<PAGE>
As filed with the Securities and Exchange Commission on August 25, 1998
Registration No. 333- 58109
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
To
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
e-NET, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 7371 52-1929282
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
12800 Middlebrook Road, Suite 200
Germantown, Maryland 20874
(301) 601-8700
(Address, including zip code, and telephone number,
including area code, of principal executive offices of
Registrant)
Robert A. Veschi
President and Chief Executive Officer
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:
Charles A. Sweet, Esq.
Williams & Connolly
725 Twelfth Street, N.W.
Washington, D.C. 20005
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Amount to Offering Price Aggregate Registration
Securities to be Registered be Registered Per Security Price(1) Fee(2)
----------------------------- --------------- ----------------- ----------------- -------------
<S> <C> <C> <C> <C>
Private Placement Stock, $.01 Par Value................ 750,000 $18.437 (1) $13,827,750 $4,687
Placement Agent's Stock, $.01 Par Value................ 75,000 18.437 (1) 1,382,775 469
Underwriter's Stock, $.01 Par Value.................... 300,000 18.437 (1) 5,531,100 1,875
Total............................................. 1,125,000 $18.437 (1) $20,741,625 $7,031
</TABLE>
(1) The registration fee was calculated in accordance with Rule 457 and
estimated solely of the purpose of determining the amount of the
registration fee and is based on the average of the high and low prices of
the Registrant's Common Stock as reported on NASDAQ Small-Cap market on
June 24, 1998.
(2) The Registration Fee was paid on June 29, 1998.
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, as amended, or until this Registration Statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
<PAGE>
Explanatory Note
This registration statement relates to the offer and sale by the selling
holders described herein of the following securities: (A) 825,000 shares of
common stock, par value $.01 per share ("Common Stock"), of e-Net, Inc. (the
"Private Placement Stock") comprised of (i) 750,000 shares of Common Stock
issued in a private placement in April 1998 (the "Private Placement"); and
(ii) 75,000 shares of Common Stock underlying a five-year warrant issued to
Pennsylvania Merchant Group Ltd., the placement agent for the Private
Placement, with an exercise price of $9.00 per share; and (B) 300,000 shares
of Common Stock underlying: (i) five-year warrants issued at the direction of
Barron Chase Securities, Inc., the underwriter (the "Underwriter") of the
Company's initial public offering of securities in April 1997 to purchase
150,000 shares of Common Stock, with an exercise price of $8.25 per share;
and (ii) five-year warrants to purchase 150,000 shares of Common Stock, with
an exercise price of $8.25 per share, which warrants (the "Underlying
Warrants") underlie five-year warrants issued at the direction of the
Underwriter to purchase the Underlying Warrants, with an exercise price of
$0.20625 per Underlying Warrant.
<PAGE>
PROSPECTUS
e-Net, Inc
1,125,000 Shares of Common Stock
This Prospectus relates to the offer and sale (the "Offering") by the
selling holders described herein (collectively, the "Selling Holders") of the
following securities: (A) 825,000 shares of common stock, par value $.01 per
share ("Common Stock"), of e-Net, Inc. ("e-Net" or the "Company," and such
shares of Common Stock, the "Private Placement Stock") comprised of (i)
750,000 shares of Common Stock issued in a private placement in April 1998
(the "Private Placement," and such shares of Common Stock, the "Issued
Private Placement Stock"); and (ii) 75,000 shares of Common Stock underlying
a five-year warrant issued to Pennsylvania Merchant Group Ltd., the placement
agent for the Private Placement (the "Placement Agent"), with an exercise
price of $9.00 per share (such warrant, the "Placement Agent's Warrant" and
such underlying shares, the "Placement Agent's Stock"); and (B) 300,000
shares of Common Stock (the "Underwriter's Stock" and, together with the
Private Placement Stock, the "Offered Stock") underlying: (i) five-year
warrants issued at the direction of Barron Chase Securities, Inc., the
underwriter (the "Underwriter") of the Company's initial public offering of
securities in April 1997 (the "Initial Public Offering ") to purchase 150,000
shares of Common Stock, with an exercise price of $8.25 per share (the
"Common Stock Representative Warrants"); and (ii) five-year warrants to
purchase 150,000 shares of Common Stock, with an exercise price of $8.25 per
share, which warrants (the "Underlying Warrants") underlie five-year warrants
issued at the direction of the Underwriter to purchase the Underlying
Warrants, with an exercise price of $0.20625 per Underlying Warrant (the
"Warrant Representative Warrants" and collectively with the Common Stock
Representative Warrants and the Underlying Warrants, the "Underwriter's
Warrants" and collectively with the Underwriter's Warrants and the Placement
Agent's Warrant, the "Warrants"). See "Description of Securities."
The Company's Common Stock is quoted on the Nasdaq SmallCap Market
("Nasdaq") under the symbols "ETEL". On August 24, 1998, the closing price of
the Common Stock as quoted on the Nasdaq SmallCap Market was $15 9/16. No
offered stock may be sold by Selling Holders in the Offering without the
availability of a current Prospectus.
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS SPECULATIVE AND INVOLVES A
HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY
INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK
FACTORS" ON PAGES 5-9 AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISISON PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The Selling Holders may sell the Offered Stock from time to time in
transactions in the open market, in negotiated transactions, or by a
combination of these methods, at fixed prices that may be changed, or market
prices at the time of sale, at prices related to market prices or at
negotiated prices. The Selling Holders may effect these transactions by
selling the Offered Stock to or through broker-dealers, who may receive
compensation in the form of discounts or commissions from the Selling Holders
or from the purchasers of the Offered Stock for whom the broker-dealers may
act as agent or to whom they may sell as principal, or both. See "Plan of
Distribution." The Company will not receive any proceeds from the resale of
the Offered Stock by the Selling Holders. The Company will receive net
proceeds of approximately $3,050,000 if all the Warrants are exercised.
The Company will bear all of the expenses in connection with the
registration of the Offered Stock, which expenses are estimated to be
$131,000. The Selling Holders will pay any brokerage compensation in
connection with their sale of the Offered Stock.
The date of this Prospectus is August 25, 1998
<PAGE>
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Certain statements made herein that are not historical are
forward-looking within the meaning of the Private Securities Litigation
Reform Act of 1995. The words "estimate," "project," "intend," "expect,"
"believe," and similar expressions are intended to identify forward-looking
statements. These forward-looking statements involve known and unknown risks
and uncertainties. Many factors could cause the actual results, performance
or achievements of the Company to be materially different from those
contemplated by any future statements, including, among others, those
described below under "Risk Factors." For additional information regarding
these and other risks and uncertainties associated with the Company's
business, see "Risk Factors" below, as well as the Company's reports filed
from time to time with the Commission.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 (the "Registration
Statement"), pursuant to the Securities Act of 1933, as amended (the "Act"),
with respect to the offer, issuance and sale of the Offered Stock (the
"Offering"). This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits thereto. The statements
contained in this Prospectus as to the contents of any contract or other
document identified as exhibits in this Prospectus are not necessarily
complete, and in each instance, reference is made to a copy of such contract
or document filed as an exhibit to the Registration Statement, each statement
being qualified in any and all respects by such reference. For further
information with respect to the Company and the securities offered hereby,
reference is made to the Registration Statement and exhibits thereof which
may be inspected without charge at the principal office of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549.
In April 1997, the Company became subject to the reporting requirements
of the Securities Exchange Act of 1934, and in accordance therewith, files
reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information can be inspected and copied
at the public reference facilities of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549; at its New York Regional Office, Room 1400, 7
World Trade Center, New York, New York 10048; and at its Chicago Regional
Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and
copies of such material can be obtained from the Public Reference Section at
prescribed rates. The Commission maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission at http://www.sec.gov. The
Company intends to furnish its shareholders with annual reports containing
audited financial statements and such other reports as the Company deems
appropriate or as may be required by law.
The Company will provide without charge to each person who receives a
Prospectus, upon written or oral request of such person, a copy of any
information that is incorporated by reference in the Prospectus (not
including exhibits to the information that is incorporated by reference
unless the exhibits are themselves specifically incorporated by reference).
