the Company, each Holder and such managing
underwriters, and shall contain such representations, warranties and covenants
by the Company and such other terms as are customarily contained in agreements
of that type used by the managing underwriter. The Holders, if required by the
Underwriter to be parties to any underwriting agreement relating to an
underwritten sale of their Registrable Securities, may, at their option, require
that any or all the representations, warranties and covenants of the Company to
or for the benefit of such underwriters shall also be made to and for the
benefit of such Holders. Such Holders shall not be required to make any
representations or warranties to or agreements with the Company or the
underwriters except as they may relate to such Holders and their intended
methods of distribution.
(k) Notwithstanding the provisions of paragraph 7.2 or paragraph 7.3 of
this Agreement, the Company shall not be required to effect or cause the
registration of Registrable Securities pursuant to paragraph 7.2 or paragraph
7.3 hereof if, within thirty (30) days after its receipt of a request to
register such Registrable Securities (i) counsel for the Company delivers an
opinion to the Holders requesting registration of such Registrable Securities,
in form and substance satisfactory to counsel to such Holder(s), to the effect
that the entire number of Registrable Securities proposed to be sold by such
Holder(s) may otherwise be sold, in the manner proposed by such Holder(s),
without registration under the Securities Act, or (ii) the SEC shall have issued
a no-action position, in form and substance satisfactory to counsel for the
Holder(s) requesting registration of such Registrable Securities, to the effect
that the entire number of
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Registrable Securities proposed to be sold by such Holder(s) may be sold by it,
in the manner proposed by such Holder(s), without registration under the
Securities Act.
(l) After completion of the Public Offering, the Company shall not,
directly or indirectly, enter into any merger, business combination or
consolidation in which (a) the Company shall not be the surviving corporation
and (b) the stockholders of the Company are to receive, in whole or in part,
capital stock or other securities of the surviving corporation, unless the
surviving corporation shall, prior to such merger, business combination or
consolidation, agree in writing to assume the obligations of the Company under
this Agreement, and for that purpose references hereunder to "Registrable
Securities" shall be deemed to include the securities which the Holders would be
entitled to receive in exchange for Registrable Securities under any such
merger, business combination or consolidation, provided that to the extent such
securities to be received are convertible into shares of Common Stock of the
issuer thereof, then any such shares of Common Stock as are issued or issuable
upon conversion of said convertible securities shall also be included within the
definition of "Registrable Securities".
8. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SECURITIES.
8.1 ADJUSTMENT FOR DIVIDENDS, SUBDIVISIONS, COMBINATIONS OR
RECLASSIFICATIONS.
In case the Company shall (a) pay a dividend or make a distribution in
shares of its capital stock (whether shares of Common Stock or of capital stock
of any other class), (b) subdivide its outstanding shares of Common Stock into a
greater number of shares, (c) combine its outstanding shares of Common Stock
into a smaller number of shares, or (d) issue by reclassification of its shares
of Common Stock any shares of capital stock of the Company; then, and in each
such case, the per share Exercise Price and the number of Warrant Securities in
effect immediately prior to such action shall be adjusted so that the Holder of
this Warrant thereafter upon the exercise hereof shall be entitled to receive
the number and kind of shares of the Company which such Holder would have owned
immediately following such action had this Warrant been exercised immediately
prior thereto. An adjustment made pursuant to this Section shall become
effective immediately after the record date in the case of a dividend or
distribution and shall become effective immediately after the effective date in
the case of a subdivision, combination or reclassification. If, as a result of
an adjustment made pursuant to this Section, the Holder of this Warrant shall
become entitled to receive shares of two or more classes of capital stock of the
Company, the Board of Directors of the Company (whose determination shall be
conclusive) shall determine the allocation of the adjusted Exercise Price
between or among shares of such class of capital stock.
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Immediately upon any adjustment of the Exercise Price pursuant to this
Section, the Company shall send written notice thereof to the Holder of Warrant
Certificates (by first class mail, postage prepaid), which notice shall state
the Exercise Price resulting from such adjustment, and any increase or decrease
in the number of Warrant Securities to be acquired upon exercise of the
Warrants, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based.
8.2 ADJUSTMENT FOR REORGANIZATION, MERGER OR CONSOLIDATION.
In case of any reorganization of the Company or consolidation of the
Company with, or merger of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger which does not result
in any reclassification or change of the outstanding Common Stock), the
corporation formed by such consolidation or merger shall execute and deliver to
the Holder a supplemental Warrant agreement providing that the Holder of each
Warrant then outstanding or to be outstanding shall have the right thereafter
(until the expiration of such Warrant) to receive, upon exercise of such
warrant, the kind and amount of shares of stock and other securities and
property receivable upon such consolidation or merger, by a holder of the number
of shares of Common Stock of the Company for which such warrant might have been
exercised immediately prior to such reorganization, consolidation, merger,
conveyance, sale or transfer. Such supplemental Warrant agreement shall provide
for adjustments which shall be identical to the adjustments provided in Section
8 and such registration rights and other rights as provided in this Agreement.