Such requests may be directed to Stockholder Relations, e-Net, Inc., 12800
Middlebrook Road, Suite 200, Germantown, Maryland 20874, telephone (301)
601-8700.
ii
<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. Each
prospective investor is urged to read this Prospectus in its entirety.
The Company
The Company develops, produces, markets and supports open
telecommunications software and related hardware that enable, enhance, and
manage telephone communications over the Internet, private Internet Protocol
("IP") networks and "intranets," and other types of digital data networks
(collectively, "Digital Data Networks" or "DDNs"). The Company's Telecom
2000-TM- products ("Telecom 2000 Products") provide a user-friendly method of
high fidelity telephone communications through DDNs. Through the use of
Telecom 2000 Products, organizations can reduce their telephone expenses by
extending their telephone services to remote offices and mobile employees, in
some cases bypassing long distance service charges, while using their
existing internal DDNs.
The Company believes that, due to demand for lower cost telephone
service, the market for telephony through DDNs, while in its early stages,
holds significant potential for growth. According to a recent report issued
by the technology industry analysis firm Frost and Sullivan, the market for
Internet telephony gateways is forecast to grow from $4.7 million in 1996 to
$1.8 billion in 2001. Although the Company has not participated in any of the
formal research contained in the Frost and Sullivan report and cannot endorse
its methods or conclusions, the Company generally believes that this market
will grow substantially and that its products are well positioned to capture
a significant share of this new, emerging market.
The Company owns U.S. Patent No. 5,526,353, "System and Method for
Communicating Audio Data over a Packet-Based Network" (the "353 Patent"). The
Company believes that the 353 Patent is the first patent that specifically
involves telephony through DDNs. The Company believes that the 353 Patent may
provide certain strategic and technological advantages in the emerging market
for telephony through DDNs. The Company can make no assurances, however, as to
the extent of the advantages or protection, if any, that may be granted to them
as a result of the 353 Patent. The Company's current and anticipated product
line is not wholly dependent on the validity or applicability of the 353 Patent,
and not all of the Company's products are covered by the 353 Patent.
The Company's Telecom 2000 Products enable telephony through DDNs.
Telecom 2000 products generally provide high fidelity duplex voice and telefax
through DDNs, and also generally offer traditional telephony features like call
waiting, call holding, call transfer, conference calling, billing, voice-mail
and the like. The Company views its products as offering several competitive
advantages. First, Telecom 2000 Products facilitate low-cost DDN telephone
service with substantially the same operating features and the voice quality of
the traditional telephone service. Next, the use of Telecom 2000 Products can be
gradually implemented so that growth from small installations to large
installations can occur while the user maintains high levels of performance and
preserves a substantial amount of its prior technology investment. Finally, the
distributed architecture of Telecom 2000 Products is designed to avoid certain
problems associated with centralized systems, such as the risk of system-wide
telephony loss due to the malfunction of a single computer or PBX, limitations
on system growth and excessive hardware cost.
There are three classes of Telecom 2000 Products, two of which include
products that are available for delivery. The first class comprises the smallest
system with the lowest number of ports, and includes the Telecom 2000 Desktop
System and the Telecom 2000 retail system called "NetConnect", both of which are
currently being sold. The second class, Telecom 2000 Customer Premises-based
Gateway Systems, now available for delivery, comprises medium-sized systems with
between 24 and 96 ports in a single chassis, serving as a "gateway" to DDNs,
consolidating customer site-originated telephone calling for DDN-based transport
efficiency and lower cost than traditional methods. The third class, Telecom
2000 Carrier-Class Gateways, now under development, comprises gateway products
with a large number of ports, which are expected to offer over 1,000
simultaneous call capacity in a single chassis, to meet interconnection and
compression standards and to be appropriate for sales to telephone carriers.
1
<PAGE>
e-Net began to sell Telecom 2000 Products in July 1997 with the
introduction of the Telecom 2000 Desktop System. The Company announced the
Telecom 2000 Customer Premise Equipment Gateway Systems, also known as the
Telecom 2000 T1/E1 Digital Trunk Interface, in October 1997 and became generally
available in February 1998. In December 1997, the Company announced its
development plan for the Telecom 2000 Carrier-Class Gateway in conjunction with
Summa Four, Inc. The Company expects this product to be available for sales in
September 1998. The Company announced the general availability of its Telecom
2000 retail system called "NetConnect" in May 1998. In regard to any future
products, no assurances can be given that these dates will be met.
e-Net has established, and expects to continue to establish, a variety
of strategic relationships that are intended to result in the embedding of e-Net
telephony-enabling technology in various DDN devices. Examples of the Company's
existing strategic relationships follow:
<TABLE>
<CAPTION>
Strategic Relationship Date Established Purpose
- ---------------------- ---------------- ----------
<S> <C> <C>
Sprint Communications March 1996 Main Carrier Internet Services and voice-over
Company, LP data product planning and testing
Paradyne Corporation June 1997 Cooperative development and marketing of
Digital Subscriber Line ("DSL") technology
Magellan Network Systems, August 1997 Carrier-Class Gateway Product applications
Inc. software
Summa Four, Inc. December 1977 Carrier-Class Gateway Product hardware
resource/programmable switch backplane
Com21, Inc. January 1998 Cable television modem telephony
IDT Corporation April 1998 Retail consumer product telephone software
bundling and network access
</TABLE>
The Company develops, produces, markets and supports open
telecommunications software and related hardware products that enable,
enhance, and manage telephone communications over the Internet, private IP
networks and "intranets," and other types of Digital Data Networks. The
Company's Telecom 2000-TM- Products provide a user-friendly method of high
fidelity telephone communications through DDNs. Through the use of Telecom
2000, organizations can reduce their telephone expenses by extending their
telephone services to remote offices and mobile employees, in some cases
bypassing long distance service charges, using their existing internal DDNs.
In April 1997, the Company completed the Initial Public Offering and
gained the listing of its Common Stock on the NASDAQ SmallCap Market as
"ETEL." e-Net was founded in January 1995. The Company maintains principal
executive offices at 12500 Middlebrook Road, Germantown, Maryland, 20874,
telephone number 301-601-8700.
See "Risk Factors," "Management" and "Certain Transactions" for a
discussion of certain factors that should be considered in evaluating the
Company and its business.
2
<PAGE>
The Offering
<TABLE>
<CAPTION>
<S> <C>
Securities Offered....................... 1,125,000 shares of Common Stock
comprised of: (A) 825,000 shares of
Common Stock issued in or in
connection with the Private
Placement, comprised of (i) 750,000
shares of Issued Private Placement
Stock; and (ii) 75,000 shares of
Common Stock underlying the
Placement Agent's Warrant and (B)
300,000 shares of Common Stock
issued in connection with the
Initial Public Offering, underlying:
(i) the Common Stock Representative
Warrants; and (ii) the Underlying
Warrants underlying the Warrant
Representative Warrants.
Selling Holders.......................... The Offered Stock offered hereby may
be offered and sold by certain
Selling Holders, each of whom
received his or her Offered Stock
either (a) in, or in connection
with, the Private Placement; or (b)
in connection with the Initial
Public Offering. See "Selling
Holders."
Common Stock outstanding as of June 30,
1998..................................... 8,220,924 shares(1)
Warrants outstanding as of June 30, 1998. 375,000
Warrants exercised as of June 30, 1998... - 0-
Common Stock Outstanding if all Warrants
are exercised............................ 8,595,924
Estimated Net Proceeds if all Warrants
are exercised............................ $3,050,000 (2) (3)
Use of Proceeds.......................... The Company will not receive any
proceeds from the sale of the
Offered Stock by the Selling
Holders. See "Use of Proceeds."
NASDAQ Small Cap Market Symbol........... Common Stock: ETEL
</TABLE>
- ---------
(1) Excludes an aggregate of 1,500,000 shares of Common Stock reserved for
issuance upon exercise of outstanding options granted pursuant to the
Company's 1997 Plan (as defined) and the 1998 Plan (as defined). See
"Dilution."
(2) The Company will not receive any of the proceeds from the sale of the
Offered Stock offered by the Selling Holders. See "Selling Holders."
(3) Assumes exercise of all Warrants, the proceeds from the sale of which
the Company will receive, at exercise prices of $8.25 and 9.00 before
deducting expenses payable by the Company as estimated at $131,000.
3
<PAGE>
Selected Financial Information
The selected financial information set forth below is derived from, and
should be read in conjunction with, the more detailed financial statements
(including the notes thereto) appearing elsewhere in this Prospectus. See
"Financial Statements."
Income Statement Items
<TABLE>
<CAPTION>
Three Months
Year Ended Year Ended Ended
March 31, 1997 March 31,1998 June 30, 1998
-------------- ------------- --------------
(Audited) (Unaudited)
<S> <C> <C> <C>
Sales................................... $ 549,000 $ 723,000 $ 433,000
Net Loss................................ 139,000 376,000 1,879,000
Gross Profit............................ (1,269,000) (3,904,000) 200,000
Loss from Operations.................... (6,938,000) (3,899,000) (1,888,000)
Loss per Share.......................... $ (1.72) $ (.68) $ (.28)
Weighted Average Shares Outstanding..... 4,034,247 5,708,904 6,795,362
</TABLE>
Balance Sheet Items
<TABLE>
<CAPTION>
Three Months As adjusted
Year Ended Year Ended Ended for Exercise
March 31, 1997 March 31, 1998 June 30, 1998 of Warrants(1)
-------------- -------------- ------------- -----------
(Audited) (Unaudited)
<S> <C> <C> <C>
Cash & Investments.......... $ 379,000 $ 1,816,000 $ 13,604,000 $ 16,654,000
Total Assets................ 2,203,636 3,722,000 15,988,000 19,038,000
Stockholders' Equity........ $ 875,432 $ 2,847,000 $ 15,094,000 $ 18,144,000
</TABLE>
- --------------------------
(1) Adjusted to reflect the exercise of all Warrants described in this
registration.
4
<PAGE>
RISK FACTORS
An investment in the securities being offered is speculative in nature,
involves a high degree of risk and should not be made by an investor who
cannot afford to lose its entire investment. Each prospective investor should
carefully consider the following risks and speculative factors, as well as
the others described elsewhere herein, before making an investment.
As described under "Forward-Looking and Cautionary Statements," certain
statements made herein that are not historical are forward-looking within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements involve known and unknown risks and uncertainties.
Many factors could cause the actual results, performance or achievements of
the Company to be materially different from those contemplated by any future
statements, including, among others, those described below.
History of Operating Losses and Accumulated Deficit; Expected Losses;
Uncertainty of Future Profitability
The Company has never recorded an operating profit and had an
accumulated deficit of approximately $13,300,000 as of June 30, 1998. The
ability of the Company to achieve profitability in the future largely depends
on its ability to generate revenues from its products and services. Given the
Company's focus on markets that are subject to rapid technological change
(see "- Technological Change; Market Acceptance of Evolving Standards"), and
the Company's resulting intention to continue to expend greater resources on
research and development, revenues must increase commensurately for the
Company to achieve profitability. In the quarter ended June 30, 1998, the
Company expended approximately $550,000 on research and development and,
although no assurance can be given, management currently expects this
expenditure rate to increase in future quarters. In view of the Company's
operating history, there can be no assurance that the Company will be able to
generate revenue that is sufficient to achieve profitability, to maintain
profitability on a quarterly or annual basis or to sustain or increase its
revenue growth in future periods. The Company's limited capitalization may
adversely affect the ability of the Company to raise additional capital in
the future and could impair the Company's ability to invest in research and
development, sales and marketing programs and other operations, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Limited Operating History
The Company was incorporated in Delaware on January 9, 1995 and, as
such, faces the risks and problems associated with businesses in their early
stages of development and has a limited operating history upon which to base
an evaluation of its prospects. Such prospects should be considered in light
of the risks, expenses and difficulties frequently encountered in the
expansion of a business in an industry characterized by a substantial number
of market entrants and intense competition. See "Business."
No Assurance of Future Profitability or Payment of Dividends
The Company can make no assurances that the future operations of the
Company will result in additional revenues or will be profitable. Should the
operations of the Company be profitable, it is likely that the Company would
retain much or all of its earnings in order to finance future growth and
expansion. Therefore, the Company does not presently intend to pay dividends,
and it is not likely that any dividends will be paid in the foreseeable
future.
Immediate and Substantial Dilution
An investor in the securities offered hereby will experience immediate
and substantial dilution. As of June 30, 1998, the Company had a net tangible
book value of approximately $15,094,000, or approximately $1.84 per share
which reflects the effect of the Private Placement in April 1998 and the
redemption and exercise of the Redeemable Common Stock Purchase Warrants in
June 1998. After giving effect to the sale upon exercise of the Warrants and
subsequent resale of offered stock: 300,000 shares at $8.25; and 75,000
shares at $9.00 and after deducting estimated offering expenses, net tangible
book value would have been $18,144,000 or $2.11 per share. The result will be
an immediate dilution to new investors of $6.14 and $6.89, respectively.
5
<PAGE>
Possible Need for Additional Financing
The Company intends to fund its operations and other capital needs for
the next 12 months substantially from the remaining proceeds of the Initial
Public Offering, the Private Placement and the redemption and exercise of the
Redeemable Common Stock Purchase Warrants, but there can be no assurance that
such funds will be sufficient for these purposes. The Company may require
substantial amounts of the proceeds of the Initial Public Offering, the
Private Placement and the redemption and exercise of the Redeemable Common
Stock Purchase Warrants for its future expansion, operating costs and working
capital. The Company has access to a $1,000,000 line of credit, which it has
not drawn upon; this line expires in May 1999, and while the Company believes
it will be renewed, no assurance can be given in this regard. The Company has
made no definitive arrangements to obtain future additional financing, if
required, and there can be no assurance that such financing will be
available, or that it will be available on acceptable terms. See "Summary -
Use of Proceeds."
Dependence on Management
The Company is principally dependent on its current management personnel
for the operation of its business. In particular, Robert A. Veschi, the
Company's president and chief executive officer, has played a substantial
role in the development and management of the Company, although there is no
assurance that additional managerial assistance will not be required. The
analysis of new business opportunities will be undertaken by or under the
supervision of the management of the Company. The Company has entered into an
employment agreement with Mr. Veschi. This employment agreement is terminable
at will by Mr. Veschi without penalty. Accordingly, if the employment by the
Company of Mr. Veschi terminates, or he is unable to perform his duties, the
Company may be materially and adversely affected. The Company has purchased
key-man life insurance on Mr. Veschi in the amount of $2 million. The Company
is the owner and beneficiary of this insurance policy. See "Business" and
"Management."
Dependence on Highly Qualified Technical Personnel
The Company believes that its future success will depend in large part
upon its continued ability to recruit and retain highly qualified technical
personnel. Competition for highly qualified technical personnel is
significant, particularly in the geographic area in which the Company's
operations are located. No assurances can be made that the Company's
relationship with its employees will remain favorable to the Company. See
"Business - Employees" and "Management."
Technological Change; Market Acceptance of Evolving Standards
The markets the Company serves are subject to rapid technological
change, changing customer requirements, frequent new product introductions
and evolving industry standards that may render existing services and
products obsolete. As a result, the Company's position in its existing
markets or other markets that it may enter could be eroded rapidly by product
advancements by competitors. The life cycles of the Company's services and
products are difficult to estimate. Broad acceptance of the Company's
products and services by customers is critical to the Company's future
success, as is the Company's ability to design, develop, test and support new
software products and enhancements on a timely basis that meet changing
customer needs and respond to technological developments and emerging
industry standards, particularly client/server and Internet communications
and security protocols. There can be no assurance that the Company will not
experience difficulties that could delay or prevent the successful
development, introduction and marketing of services and products, or that new
services and products and enhancements will meet the requirements of the
marketplace and achieve market acceptance. Further, because the Company has
only recently commenced sales of its Telecom 2000 Products, there can be no
assurance that, despite testing by the Company and by current and potential
customers, errors will not be found in the Company's products, or, if
discovered, successfully corrected in a timely manner. If the Company is
unable to develop and introduce services and products in a timely manner in
response to changing market conditions or customer requirements, the
Company's business, financial condition and results of operations would be
materially and adversely affected.