The Company shall not effect any such consolidation, merger, or similar
transaction as contemplated by this paragraph, unless prior to or simultaneously
with the consummation thereof, the successor corporation (if other than the
Company) resulting from such consolidation or merger or the corporation
purchasing, receiving, or leasing such assets or other appropriate corporation
or entity shall assume, by written instrument executed and delivered to the
Holders, the obligation to deliver to the Holders, such shares of stock,
securities, or assets as, in accordance with the foregoing provisions, such
holders may be entitled to purchase, and to perform the other obligations of the
Company under this Agreement. The above provision of this Subsection shall
similarly apply to successive consolidations or successively whenever any event
listed above shall occur.
8.3 DIVIDENDS AND OTHER DISTRIBUTIONS.
In the event that the Company shall at any time prior to the exercise of
all of the Warrants and/or Underlying Warrants distribute to its stockholders
any assets, property, rights, evidences of indebtedness, securities (other than
a distribution
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made as a cash dividend payable out of earnings or out of any earned surplus
legally available for dividends under the laws of the jurisdictions of
incorporation of the Company), whether issued by the Company or by another, the
Holders of the unexercised Warrants shall thereafter be entitled, in addition to
the shares of Common Stock or other securities and property receivable upon the
exercise thereof, to receive, upon the exercise of such Warrants, the same
property, assets, rights, evidences of indebtedness, securities or any other
thing of value that they would have been entitled to receive at the time of such
distribution as if the Warrants had been exercised immediately prior to such
distribution. At the time of any such distribution, the Company shall make
appropriate reserves to ensure the timely performance of the provisions of this
subsection or an adjustment to the Exercise Price, which shall be effective as
of the day following the record date for such distribution.
8.4 ADJUSTMENT IN NUMBER OF SECURITIES.
Upon each adjustment of the Exercise Price pursuant to the provisions of
this Section 8, the number of securities issuable upon the exercise of each
Warrant and/or Underlying Warrant shall be adjusted to the nearest full amount
by multiplying a number equal to the Exercise Price in effect immediately prior
to such adjustment by the number of securities issuable upon exercise of the
Warrants and/or the Underlying Warrants immediately prior to such adjustment and
dividing the product so obtained by the adjusted Exercise Price.
8.5 NO ADJUSTMENT OF EXERCISE PRICE IN CERTAIN CASES.
No adjustment of the Exercise Price shall be made if the amount of said
adjustment shall be less than 5 cents ($.05) per Share, provided, however, that
in such case any adjustment that would otherwise be required then 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 so carried
forward, shall amount to at least 5 cents ($.05) per Share.
8.6 ACCOUNTANT'S CERTIFICATE OF ADJUSTMENT.
In each case of an adjustment or readjustment of the Exercise Price or the
number of any securities issuable upon exercise of the Warrants and/or
Underlying Warrants, the Company, at its expense, shall cause independent
certified public accountants of recognized standing selected by the Company (who
may be the independent certified public accountants then auditing the books of
the Company) to compute such adjustment or readjustment in accordance herewith
and prepare a certificate showing such adjustment or readjustment, and shall
mail such certificate, by first class mail, postage prepaid, to any Holder of
the Warrants and/or Underlying Warrants at the Holder's address as shown on the
Company's books.
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The certificate shall set forth such adjustment or readjustment, showing in
detail the facts upon which such adjustment or readjustment is based including,
but not limited to, a statement of (i) the Exercise Price at the time in effect,
and (ii) the number of additional securities and the type and amount, if any, of
other property which at the time would be received upon exercise of the Warrants
and/or Underlying Warrants.
8.7 ADJUSTMENT OF UNDERLYING WARRANT EXERCISE PRICE.
With respect to any of the Underlying Warrants whether or not the
Underlying Warrants have been exercised (or are exercisable) and whether or not
the Underlying Warrants are issued and outstanding, the Underlying Warrant
exercise price and the number of shares of Common Stock underlying such
Underlying Warrants shall be automatically adjusted in accordance with the
Warrant Agreement between the Company and the Company's transfer agent, upon
occurrence of any of the events relating to adjustments described therein.
Thereafter, the Underlying Warrants shall be exercisable at such adjusted
Underlying Warrant exercise price for such adjusted number of underlying shares
of Common Stock or other securities, properties or rights.
9. EXCHANGE AND REPLACEMENT OF WARRANT CERTIFICATES.
Each Warrant Certificate is exchangeable without expense, upon the
surrender thereof by the registered Holder at the principal executive office of
the Company, for a new Warrant Certificate of like tenor and date representing
in the aggregate the right to purchase the same number of securities in such
denominations as shall be designated by the Holder thereof at the time of such
surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft, destruction or mutilation of any Warrant Certificate, and, in
case of loss, theft or destruction, of indemnity or security reasonably
satisfactory to it, and reimbursement to the Company of all reasonable expenses
incidental thereto, and upon surrender and cancellation of the Warrants, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
10. ELIMINATION OF FRACTIONAL INTEREST.
The Company shall not be required to issue certificates representing
fractions of shares of Common Stock upon the exercise of the Warrants and/or
Underlying Warrants, nor shall it be required to issue script or pay cash in
lieu of fractional interests, it being the intent of the parties that all
fractional interests may be eliminated, at the Company's option, by rounding any
fraction up to the nearest whole number of shares of Common Stock or other
securities, properties or rights, or in lieu thereof
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paying cash equal to such fractional interest multiplied by the current value of
a share of Common Stock.