6
<PAGE>
Uncertain Protection of Patent, Trademark, Copyright and Proprietary Rights
In March 1996, the Company acquired all right, title and interest in and
to the 353 Patent. The Company believes that the 353 Patent is the first
patent that specifically involves telephony through DDNs. The Company also
believes that the 353 Patent may provide certain strategic and technological
advantages in the emerging market for telephony through DDNs. The Company can
make no assurances, however, as to the extent of the advantages or
protection, if any, that may be granted to the Company as a result of the 353
Patent.
The Company currently has other patent and trademark applications
pending; however, there can be no assurance that these applications will be
granted, or, if granted, will result in substantial value to the Company. The
Company may file additional patent, trademark and copyright applications
relating to certain of the Company's products and technologies. If patents,
trademarks or copyrights are granted, there can be no assurance as to the
extent of the protection that will be granted to the Company as a result of
having such patents, trademarks or copyrights or that the Company will be
able to afford the expenses of any litigation which may be necessary to
enforce its proprietary rights. Although the Company's products have never
been the subject of infringement claims, there can be no assurance that third
parties will not assert infringement claims against the Company in the future
or that any such assertion will not require the Company to enter into royalty
arrangements or result in costly litigation and liability. Failure of the
Company's patents, trademark and copyright applications may have a material
adverse effect on the Company's business. Except as may be required by the
filing of patent, trademark and copyright applications, the Company will
attempt to keep all other proprietary information secret and to take such
actions as may be necessary to prevent the disclosure of the results of its
development activities and protect its trade secrets under applicable law.
Such steps are expected to include the execution of nondisclosure agreements
by key Company personnel and may also include the imposition of restrictive
agreements on purchasers of the Company's products and services. There is no
assurance that the execution of such agreements will be effective to protect
the Company, that the Company will be able to enforce the provisions of such
nondisclosure agreements or that technology and other information acquired by
the Company pursuant to its development activities will be deemed to
constitute trade secrets by any court of competent jurisdiction.
Substantial Competition
Businesses in the United States and abroad that are engaged in Internet
technologies, products and services are substantial in number and highly
competitive, particularly in the field of Internet and IP network telephony.
Many of the companies with which the Company intends to compete are
substantially larger and have substantially greater resources than the
Company. It is also likely that other competitors will emerge in the future.
The Company will compete with companies that have greater market recognition,
greater resources and broader capabilities than the Company. As a
consequence, there is no assurance that the Company will be able to
successfully compete in the marketplace. See "Business - Competition."
Reliance on Major Customers and Large Contracts
Historically, substantially all of the Company's revenue has been
derived from sales to a relatively small number of customers. For the fiscal
year ended March 31, 1998, revenue attributable to three customers
represented approximately 82% of the Company's total revenues. Revenue
attributable to four customers, as a percentage of the Company's total
revenue in the three month period ended June 30, 1998, was 73%. Similar or
greater concentration of its net sales among a limited number of customers
may occur in the future. In such event, any material decrease in net sales to
any one of the Company's largest customers that is not matched by
corresponding increases in net sales to new or existing customers could have
a material adverse effect on the Company's financial condition and results of
operations. There can be no assurance that the Company will receive orders
from any existing customers or from new customers.
Additional Authorized Shares and Shares Eligible for Future Sale May Adversely
Affect the Market
The Company is authorized to issue 50,000,000 shares of its Common
Stock, $.01 par value per share. If all of the Warrants are exercised there
will be a total of approximately 8,600,000 shares of Common Stock issued and
outstanding. The Company will have approximately 40,900,000 shares of
authorized but unissued capital stock available for issuance without further
shareholder approval. Any issuance of additional shares of Common Stock
7
<PAGE>
may cause current shareholders of the Company to suffer significant dilution,
which may adversely affect the market for the Company's Common Stock.
As of June 30, 1998, the Company has outstanding 271,000 options to
purchase shares of Common Stock granted under its 1997 Non-Qualified Stock
Option Plan (the "1997 Plan"), has committed to issue 26,587 options to
certain consultants that have provided services to the Company, and has
committed to grant 841,250 options under the 1998 Stock Compensation Plan
(the "1998 Plan"), assuming stockholder approval. The Company has reserved
500,000 shares of Common Stock for issuance upon exercise of options under
the 1997 Plan and has reserved 1,000,000 shares of Common Stock for issuance
upon exercise of options under the 1998 Plan. All of the options granted
under the 1997 Plan or otherwise committed under the 1998 Plan or otherwise,
have exercise prices which were at fair market value on the date of grant or
commitment, as determined by a moving average to trading activity prior to
the grant date. On July 22, 1998, the Company filed with the Securities and
Exchange Commission a registration statement on Form S-8 covering up to a
total of 500,000 option shares issuable under the 1997 Plan. To the extent
that any options under are exercised or converted, dilution to the interests
of the Company's stockholders may occur. Exercise or conversion of such
options, or even the potential of their exercise or conversion, may have an
adverse effect on the trading price and market for the Company's Common
Stock. The holders of such options are likely to exercise or convert them at
times when the market price of the shares of Common Stock exceeds their
exercise price. Accordingly, the issuance of shares of Common Stock upon
exercise of the options may result in dilution of the equity represented by
the then outstanding shares of Common Stock held by other stockholders.
Although the Company has no current plans to issue any additional shares
of Common Stock other than pursuant to its 1997 Plan, its 1998 Plan, pursuant
to other commitments to consultants or upon exercise of any of the
outstanding Warrants, there can be no assurance that the Board of Directors
will not decide to do so in the future. In addition, the Company must comply
with the Nasdaq marketplace rules that require, among other things,
shareholder approval prior to the issuance of common stock representing 20%
or more of the common stock or 20% or more of the voting power prior to the
issuance at a price less than the greater of book or market value of the
stock.
5,000,000 of the Company's 8,220,924 outstanding shares of Common Stock
as of June 30, 1998 (including the Issued Private Placement Stock but
excluding the effect of the redemption and exercise of the Redeemable Common
Stock Purchase Warrants in June 1998) are, and all 75,000 shares of Placement
Agent's Stock and all 300,000 shares of Underwriter's Stock will be upon
issuance, "restricted securities" which may be resold to the public either
upon registration or upon compliance with Rule 144 under the Act. Assuming
that all of the Warrants are exercised but that there is no exercise of any
other issued and outstanding options, a total of 5,375,000 of the Company's
issued and outstanding shares of Common Stock will be restricted securities.
The registration statement of which this Prospectus forms a part will enable
all of the Offered Stock to be resold without compliance with Rule 144.
However, with regard to the Company's remaining outstanding restricted
securities, Rule 144 provides, in essence, that, if there is adequate current
public information available concerning the Company, an affiliate, or a
person holding "restricted securities" for a period of one year, may sell
only an amount every three months equal to the greater of (a) one percent of
the Company's issued and outstanding shares, or (b) the average weekly volume
of sales during the four calendar weeks preceding the sale. Nonaffiliates,
however, may sell "restricted securities" without such volume limitation if
their shares are held for two years. Based on these assumptions, a holder of
"restricted securities" who has held them for at least one year may sell
under Rule 144 at least up to 65,000 shares during each three-month period.
In connection with the Initial Public Offering and the Private Placement, the
stockholders holding 4,000,000 of the Company's restricted shares have agreed
not to sell, transfer, assign or dispose of any restricted shares of Common
Stock prior to April 7, 1999. The sale of a significant number of these
shares in the public market may adversely affect the market price of the
Company's securities.
Prospective investors should be aware that future sales may have a
depressive effect on the price of the Company's Common Stock and, therefore,
the ability of any investor to market his shares may directly depend upon the
number of shares that are offered and sold.
8
<PAGE>
Potential Volatility of Market Price for Common Stock
The current market price for the Company's Common Stock does not appear
to bear any relationship to any established valuation criteria such as
assets, book value, or current earnings. The Company attributes the current
market price of the Company's Common Stock to anticipated benefits to the
Company upon execution of its business plan. Market prices for securities of
small-cap emerging companies have historically been quite volatile. General
economic, industry and market conditions, as well as future announcements
concerning the Company or its competitors, including technological
innovations or new products, developments concerning proprietary rights,
litigation involving the Company, or other factors may have a significant
impact on the market price of the Common Stock. See "Market Price of Common
Stock."
9
<PAGE>
USE OF PROCEEDS
The Company will receive no proceeds from the sale of the Offered Stock
by the Selling Holders. The Company will receive net proceeds of
approximately $3,050,000 if all the Warrants are exercised.
The Company intends to use the net proceeds from the exercise of the
Warrants to fund the sales and marketing of Telecom 2000 Products; for
research and development of other telecommunications products; and for other
working capital and general corporate purposes. The Company may also use a
portion of the net proceeds for the acquisition of businesses, products and
technologies that are complementary to those of the Company. While the
Company from time to time has engaged, and expects to continue to engage, in
preliminary discussions with other business entities with regard to the
possibility of such acquisitions, as of the date hereof no such discussions
have resulted in any definitive agreement. No assurance can be given that the
Company will be able to reach agreement on or consummate any such
acquisitions.
DILUTION
The difference between the per share exercise price of the Warrants per
share of Common Stock and the pro forma net tangible book value per share of
Common Stock after this Offering constitutes the dilution per share of Common
Stock to investors in this Offering.
As of June 30, 1998, the Company had net tangible book value of
$15,094,000 or $1.84 per share, which reflects the Private Placement in April
1998 and the redemption and exercise of the Redeemable Common Stock Purchase
Warrants in June 1998. Net tangible book value per share means the tangible
assets of the Company, less all liabilities, divided by the number of shares
of Common Stock outstanding. After giving effect to the exercise of the
Warrants and the sale by the Company of the Placement Agent's Stock and the
Underwriter's Stock, at an assumed prices of $8.25 and $9.00 per share, as
applicable, and estimated offering expenses, net tangible book value would
have been $18,144,000 or $2.11 per share. The result will be an immediate
increase in net tangible book value per share of $.27 (15%) to existing
shareholders and an immediate dilution to new investors of $6.14 (74%), and
$6.89 (77%) per share, respectively. As a result, public investors will bear
most of the risk of loss since their shares are being purchased at a cost
substantially above the price that existing shareholders acquired their
shares. The following table illustrates this dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Public offering prices of the Placement Agent's Stock and the
Underwriter's Stock........................................................ $ 8.25 $ 9.00
Pro forma net tangible book value per share, before the Offering...........
$ 1.84
Increase per share attributable to the sale by the Company of the
Offered Stock.............................................................. .27
------
Pro forma net tangible book value per share, after the Offering...............
2.11 2.11
------ -------
Dilution per share to new investors........................................... $ 6.14 $ 6.89
------ -------
------ -------
</TABLE>
The following table summarizes the investments of all existing
stockholders and new investors after giving effect to the exercise of
Warrants and issuance of the Placement Agent's Stock and the Underwriter's
Stock.
<TABLE>
<CAPTION>
Percent Percent Average
Shares of Total Aggregate of Total Price Per
Purchased Shares Consideration Invested Share
--------- -------- -------------- -------- ----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders (Pro Forma) 8,220,924 96% $28,265,000 90% $3.44
Investors in this Offering 375,000 4% 3,046,000 10% $8.12
--------- ---- ------------ --- -----
Total 8,595,924 100% $31,311,000 100% $3.64
--------- ---- ------------ --- -----
--------- ---- ------------ --- -----
</TABLE>
No assurance can be given as to the timing of the exercise of the
Warrants or whether any or all of the Warrants will be exercised. The foregoing
analysis assumes no exercise of any options or warrants other than the Warrants.
In the event any such options or warrants are exercised, the percentage
ownership of the investors in this Offering will be reduced and the dilution per
share of Common Stock to purchasers of Common Stock in this Offering will
increase.
10
<PAGE>
MARKET PRICES OF COMMON STOCK
The Company's Common Stock has traded on the Nasdaq SmallCap Market
since April 8, 1997, under the symbol "ETEL." On June 24, 1998, the closing
price of the Common Stock was $18 7/16 per share. There are approximately 84
record holders of the Company's Common Stock. The following table sets forth
the range of high and low bid prices for tile Common Stock, as quoted on
Nasdaq, for the period from April 8, 1997, the date of the Company's initial
public offering of securities, through March 31, 1998.
<TABLE>
<CAPTION>
Period High Low
- ------ ----- -----
<S> <C> <C>
April 8 - June 30, 1997 $ 5.8125 $ 3.8130
July 1 - September 30, 1997 $ 5.3750 $ 3.7500
October 1 - December 31, 1997 $ 9.1250 $ 4.8750
January 1 - March 31, 1998 $ 7.5000 $ 5.0000
April 1, 1998 - June 30, 1998 $18.5000 $ 8.0000
</TABLE>
CAPITALIZATION
The following table sets forth the capitalization of the Company, as of
March 31, 1998 and as adjusted to reflect the sale of the Offered Stock. No
assurance can be given to the timing of exercise of the Warrants or whether
all or any of the Warrants will be executed. The table should be read in
conjunction with the Financial Statements and the notes thereto.
<TABLE>
<CAPTION>
Historical
June 30, 1998 As Adjusted (1)
-------------- ----------------
<S> <C> <C>
Long-term debt $ 0 $ 0
Stockholders Equity
Common Stock, $.01 par value, 50,000,000 shares authorized,
8,220,924 shares outstanding; 8,595,924 shares outstanding,
as adjusted 82,000 86,000
Stock Subscriptions Receivable -- --
Additional paid-in capital 28,265,000 31,311,000
Retained deficit (13,253,000) (13,253,000)
------------- ----------------
Total stockholders' equity $ 15,094,000 $ 18,144,000
------------- ----------------
Total capitalization $ 15,094,000 $ 18,144,000
------------- ----------------
------------- ----------------
</TABLE>
- --------------------------
(1) As adjusted to reflect the net proceeds to the Company of the exercise
of the Warrants. Assumes no exercise of any options or warrants other
than the Warrants.
DIVIDEND POLICY
CONDITION AND RESULTS OF OPERATIONS
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.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
Year Ended March 31, 1998 Compared to Year Ended March 31, 1997
Sales for the year ended March 31, 1998 were approximately $722,800, an
increase of 32% from the approximately $549,000 recorded for fiscal year
1997. The revenue increase was due to the general availability of the
Company's Telecom 2000 product line. Product sales for the Telecom 2000
product line resulted in approximately $347,500 of sales for the fiscal year
ended March 31, 1998, compared to approximately $24,000 of product sales for
the corresponding fiscal year 1997. Services sales for the year ended March
31, 1998, were primarily from one customer.
Gross profits for the year ended March 31, 1998 were approximately
$375,700 or 52% of sales, compared to the approximately $139,000 or 25% of
sales for fiscal year 1997. The gross profit percentage increase was due to
the increased emphasis on Telecom 2000 product sales, which have a higher
gross profit contribution than software installation and support services
sales.
Selling, general & administrative expenses for the year ended March 31,
1998, were approximately $3,474,900, an increase of 197% over the approximately
$1,171,200 recorded for fiscal year 1997. The dollar increase in these expenses
over the prior year reflected additional spending for personnel and programs
consistent with the Company's emphasis on the Telecom 2000 product line. The
increased spending level in fiscal year 1998 also reflected higher spending for
programs and promotions needed to generate and support product roll-out of, as
well as substantial marketing expenditures made in connection with the general
availability of, the Company's Telecom 2000 product line.
Research & development expenses for the year ended March 31, 1998, were
approximately $804,800, a 240% increase over the approximately $236,800
recorded for fiscal year 1997. The increased expenditures for research and
development are due to the increase in number of employees and other
expenditures devoted to the general development of the Company's technology
products.
Other income (expense) charges for the year ended March 31, 1998, were
approximately $5,000, an increase from the approximately $(5,668,500)
recorded for fiscal year 1997. In the year ended March 31, 1997, the
Company's other income and expenses included several one-time charges
associated with the issuance of bridge loans which were subsequently
converted to equity of approximately $5,385,100, and the cost of an abandoned
stock registration of approximately $284,600. The Company also had an
increase in funds invested over the same period in 1997.
To date, inflation and seasonality have not had a material impact on the
Company's results of operations.