11. RESERVATION AND LISTING.
The Company shall at all times reserve and keep available out of its
authorized shares of Common Stock, solely for the purpose of issuance upon the
exercise of the Warrants and the Underlying Warrants, such number of shares of
Common Stock or other securities, properties or rights as shall be issuable upon
the exercise thereof. The Company covenants and agrees that, upon exercise of
the Warrants and/or the Underlying Warrants, and payment of the Exercise Price
therefor, all shares of Common Stock and other securities issuable upon such
exercise shall be duly and validly issued, fully paid, non-assessable and not
subject to the preemptive rights of any stockholder. As long as the Warrants
and/or Underlying Warrants shall be outstanding, the Company shall use its best
efforts to cause all shares of Common Stock issuable upon the exercise of the
Warrants and the Underlying Warrants to be listed and quoted (subject to
official notice of issuance) on all securities Exchanges and Systems on which
the Common Stock and/or the Public Warrants may then be listed and/or quoted,
including Nasdaq.
12. NOTICES TO WARRANT HOLDERS.
Nothing contained in this Agreement shall be construed as conferring upon
the Holders of the Warrants and/or Underlying Warrants the right to vote or to
consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Warrants and/or Underlying Warrants and their
exercise, any of the following events shall occur:
(a) the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained earnings, as
indicated by the accounting treatment of such dividend or distribution on
the books of the Company; or
(b) the Company shall offer to all the holders of its Common Stock
any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the
Company, or any option, right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation or
16
<PAGE>
merger) or a sale of all or substantially all of its property, assets and
business as an entirety shall be proposed;
then, in any one or more of said events, the Company shall give written notice
of such event at least fifteen (15) days prior to the date fixed as a record
date of the date of closing the transfer books for the determination of the
stockholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notices shall
specify such record date or the date of closing the transfer books, as the case
may be. Failure to give such notice or any defect therein shall not affect the
validity of any action taken in connection with the declaration or payment of
any such dividend, or the issuance of any convertible or exchangeable
securities, or subscription rights, options or warrants, or any proposed
dissolution, liquidation, winding up or sale.
13. UNDERLYING WARRANTS.
The form of the certificate representing the Underlying Warrants (and the
form of election to purchase shares of Common Stock upon the exercise of the
Underlying Warrants and the form of assignment printed on the reverse thereof)
shall be substantially as set forth in the exhibits to the Warrant Agreement.
Subject to the terms of this Agreement, one (1) Underlying Warrant shall
evidence the right to initially purchase one (1) fully-paid and non-assessable
share of Common Stock at an initial purchase price of $8.25 during the five (5)
year period commencing on the Effective Date of the Registration Statement, at
which time the Underlying Warrants, unless the exercise period has been
extended, shall expire. The exercise price of the Underlying Warrants and the
number of shares of Common Stock issuable upon the exercise of the Underlying
Warrants are subject to adjustment, whether or not the Warrants have been
exercised and the Underlying Warrants have been issued, in the manner and upon
the occurrence of the events set forth in the Warrant Agreement, which is hereby
incorporated herein by reference and made a part hereof as if set forth in its
entirety herein. Subject to the provisions of this Agreement and upon issuance
of the Underlying Warrants, each registered holder of such Underlying Warrant
shall have the right to purchase from the Company (and the Company shall issue
to such registered holders) up to the number of fully-paid and non-assessable
shares of Common Stock (subject to adjustment as provided in the Warrant
Agreement) set forth in such Warrant Certificate, free and clear of all
preemptive rights of stockholders, provided that such registered Holder complies
with the terms governing exercise of the Underlying Warrant set forth in the
Warrant Agreement, and pays the applicable exercise price, determined in
accordance with the terms of the Warrant Agreement. Upon exercise of the
Underlying Warrants, the Company shall forthwith issue to the registered Holder
of any such
17
<PAGE>
Underlying Warrant in his name or in such name as may be directed by him,
certificates for the number of shares of Common Stock so purchased. Except as
otherwise provided herein and in this Agreement, the Underlying Warrants shall
be governed in all respects by the terms of the Warrant Agreement. The
Underlying Warrants shall be transferrable in the manner provided in the Warrant
Agreement, and upon any such transfer, a new Underlying Warrant certificate
shall be issued promptly to the transferee. The Company covenants to send to
each Holder, irrespective of whether or not the Warrants have been exercised,
any and all notices required by the Warrant Agreement to be sent to holders of
Underlying Warrants.
14. NOTICES.
All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed to have been duly given when personally
delivered, or mailed by registered or certified mail, return receipt requested:
(a) If to the registered Holder of any of the Registrable Securities,
to the address of such Holder as shown on the books of the Company; or
(b) If to the Company, to the address set forth below or to such
other address as the Company may designate by notice to the Holders.
Robert A. Veschi, President
e-Net, Inc.
12800 Middlebrook Road
Suite 200
Germantown, Maryland 20874
With a copy to: Thomas T. Prousalis, Jr., Esq.
1919 Pennsylvania Avenue, N.W.
Suite 800
Washington, D.C. 20006
15. ENTIRE AGREEMENT: MODIFICATION.
This Agreement (and the Underwriting Agreement and Warrant Agreement to the
extent applicable) contain the entire understanding between the parties hereto
with respect to the subject matter hereof, and the terms and provisions of this
Agreement may not be modified, waived or amended except in a writing executed by
the Company and the Holders of at least a majority of Registrable Securities
(based on underlying numbers of shares of Common Stock). Notice of any
modification, waiver or amendment shall be promptly provided to any Holder not
consenting to such modification, waiver or amendment.
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<PAGE>
16. SUCCESSORS.
All the covenants and provisions of this Agreement shall be binding upon
and inure to the benefit of the Company, the Holders and their respective
successors and assigns hereunder.
17. TERMINATION.
This Agreement shall terminate at the close of business on
, 2004. Notwithstanding the foregoing, the indemnification provisions of
Section 7 shall survive such termination.
18. GOVERNING LAW; SUBMISSION TO JURISDICTION.
This Agreement and each Warrant Certificate issued hereunder shall be
deemed to be a contract made under the laws of the State of Florida and for all
purposes shall be construed in accordance with the laws of said State without
giving effect to the rules of said State governing the conflicts of laws. The
Company, the Representative and the Holders hereby agree that any action,
proceeding or claim arising out of, or relating in any way to, this Agreement
shall be brought and enforced in a federal or state court of competent
jurisdiction with venue only in the Fifteenth Judicial Circuit Court in and for
Palm Beach County, Florida or the United States District Court for the Southern
District of Florida, West Palm Beach Division, and irrevocably submits to such
jurisdiction, which jurisdiction shall be exclusive. The Company, the
Representative and the Holders hereby irrevocably waive any objection to such
exclusive jurisdiction or inconvenient forum. Any such process or summons to be
served upon any of the Company, the Representative and the Holders (at the
option of the party bringing such action, proceeding or claim) may be served by
transmitting a copy thereof, by registered or certified mail, return receipt
requested, postage prepaid, addressed to it at the address set forth in Section
14 hereof. Such mailing shall be deemed personal service and shall be legal and
binding upon the party so served in any action, proceeding or claim.
19. SEVERABILITY.
If any provision of this Agreement shall be held to be invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provision of this Agreement.
20. CAPTIONS.
The caption headings of the Sections of this Agreement are for convenience
of reference only and are not intended, nor should they be construed as, a part
of this Agreement and shall be given no substantive effect.
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<PAGE>
21. BENEFITS OF THIS AGREEMENT.
Nothing in this Agreement shall be construed to give to any person or
corporation other than the Company and the Representative and any other
registered Holder(s) of the Warrant Certificates or Registrable Securities any
legal or equitable right, remedy or claim under this Agreement; and this
Agreement shall be for the sole and exclusive benefit of the Company and the
Representative and any other Holder(s) of the Warrant Certificates or
Registrable Securities.
22. COUNTERPARTS.
This Agreement may be executed in any number of counterparts and each of
such counterparts shall for all purposes be deemed to be an original, and such
counterparts shall together constitute but one and the same instrument.
IN WITNESS HEREOF, the parties hereto have caused this Agreement to be duly
executed, as of the day and year first above written.
e-NET, INC.
By:
-------------------------------
Robert A. Veschi, President
Attest:
- --------------------------------
Robert A. Veschi, Secretary
BARRON CHASE SECURITIES, INC.
By:
-------------------------------
Robert Kirk, President
20
<PAGE>
WARRANT CERTIFICATE
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF
SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:30 P.M, EASTERN TIME ON ________________ , 200_
NO. W-_____
_____ Common Stock _____ Warrant
Representative Representative
Warrants Warrants
or
_____ Underlying
Warrants
This Warrant Certificate certifies that _____________ , or registered
assigns, is the registered holder of _____ Common Stock Representative
Warrants and/or _______ Warrant Representative Warrants and/or __________
Underlying Warrants of e-Net, Inc. (the "Company"). Each Common Stock
Representative Warrant permits the Holder hereof to purchase initially, at any
time from ______ , 1997 ("Purchase Date") until 5:30 p.m. Eastern Time on _____
, 2002 ("Expiration Date"), one (1) share of the Company's Common Stock at the
initial exercise price, subject to adjustment in certain events (the "Exercise
Price"), of $8.25 per share (165% of the public offering price). Each Warrant
Representative Warrant permits the Holder hereof to purchase initially, at any
time from the Purchase Date until five (5) years from the Purchase Date, one (1)
Underlying Warrant at the Exercise Price of $.20625 per Underlying Warrant.
Each Underlying Warrant permits the Holder thereof to purchase, at any time from
the Purchase Date until five (5) years from the Purchase Date, one (1) share of
the Company's Common Stock at the Exercise Price of $8.25 per share.
21
<PAGE>
Any exercise of Common Stock Representative Warrants and/or Warrant
Representative Warrants and/or Underlying Warrants shall be effected by
surrender of this Warrant Certificate and payment of the Exercise Price at an
office or agency of the Company, but subject to the conditions set forth herein
and in the Representative's Warrant Agreement dated as of ________ , 1997,
between the Company and Barron Chase Securities, Inc. (the "Representative's
Warrant Agreement"). Payment of the Exercise Price shall be made by certified
check or official bank check in New York Clearing House funds payable to the
order of the Company in the event there is no cashless exercise pursuant to
Section 3.1(ii) of the Representative's Warrant Agreement. The Common Stock
Representative Warrants, the Warrant Representative Warrants, and the Underlying
Warrants are collectively referred to as "Warrants".