Year Ended March 31, 1997 Compared to Year Ended March 31, 1996
Sales increased by 87% to approximately $549,000 in the year ended March
31, 1997 from approximately $294,000 in the period ended March 31, 1996. The
increase in sales dollars was attributable to the increased delivery of the
Company's IntelliSeries Products and Help Desk Services. In the period ended
March 31, 1997, revenue mix, as a percentage of sales, among products and
services was 5% and 95%, respectively. Revenue mix among products and
services for the corresponding period in 1996 was 15% and 85%, respectively.
For the year ended March 31, 1997, the Company derived 78% and 21% of its
sales from two customers, respectively and 32%, 29%, 16%, and 13% from four
customers, respectively for the same period in 1996.
Cost of product sales and service increased by 364% to approximately
$410,000 in the year ended March 31, 1997 or 75% as a percentage of revenue
as compared to approximately $88,000 or 30% as a percentage of revenue in the
corresponding period in 1996. The dollar increase was largely attributable to
the increased business volume and the associated labor, overhead, consultant
and subcontract costs necessary to service the increased volume, as well as
the foregoing compensation during the start-up phase (see pro forma
adjustment on the Statement
12
<PAGE>
of Operations for the period from beginning of operations to March 31, 1996).
The percentage increase was attributable to the proportional increase in
service revenues compared to product revenues.
General and administrative expense increased by 917% to approximately
$1,171,000 in the year ended March 31, 1997 from approximately $115,000 in
the corresponding period in 1996. The dollar and percentage increase were
largely due to the hiring of administrative and selling staff. The number of
employees of the Company engaged in general and administrative, selling, and
research and development activities increased from one at March 31, 1996 to
11 at March 31, 1997. The Company plans to make additional expenditures in
the research and development and the general, administrative and selling
organizations as necessary over the next twelve months.
Research and development costs increased to approximately $237,000 in
the year ended March 31, 1997 as compared to $-0- in the corresponding period
in 1996. Research and development costs consist of hardware related
development costs associated with its Telecom 2000 Products and the $50,000
purchase price for certain prototype boards, proprietary software code and
research and development in May 1996. The Company also incurred approximately
$521,000 in capitalized software development costs related to development of
software for its Telecom 2000 Products in the year ended March 31, 1997. The
Company plans to continue research and development activities, however,
future software development costs will be capitalized in accordance with
generally accepted accounting principles, subject to judgements to be made as
to technological feasibility of the software development efforts and
recoverability. Upon release of software products, ongoing development,
maintenance and support costs will be expensed as incurred.
Interest and financing charges net total was approximately $5,669,000
for the year ended March 31, 1997 as compared to approximately $627,000 in
the corresponding period in 1996. The increase in interest and financing
charges was mainly due to approximately $5,385,000 in interest expense
associated with certain bridge loans and approximately $285,000 of costs
associated with a planned initial public offering of securities in 1996 which
was abandoned in September 1996. The anomalous interest expense associated
with the bridge loans reflects the highly speculative nature of the loans at
the time. The aggregate value of $6,000,000 of interest expense incurred in
the fiscal years ended March 31, 1996 and 1997 attributed to issuance of the
bridge loans 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. Traditional forms of short term asset based financing were
not available to the Company. Management therefore believed the funds
provided by the loans were critical to the Company to bring its products to
market and justified the issuance of the bridge unit securities as additional
consideration for such loans. The Company does not expect to encounter
similar difficulty in obtaining short term financing in the future.
Therefore, financing expense of the magnitude associated with the bridge
financing is believed to be nonrecurring. The Company's product lines are, in
some cases ready for, and in other cases being prepared for, commercial
production. A portion of the proceeds from the Company's initial public
offering was used to fund the production of start-up inventory necessary for
initial deliveries to customers. By filling sales orders and generating
increases in accounts receivable and cash flow, management believes
traditional asset-based financing will be attainable to satisfy ongoing
working capital needs. In addition to successfully completing its initial
public offering in April, 1997, the Company also secured a $1,000,000 credit
facility (see Liquidity and Capital Resources below). In April, 1998, the
Company sold 750,000 shares of common stock in the Private Placement,
resulting in net proceeds to the Company of approximately $5,175,000.
Loss from operations increased to approximately $1,269,000 in the year
ended March 31, 1997 as compared to income from operations of approximately
$90,000 in the corresponding period in 1996. The dollar increase in loss from
operations was largely attributable to the increase in research and
development, and selling, general and administrative costs, and cost of
product sales and service as discussed above. In future periods, gross
margins may be affected by price competition or changes in sales channels,
increases in the costs of goods or changes in the mix of products sold.
Loss before income taxes increased to approximately $6,938,000 in the
year ended March 31, 1997 as compared to loss before income taxes of
approximately $537,000 in the corresponding period in 1996. The dollar
increase in loss before income taxes was largely attributable to the increase
in financing costs associated with a private placement and operating costs as
discussed above.
13
<PAGE>
A valuation allowance has been established equal to the amount of income
taxes pending evidence that the Company will be able to generate taxable net
income which will be offset by the net tax loss carryforward in future years.
Financing expense associated with the issuance of bridge units is
non-deductible and is being treated as a capital transaction for income tax
reporting purposes. The use of net operating losses by the Company in the
future to offset taxable income may be limited to the event of a change in
control of the Company in accordance with Section 382 of the Internal Revenue
Code.
Net loss for the year ended March 31, 1997 was approximately $6,938,000
or ($1.72) per share, compared to a pro forma net loss of approximately
$775,000 or ($.26) per share for the same period in 1996. Pro forma data
presented in the accompanying statement of operations reflect the result of
operations on a pro forma basis had the officer been employed by the Company
for the entire period at a compensation level equal to that contained in the
agreement disclosed in Note F--Commitments and Contingent Liabilities.
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1997
Net sales for the first quarter ended June 30, 1998 were approximately
$433,000, an increase of 392% over the approximately $88,000 recorded for the
corresponding quarter of 1997. The revenue increase was driven primarily by
the general availability of the Company's T2000 product line. Product sales
increased to approximately $304,000 in the first quarter ended June 30, 1998
compared to $1,000 recorded for the corresponding quarter of 1997. The sales
for the quarter ended June 30, 1997 were primarily from one customer while
the product sales for the quarter ended June 30, 1998 were primarily from
four customers.
Gross profits for the first quarter ended June 30, 1998 were
approximately $200,000 or 46% of sales, compared to the approximately $49,000
or 56% of sales for the corresponding quarter of 1997. The amount of gross
profit increase was due to increased product sales as discussed above. The
gross profits on product sales for the first quarter ended June 30, 1998 were
approximately $114,000 or 37% of product sales. The product sales, cost of
sales and resulting gross profits were affected by increased capitalized
software amortization costs and sales discounts to distributors and value
added resellers.
Selling, general & administrative expenses for the first quarter ended
June 30, 1998 were approximately $1,533,000, an increase of 140% over the
approximately $639,000 recorded for the corresponding quarter of 1997. The
dollar increase in these expenses over the prior year reflected additional
spending for personnel, advertising and substantial marketing expenditures
made in connection with promotion of the Company's T2000 product line.
Research & development expenses for the first quarter ended June 30,
1998 were approximately $555,000, an increase over the approximately $23,000
recorded for the corresponding quarter of 1997. The majority of the research
and development expenditures for the 1997 quarter were software development
costs incurred on products after achieving technological feasibility and were
capitalized for future amortization.
Interest & financing expenses for the first quarter ended June 30, 1998
were approximately $-0-, a decrease over the approximately $10,000 recorded
for the corresponding quarter of 1997. Other expenses for the first quarter
ended June 30, 1998, were approximately $69,000, an increase over the
approximately $32,000 recorded for the corresponding quarter of 1997. The
increase in other expenses are due primarily to expenses associated with the
continued registration of certain of the Company's publicly traded securities
and other related items.
The Company does not believe that inflation has had a material adverse
effect on sales or income during the past several years. Increases in
supplies or other operating costs may adversely affect the Company's
operations; however, the Company believes it may increase prices of its
products and systems to offset increases in costs of goods sold or other
operating costs.