No Warrant may be exercised after 5:30 p.m., Eastern Time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, hereby shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Representative's Warrant
Agreement, which Representative's Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation or rights, obligations, duties and
immunities thereunder of the Company and the holders (the words "holders" or
"holder" meaning the registered holders or registered holder) of the Warrants.
The Representative's Warrant Agreement provides that upon the occurrence of
certain events, the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the rights
of the holder as set forth in the Representative's Warrant Agreement.
Upon due presentment for registration or transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the
Representative's Warrant Agreement, without any charge except for any tax or
other governmental charge imposed in connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced
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<PAGE>
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the
Representative's Warrant Agreement shall have the meanings assigned to them in
the Representative's Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed under its corporate seal.
Dated as of _____________, 1997
e-NET, INC.
By:
-------------------------------
Robert A. Veschi, President
Attest:
- -------------------------------
Robert A. Veschi, Secretary
23
<PAGE>
EXHIBIT "A"
FORM OF SUBSCRIPTION (CASH EXERCISE)
(To be signed only upon exercise of Warrant)
TO: e-Net, Inc.
12800 Middlebrook Road
Suite 200
Germantown, Maryland 20874
The undersigned, the Holder of Warrant Certificate number ___ (the
"Warrant"), representing __________ Common Stock Representative Warrants and/or
_________ Warrant Representative Warrants and/or __________ Underlying Warrants
of e-Net, Inc. (the "Company"), which Warrant Certificate is being delivered
herewith, hereby irrevocably elects to exercise the purchase right provided by
the Warrant Certificate for, and to purchase thereunder, ___________ Shares
and/or ____________ Underlying Warrants of the Company, and herewith makes
payment of $ __________ therefor, and requests that the certificates for such
securities be issued in the name of, and delivered to, _______________________
_______________________, whose address is ____________________________________
_____________________________________________________________________________,
all in accordance with the Representative's Warrant Agreement and the Warrant
Certificate.
Dated: ___________________
________________________________
(Signature must conform in all
respects to name of Holder as
specified on the face of the
Warrant Certificate)
________________________________
________________________________
(Address)
24
<PAGE>
EXHIBIT "B"
FORM OF SUBSCRIPTION (CASHLESS EXERCISE)
TO: e-Net, Inc.
12800 Middlebrook Road
Suite 200
Germantown, Maryland 20874
The undersigned, the Holder of Warrant Certificate number ___ (the
"Warrant"), representing __________ Common Stock Representative Warrants and/or
_______ Underlying Warrants e-Net, Inc. (the "Company"), which Warrant is being
delivered herewith, hereby irrevocably elects the cashless exercise of the
purchase right provided by the Representative's Warrant Agreement and the
Warrant Certificate for, and to purchase thereunder, Shares of the Company in
accordance with the formula provided at Section three (3) of the
Representative's Warrant Agreement. The undersigned requests that the
certificates for such Shares be issued in the name of, and delivered to, _______
_______________________________________________________________________________
_________, whose address is, __________________________________________________
___________________________________________________________ , all in accordance
with the Warrant Certificate.
Dated: _____________________
______________________________
(Signature must conform in all
respects to name of Holder as
specified on the face of the
Warrant Certificate)
______________________________
______________________________
(Address)
25
<PAGE>
(FORM OF ASSIGNMENT)
(To be exercised by the registered holder if such
holder desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED_______________________________________________________
hereby sells, assigns and transfers unto
(Print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint ___________________________
_______________ Attorney, to transfer the within Warrant Certificate on the
books of the within-named Company, and full power of substitution.
Dated: Signature:
___________________ __________________________________________
(Signature must conform in all respects to
name of holder as specified on the fact of
the Warrant Certificate)
__________________________________________
(Insert Social Security or Other Identifying
Number of Assignee)
26
<PAGE>
Exhibit 10.4
FINANCIAL ADVISORY AGREEMENT
This Agreement is made and entered into as of the day of
, 1997, between e-Net, Inc. (the "Company") and Barron Chase Securities, Inc.
(the "Financial Advisor").
W I T N E S S E T H :
WHEREAS, The Company has engaged the Financial Advisor to act as the
Underwriter in connection with the public offering of the Company's securities;
and
WHEREAS, the Financial Advisor has experience in providing financial and
business advice to public and private companies; and
WHEREAS, the Company is seeking and the Financial Advisor is willing to
furnish business and financial related advice and services to the Company on the
terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of, and for the mutual promises and
covenants contained herein, and for other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties agree as follows:
1. PURPOSE. The Company hereby engages the Financial Advisor on a
non-exclusive basis for the term specified in this Agreement to render financial
advisory and consulting advice to the Company as an investment banker relating
to financial and similar matters upon the terms and conditions set forth herein.
However, the advisory will only be rendered if specifically requested in writing
by the CEO of the Company.