Based on its experience to date, the Company believes that its future
operating results may be subject to quarterly variations based on a variety
of factors, including seasonal changes in the weather. 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.
14
<PAGE>
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.
In the year ended March 31, 1998, the Company received net proceeds of
approximately $5,885,100 from an initial public offering of the Company's
Common Stock and Warrants. The Company also secured a $1,000,000 one year
credit facility in the year ended March 31, 1998, which is secured by
investments, receivables and fixed assets. The Company used approximately
$(3,488,000) in cash flows from operating activities, excluding changes in
assets and liabilities, during the year ended March 31, 1998, compared to
approximately $(1,518,000) for fiscal year 1997. The increase in cash flows
used in operating activities excluding changes in assets and liabilities was
mainly due to the increase in selling, general and administrative expenses
and research and development expenses discussed above. The total net cash
used by operating activities was approximately $(3,642,300) for the year
ended March 31, 1998, compared to approximately $(1,187,000) for the
corresponding fiscal year 1997.
Cash used by investing activities totaled approximately $1,762,000 for
the year ended March 31, 1998 as compared to approximately $646,000 for
fiscal year 1997. The main component of that investing activity was the
investment in short-term securities of approximately $960,200, as well as
continued expenditures for capitalized software development and property and
equipment of approximately $465,300 and $337,000, respectively. The majority
of the expenditures related to continued development of the Telecom 2000
product line.
Cash provided by financing activities totaled approximately $5,880,600
for the year ended March 31, 1998, compared to approximately $1,654,900 for
the corresponding fiscal year 1997. The Company successfully completed an
Initial Public Offering in April 1997, which yielded net proceeds of
approximately $5,885,100. The Company has access to a $1,000,000 credit line
through May 1999, secured by investments, fixed assets and receivables, but
did not borrow against that line of credit during the year ended March 31,
1998. While there is no assurance of its renewal, the Company believes that
this credit facility should remain available to the Company for working
capital requirements.
In the quarter ended June 30, 1998, the Company received net proceeds of
approximately $5,100,000 from a private placement of the Company's common
stock and net proceeds of approximately $9,000,000 from the exercise of the
Company's common stock warrants. The Company also renewed a $1,000,000 one
year credit facility that is secured by investments, receivables and fixed
assets. The Company used approximately $(1,756,000) in cash flows from
operating activities, excluding changes in assets and liabilities, during the
first quarter ended June 30, 1998, compared to approximately $(577,000) for
the corresponding quarter of 1997. The increase in cash flows used in
operating activities excluding changes in assets and liabilities was mainly
due to the increase in selling, general and administrative expenses and
research and development expenses discussed above. The total net cash used by
operating activities was approximately $(2,144,000) for the first quarter
ended June 30, 1998, compared to approximately $(914,000) for the
corresponding quarter of 1997.
Cash used by investing activities totalled approximately $3,099,000 for
the first quarter ended June 30, 1998 as compared to approximately $2,997,900
for the corresponding quarter of 1997. The main component of that investing
activity was the investment in short-term securities of approximately
$2,917,000, as well as continued expenditures for capitalized software
development and property and equipment of approximately $30,000 and $151,000,
respectively. The majority of the expenditures related to continued
development of the Company's T2000 product line.
Cash provided by financing activities totalled approximately $14,113,000
compared to approximately $5,883,000 for the corresponding quarter of 1997.
The Company successfully completed a private placement in April 1998 that
yielded net proceeds of approximately $5,100,000, and exercises of the
Company's common stock warrants prior to their redemption in June 1998
yielded net proceeds of approximately $9,000,000. The Company has access to a
$1,000,000 credit line secured by investments, fixed assets and receivables,
but did not borrow against that line of credit during the first quarter ended
June 30, 1998.
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The Company expects to continue to make significant investments in the
future to support its overall growth. Currently, it is anticipated that
ongoing operations will be financed primarily from net proceeds of the
private placement, warrant exercise, the line of credit facility, and from
internally generated funds. The Company presently has a line of credit,
investments, and cash and cash equivalents on hand and believes that these
will be sufficient to meet cash requirements as needed. However, as indicated
in the Company's most recent Annual Report on Form 10-KSB, as amended, while
operating activities may provide cash in certain periods, to the extent the
Company experiences growth in the future, the Company anticipates that its
operating and product development activities may use cash and consequently,
such growth may require the Company to obtain additional sources of
financing. There can be no assurances that unforeseen events may not require
more working capital than the Company currently has at its disposal.
Future Operating Results
The preceding paragraphs and the following discussion include
forward-looking statements regarding the Company's future financial position
and results of operations. Actual financial position and results of
operations may differ materially from these statements. All such statements
are qualified by the cautionary statements set forth above under "Forward
Looking and Cautionary Statements" and "Risk Factors," as well as the
following statements.
The Company has invested significant amounts in the research and
development and the initial product roll-out marketing and selling for the
Telecom 2000 product line. The emphasis, attention, and dedication of
Company's limited resources for the Telecom 2000 product line have caused
and, in management's view, will continue to cause negative operating
earnings. However, the Company believes that the value and sales potential of
the Telecom 2000 product line outweighs the risk of continued operating
losses.
The first products of the Telecom 2000 product line became generally
available during the second quarter of fiscal 1998 and the Company believes
that revenues will continue to grow as contracts are finalized and products
are delivered over fiscal 1999. The protracted process of obtaining
governmental regulatory approval of products (i.e. Federal Communications
Commission product certification) and the hiring of senior telecommunications
sales and technical staff in the current low-unemployment-rate economy have
caused, and may continue to cause, an effect on the delivery of the Company's
products to market. To date the Company has received all regulatory approvals
which it has sought, and has been able to hire senior telecommunications
sales and technical staff, although no assurance can be given to such results
in the future.
The Company does not expect revenue growth to occur ratably over the
1999 and 2000 fiscal years; instead, the Company expects that the major
impact of the Telecom 2000 product introduction on revenues and earnings will
occur during fiscal 1999. Revenue growth in fiscal 1999 will depend to a
large extent on the timing of the Company's rollout for products in the
Telecom 2000 product line.
Because of the foregoing uncertainties affecting the Company's future
operating results, past performance should not be considered to be a reliable
indicator of future performance. The use of historical trends to anticipate
results or trends in future periods may be inappropriate. In addition, the
Company's participation in a highly dynamic industry may result in
significant volatility in the price of the Company's common stock.
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BUSINESS
e-Net develops, produces, markets and supports open telecommunications
software and related hardware that enable, enhance, and manage telephone
communications over the Internet, private IP networks and "intranets," and
other types of DDNs. The Company's Telecom 2000-TM- Products provide a
user-friendly method of high fidelity telephone communications through DDNs.
Through the use of Telecom 2000 Products, organizations can reduce their
telephone expenses by extending their telephone services to remote offices
and mobile employees, in some cases bypassing long distance service charges,
while using their existing internal DDNs.
Company Background
Since its founding, the Company has focused on the development of
software-based telecommunications products that enable, enhance or manage
telephone communications. In the early 1990's, prior to the Company's
founding, its principal founder, President and Chief Executive Officer,
Robert A. Veschi, collaborated in developing telephony-over-data
telecommunications products with Arthur Henley and Scott Grau, two other
founders of the Company. Working within a corporation named Officecom, Inc.,
this product development effort included the invention by Messrs. Henley and
Grau of the technology covered by the 353 Patent. In order to continue this
product development effort, in March 1996 the Company acquired all right,
title and interest in and to the 353 Patent from Messrs. Henley and Grau in
consideration of a five percent royalty against gross profits from the sale
of products covered by the 353 Patent. The Company completed this
intellectual property acquisition in April 1996 by purchasing all of the
assets of Officecom, Inc. for $50,000.
The Company purchased a set of products, licenses and contracts from a
Washington, DC area telecommunications firm, OctaCom, Inc., in May 1995. This
transaction included the assignment of contracts to provide services to
Sprint Communications Company, LP ("Sprint") and Comsat Corp., the
acquisition of the Company's IntelliCD-TM- and DebitBill-TM- products, and an
exclusive license for e-Net NMS-TM-. The initial revenue and contract base
for the Company was established at this time.