2. REPRESENTATIONS OF THE FINANCIAL ADVISOR AND THE COMPANY. The
Financial Advisor represents and warrants to the Company that (i) it is a member
in good standing of the National Association of Securities Dealers, Inc.
("NASD") and that it is engaged in the securities brokerage business; (ii) in
addition to its securities brokerage business, the Financial Advisor provides
consulting advisory services; and (iii) it is free to enter into this Agreement
and the services to be provided pursuant to this Agreement are not in conflict
with any other contractual or other obligation to which the Financial Advisor is
bound. The Company acknowledges that the Financial Advisor is in the business
of providing financial services and consulting advice (of the type contemplated
by this Agreement) to others and that nothing herein contained shall be
construed to limit or restrict the Financial Advisor in conducting such business
with respect to others, or rendering such advice to others.
3. DUTIES OF THE FINANCIAL ADVISOR. During the term of this Agreement,
the Financial Advisor will provide the Company with consulting advice as
specified below at the request of the Company, provided that the Financial
Advisor shall not be required to undertake duties not reasonably within the
scope of the consulting advisory service in which the Financial Advisor is
engaged
1
<PAGE>
generally. In performance of these duties, the Financial Advisor shall provide
the Company with the benefits of its best judgment and efforts. It is
understood and acknowledged by the parties that the value of the Financial
Advisor's advice is not measurable in any quantitative manner, and that the
amount of time spent rendering such consulting advice shall be determined
according to the Financial Advisor's discretion.
The Financial Advisor's duties may include, but will not necessarily be
limited to:
1) Advice relating to corporate financing activities;
2) Recommendations relating to specific business operations and
investments;
3) Advice relating to financial planning; and
4) Advice regarding future financings involving securities of the
Company or any subsidiary.
4. TERM. The term of this Agreement shall be for thirty-six (36) months
commencing on the first day of the month following the Company's receipt of the
proceeds from the contemplated public offering (the "Commencement Date");
provided, however, that this Agreement may be renewed or extended upon such
terms and conditions as may be mutually agreed upon by the parties hereto.
5. FEE. The Company shall pay the Financial Advisor a fee of $108,000
for the financial services to be rendered pursuant to this Agreement, all of
which shall be payable at the Closing Date of the Company's proposed public
offering.
6. EXPENSES. In addition to the fees payable hereunder, the Company shall
reimburse the Financial Advisor, within five (5) business days of its request,
for any and all reasonable out-of-pocket expenses incurred in connection with
the services performed by the Financial Advisor and its counsel pursuant to this
Agreement, including (i) reasonable hotel, food and associated expenses; (ii)
reasonable charges for travel; (iii) reasonable long-distance telephone calls;
and (iv) other reasonable expenses spent or incurred on the Company's behalf.
All such expenses in excess of $500 shall be pre-approved by the Company.
7. INTRODUCTION OF CUSTOMERS, ORIGINATION OF LINE OF CREDIT AND SIMILAR
TRANSACTIONS. In the event the Financial Advisor originates a line of credit
with a lender or a corporate partner, the Company and the Financial Advisor will
mutually agree on a satisfactory fee and the terms of payment of such fee. In
the event the Financial Advisor introduces the Company to a joint venture
partner or customer and sales develop as a result of the introduction, the
Company agrees to pay a fee of five percent (5%) of total sales generated
directly from this introduction during the first two years following the date of
the first sale. Total sales shall mean cost receipts less any applicable
refunds, returns, allowances, credits and shipping charges and monies paid by
the Company by way of settlement or judgment arising out of claims made by or
threatened against the Company. Commission payments shall be
2
<PAGE>
paid on the 15th day of each month following the receipt of customers' payments.
In the event any adjustments are made to the total sales after the commission
has been paid, the Company shall be entitled to an appropriate refund or credit
against future payments under this Agreement.
All fees to be paid pursuant to this paragraph, except as otherwise
specified, are due and payable to the Financial Advisor in cash at the closing
or closings of any transaction specified in this paragraph. In the event that
this Agreement shall not be renewed or if terminated for any reason,
notwithstanding any such non-renewal or termination, the Financial Advisor shall
be entitled to a full fee as provided under this paragraph for any transaction
for which the discussions were initiated during the term of this Agreement and
which is consummated within a period of twelve months after non-renewal or
termination of this Agreement. Nothing herein shall impose any obligation on
the part of the Company to enter into any transaction or to use any services of
the Financial Advisor offered pursuant to this paragraph or this Agreement.
8. USE OF ADVICE BY THE COMPANY; PUBLIC MARKET FOR THE COMPANY'S
SECURITIES. The Company acknowledges that all opinions and advice (written or
oral) given by the Financial Advisor to the Company in connection with the
engagement of the Financial Advisor are intended solely for the benefit and use
of the Company in considering the transaction to which they relate, and the
Company agrees that no person or entity other than the Company shall be entitled
to make use of or rely upon the advice of the Financial Advisor to be given
hereunder, and no such opinion or advice shall be used for any other purpose or
reproduced, disseminated, quoted or referred to at any time, in any manner or
for any purpose, nor may the Company make any public references to the Financial
Advisor, or use of the Financial Advisor's name in any annual reports or any
other reports or releases of the Company without the prior written consent of
the Financial Advisor.
The Company acknowledges that the Financial Advisor makes no commitment
whatsoever as to making a public trading market in the Company's securities or
to recommending or advising its clients to purchase the Company's securities.
Research reports or corporate finance reports that may be prepared by the
Financial Advisor will, when and if prepared, be done solely on the merits or
judgment and analysis of the Financial Advisor or any senior corporate finance
personnel of the Financial Advisor.
9. COMPANY INFORMATION; CONFIDENTIALLY. The Company recognizes and
confirms that, in advising the Company and in fulfilling its engagement
hereunder, the Financial Advisor will use and rely on data, material and other
information furnished to the Financial Advisor by the Company. The Company
acknowledges and agrees that in performing its services under this engagement,
the Financial Advisor may rely upon the data, material and other information
supplied by the Company without independently verifying the accuracy,
completeness or veracity of same. In addition, in the performance of its
services, the Financial Advisor may look to such others for such factual
information, economic advice and/or research upon which to base its advice to
the Company hereunder as the Financial Advisor shall in good faith deem
appropriate.
3
<PAGE>
Except as contemplated by the terms hereof or as required by applicable
law, the Financial Advisor shall keep confidential all non-public information
provided to it by the Company, and shall not disclose such information to any
third party without the Company's prior written consent, other than such of its
employees and advisors as the Financial Advisor determines to have a need to
know.
10. INDEMNIFICATION. The Company shall indemnify and hold harmless the
Financial Advisor against any and all liabilities, claims, lawsuits, including
any and all awards and/or judgments to which it may become subject under the
Securities Act of 1933, (the "Act"), the Securities Exchange Act of 1934, as
amended (the "1934 Act") or any other federal or state statute, at common law or
otherwise, insofar as said liabilities, claims and lawsuits (including costs,
expenses, awards and/or judgments) arise out of or are in connection with the
services rendered by the Financial Advisor or any transactions in connection
with this Agreement, except for any liabilities, claims and lawsuits (including
awards and/or judgments), arising out of willful misconduct or willful omissions
of the Financial Advisor. In addition, the Company shall also indemnify and
hold harmless the Financial Advisor against any and all reasonable costs and
expenses, including reasonable counsel fees, incurred relating to the foregoing.
The Financial Advisor shall give the Company prompt notice of any such
liability, claim or lawsuit which the Financial Advisor contends is the subject
matter of the Company's indemnification and the Company thereupon shall be
granted the right to take any and all necessary and proper action, at its sole
cost and expense, with respect to such liability, claim and lawsuit, including
the right to settle, compromise and dispose of such liability, claim or lawsuit,
excepting therefrom any and all proceedings or hearings before any regulatory
bodies and/or authorities.
The Financial Advisor shall indemnify and hold the Company harmless against
any and all liabilities, claims and lawsuits, including any and all awards
and/or judgments to which it may become subject under the Act, the 1934 Act or
any other federal or state statute, at common law or otherwise, insofar as said
liabilities, claims and lawsuits (including costs, expenses, awards and/or
judgments) arise out of or are based upon willful misconduct or willful
omissions of the Financial Advisor. In addition, the Financial Advisor shall
also indemnify and hold the Company harmless against any and all reasonable
costs and expenses, including reasonable counsel fees, incurred relating to the
foregoing.
The Company shall give the Financial Advisor prompt notice of any such
liability, claim or lawsuit which the Company contends is the subject matter of
the Financial Advisor's indemnification and the Financial Advisor thereupon
shall be granted the right to take any and all necessary and proper action, at
its sole cost and expense, with respect to such liability, claim and lawsuit,
including the right to settle, compromise or dispose of such liability, claim or
lawsuit, excepting therefrom any and all proceedings or hearings before any
regulatory bodies and/or authorities.
4
<PAGE>
11. THE FINANCIAL ADVISOR AS AN INDEPENDENT CONTRACTOR. The Financial
Advisor shall perform its services hereunder as an independent contractor and
not as an employee of the Company or an affiliate thereof. It is expressly
understood and agreed to by the parties hereto that the Financial Advisor shall
have no authority to act for, represent or bind the Company or any affiliate
thereof in any manner, except as may be agreed to expressly by the Company in
writing from time to time.
12. MISCELLANEOUS.
(a) This Agreement between the Company and the Financial Advisor
constitutes the entire agreement and understanding of the parties hereto, and
supersedes any and all previous agreements and understandings, whether oral or
written, between the parties with respect to the matters set forth herein.
(b) Any notice or communication permitted or required hereunder shall be
in writing and shall be deemed sufficiently given if hand-delivered or sent
postage prepaid by certified or registered mail, return receipt requested, to
the respective parties as set forth below, or to such other address as either
party may notify the other in writing:
If to the Company: Robert A. Veschi, President
e-Net, Inc.
12800 Middlebrook Road
Suite 200
Germantown, Maryland 20874
Copy to: Thomas T. Prousalis, Jr., Esq.
1919 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
If to the
Financial Advisor: Robert T. Kirk, President
Barron Chase Securities, Inc.
7700 West Camino Real, Suite 200
Boca Raton, Florida 33433
Copy to: David A. Carter, P.A.
355 West Palmetto Park Road
Boca Raton, Florida 33432
(c) This Agreement shall be binding upon and inure to the benefit of each
of the parties hereto and their respective successors, legal representatives and
assigns.
(d) This Agreement may be executed in any number of counterparts, each of
which together shall constitute one and the same original document.
(e) No provision of this Agreement may be amended, modified or waived,
except in a writing signed by all of the parties hereto.
(f) This Agreement shall be construed in accordance with and
5
<PAGE>
governed by the laws of the State of Florida, without giving effect to conflict
of law principles. The parties hereby agree that any dispute which may arise
between them arising out of or in connection with this Agreement shall be
adjudicated before a court located in Palm Beach County, Florida, and they
hereby submit to the exclusive jurisdiction of the courts of the State of
Florida located in Palm Beach County, Florida and of the federal courts in the
Southern District of Florida with respect to any action or legal proceeding
commenced by any party, and irrevocably waive any objection they now or
hereafter may have respecting the venue of any such action or proceeding brought
in such a court or respecting the fact that such court is an inconvenient forum,
relating to or arising out of this Agreement, and consent to the service of
process in any such action or legal proceeding by means of registered or
certified mail, return receipt requested, in care of the address set forth in
paragraph 12(b) hereof.
(g) This Agreement has been duly authorized, executed and delivered by and
on behalf of the Company and the Financial Advisor.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
Very truly yours,
e-NET, INC.
BY:
-------------------------------
Robert A. Veschi, President
BARRON CHASE SECURITIES, INC.
BY:
-------------------------------
Robert T. Kirk, President
6
<PAGE>
Exhibit 10.5
___________________ , 1997
Robert A. Veschi, President
e-Net, Inc.
12800 Middlebrook Road
Suite 200
Germantown, Maryland 20874
Re: Merger and Acquisition Agreement
Gentlemen:
You have agreed that Barron Chase Securities, Inc., (the "Finder") may act
as a non-exclusive finder or financial consultant for you in various
transactions in which e-Net, Inc. (the "Company") may be involved, such as
mergers, acquisitions, joint ventures, debt or equity placements and similar or
other on-balance or off-balance sheet corporate finance transactions. The
Company hereby agrees that in the event that the Finder shall first introduce to
the Company another party or entity, in writing, and that as a result of such
introduction, a transaction between such entity and the Company is consummated
("Consummated Transaction"), then the Company shall pay to the Finder a finder's
fee as follows:
a. Five percent (5%) of the first $1,000,000 of the consideration paid in
such transaction;
b. Four percent (4%) of the consideration in excess of $1,000,000 and up
to $2,000,000;
c. Three percent (3%) of the consideration in excess of $2,000,000 and up
to $3,000,000;
d. Two percent (2%) of any consideration in excess of $3,000,000 and up
to $4,000,000; and
e. One percent (1%) of any consideration in excess of $4,000,000.
The fee due the Finder shall be paid by the Company in cash and/or in stock
at the closing of the Consummated Transaction as mutually agreed between the
Company and the Finder, without regard to whether the Consummated Transaction
involves payments in cash, in stock, or a combination of stock and cash, or is
made on an installment sale basis. By way of example, if the Consummated
Transaction involves securities of the acquiring entity (whether securities of
the Company, if the Company is the acquiring party, or securities of another
entity, if the Company is the selling party) having a value of $5,000,000, the
consideration to be paid by the Company to the Finder at closing shall be
$150,000.
However, both parties agree that it is the purpose of the Company to use
the proceeds of the offering in the acquisition,
<PAGE>
merger, purchase of shares or any other kind of association with foreign
companies as described in the prospectus. To the extent that the Company has
any prior relationships with such foreign companies these foreign companies are
specifically excluded from this Agreement.
In the event that for any reason the Company shall fail to pay to the
Finder all or any portion of the finder's fee payable hereunder when due,
interest shall accrue and be payable on the unpaid balance due hereunder from
the date when first due through and including that date when actually collected
by the Finder, at a rate equal to two (2) points over the prime rate of
Citibank, N.A. in New York, New York, computed on a daily basis and adjusted as
announced from time to time.
This agreement shall be effective on the date hereof and shall expire on
the fifth anniversary of the date hereof.
Notwithstanding anything herein to the contrary, if the Company shall,
within 180 days immediately following the termination of the five year period
provided above, conclude a Consummated Transaction with any party introduced by
the Finder to the Company prior to the termination of said five year period, the
Company shall also pay the Finder the fee determined above.
The Company represents and warrants to the Finder that the engagement of
the Finder hereunder has been duly authorized and approved by the Board of
Directors of the Company and this letter agreement has been duly executed and
delivered by the Company and constitutes a legal, valid and binding obligation
of the Company.
This agreement has been executed and delivered in the State of Florida and
shall be governed by the laws of such state, without giving effect to the
conflicts of laws rules thereunder.
This agreement shall be binding upon, and enforceable against, the
successors and assigns of each of the undersigned.
Please sign this letter at the place indicated below, whereupon it will
constitute our mutually binding agreement with respect to the matters contained
herein.
Very truly yours,
BARRON CHASE SECURITIES, INC.
BY:
-------------------------------
Robert T. Kirk, President
Agreed to and Accepted:
e-NET, INC.
By:
--------------------------------
Robert A. Veschi, President