The Company was awarded a contract known as Internet Protocol Dial
Services Support ("IP Dial Support") by Sprint in February 1996, under which
e-Net technical personnel provide Internet usage, management and maintenance
services to Sprint. Sprint expanded e-Net's IP Dial Support role in February
1997 by adding to the contract Sprint Frame-Relay network reporting using the
Company's Intelli-Series-TM- product.
The Company announced its first Telecom 2000 Products in April 1996.
Thereafter, the Company established two significant "beta" test sites for the
Telecom 2000 system: Intermedia Communication Incorporated ("ICI"), a
substantial regional competitive local exchange carrier ("CLEC"), in October
1996, and Sprint, a major long distance services provider, in November 1996.
These agreements provided e-Net with Telecom 2000 Product usage experience
and established references for e-Net with these two companies. Long distance
services providers and CLECs, such as ICI and Sprint, are among the Company's
primary target customers for Telecom 2000 Products.
Having completed "beta" testing, in May 1997 the Company announced its
IP version of Telecom 2000. In July 1997, the Company began sales of Telecom
2000 Products with the introduction of the Telecom 2000 Desktop System. In
August 1997, the Federal Communications Commission certified the Telecom 2000
Desktop System for interconnection to public telephone systems, eliminating a
regulatory impediment to sales, and in October 1997 the Company announced
that it had hired its first Vice-President of Sales.
Industry Background
The Internet is a global web of computer networks. Developed over 25
years ago, this "network of networks" allows any computer attached to the
Internet to talk to any other using the Internet Protocol. The Internet has
traditionally been subsidized by the U.S. federal government, and was
historically used by academic institutions, defense contractors and
government agencies primarily for remote access to host computers and for
sending and receiving e-mail. As the number of commercial entities that rely
on the Internet for business communications and commerce has increased, the
level of federal subsidies has significantly diminished, and funding for
Internet infrastructure and backbone operations has shifted primarily to the
private sector.
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In the mid-1990's, companies began to develop and market products that
delivered audio, including voice, over the Internet. Early Internet telephony
required cumbersome components to make Internet-based telephone calls, such
as personal computer speakers and microphones. In addition, participants in
the telephone call had to use identical software, running at the same time.
Voice quality was poor, with a half-duplex nature and with long delays;
however, the promise of this technology was established because the Internet
telephone call could seemingly be made "free," even over long international
distances, and because the extraordinary increase in users of the Internet
began to create a large target market for the products. See "-Competition."
"Voice-over-IP" refers to the transmission of voice as digital data on
IP-compatible networks, which include the Internet as well as
Internet-compatible, private "Intranets." IP networks are increasing in usage
and popularity as a function of an increase in the number of Internet users.
"Telephony" is distinguishable from "voice" in that voice is the sound of
speech, whereas "telephony" means voice coupled with features such as
full-duplex, call waiting, call holding, call transfer, conference calling,
billing, voice-mail and the like. Management believes that telephony on IP
networks is becoming more attractive because of the low cost of using IP
networks (especially the Internet), because of the growing number of IP
network users and because IP telephony products like e-Net's are improving
their voice sound quality. The Company believes that, due to the demand for
lower cost telephone service, the market for telephony through DDNs, while in
its early stages, holds significant potential for growth. According to a
recent report issued by the technology industry analysis firm Frost and
Sullivan, market for Internet telephony gateways is forecast to grow from
$4.7 million in 1996 to $1.8 billion in 2001. Although the Company has not
participated in any of the formal research contained in the Frost and
Sullivan report and cannot endorse its methods or conclusions, the Company
generally believes that this market will grow substantially and that its
products are well positioned to capture a significant share of this new,
emerging market.
Telecom 2000-TM- Products
The Company's Telecom 2000 Products enable telephony through DDNs.
Telecom 2000 Products provide high fidelity duplex voice and telefax through
DDNs, and also generally offer traditional telephony features such as call
waiting, call holding, call transfer, conference calling, billing, voice-mail
and the like. The Company views its products as offering several competitive
advantages. First, Telecom 2000 Products facilitate low-cost DDN telephone
service with substantially the same operating features and the voice quality
of traditional telephone service. Next, the use of Telecom 2000 Products can
be gradually implemented so that growth from small installations to large
installations can occur while the user maintains high levels of performance
and preserves a substantial amount of its prior technology investment.
Finally, the distributed architecture of Telecom 2000 Products is designed to
avoid problems associated with centralized systems, such as system-wide
telephony loss due to the malfunction of a single computer or PBX,
limitations on system growth and excessive hardware cost. There are three
classes of Telecom 2000 Products, two of which include products that are
available for delivery.
Telecom 2000 Desktop - Small Systems
This product set, with sales commencing in July 1997, consists of
e-Net's award-winning Telecom 2000 Desktop system with two components, the
TS-Workstation card and the CO-Gateway card. This system uses the customer's
existing network computer installed base and its fixed-cost,
available-capacity LAN/WAN, including the Internet, to provide peer-to-peer
toll-quality telephony, with or without the use of a PBX.
The small systems product set also includes the Telecom 2000 retail
consumer product called NetConnect, with respect to which the Company
announced general availability in May 1998. This product is a half-card TS
circuit set with a dial-up functionality enabling Internet telephony for the
individual consumer and home use, is the lowest-priced Telecom 2000 Product
offering and, in management's view, offers a broad market potential. In
combination with some of the advanced Internet "chat-room" services, this
product is designed to provide a unique, secure, private-dialing-plan
Internet telephony service with high fidelity, at a low price.
Generally speaking, Telecom 2000 Desktop products are characterized by
embedded firmware, which can be placed on a computer integrated circuit
board, in the assembly of a modem (cable TV set-top, DSL box, ISDN pipe) or
in a router, switch or multiplexer. Telecom 2000 Desktop products start with
one port and scale up to 24
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ports. When all products are announced, the price range of the Telecom 2000
Desktop product set is expected to be between $100 and $5,000.
Telecom 2000 Customer-Premises-based Gateway - Medium Systems
The Telecom 2000 Customer-Premises-based Gateway product set was
announced in October 1997 and made available for shipment in February 1998.
It provides T1/E1 voice-over-data advantages, consolidates customer
site-originated telephone calling for data network-based transport and
efficiency and delivers a mid-level of data network call volume handling on a
cost-effective basis. Starting with 24 ports (T1 single span), the product is
scaleable up to 96 channels per-chassis (and 192 ports in a dual back plane
configuration). Each chassis is capable of being interconnected to obtain
single-device performance, gaining more ports as a function of this "linking"
or "ganging."
The resulting product suite delivers a customer site application of
high voice quality with a low per-port data network telephony price. When all
products are announced, the price range of the Telecom 2000
Customer-Premises-based Gateway product set is expected to be between $5,000 and
$50,000.
Telecom 2000-Trademark- Carrier-Class Gateway - Large Systems
The large systems product set, Telecom 2000 Carrier-Class Gateways, was
announced in December 1997, is under development and is anticipated to be
ready for delivery by September 1998. Of all Telecom 2000 Products, it will
offer the largest number of ports. It is designed to be scaleable from the
equivalent of four T1s up to 60 T1s, with high fidelity voice quality, and is
intended to meet fully all-existing and evolving standards for the emerging
voice-over-IP carrier market. The Company believes that, at the time of its
introduction, this system will be the only available DDN telephony technology
offering over 1000 simultaneous call capacity in a single cost-effective,
space-efficient chassis. Each chassis is capable of being interconnected to
obtain single-device performance and greater port density, with no logical
upward limitation on the total number of ports.
The Telecom 2000 Carrier-Class Gateway is being designed to meet all
interconnection and compression standards, will be certified in most foreign
countries, and is designed to be fully NEBS-compliant for main long distance
carriers, alternate access carrier, local exchange carrier and CLEC
customers. When all products are announced, the price range of the Telecom
2000 Carrier-Class Gateways product set is expected to be between $100,000
and $500,000.
Other Company Products and Services
e-Net NMS-TM- and IntelliSeries-TM-
The Company sells a proprietary, expert systems-based, user friendly,
object-oriented network and system management product called the e-Net
NMS(TM) network management system. e-Net NMS provides enterprises with a
broad range of capabilities for managing global telephone and data networks.
This product offers automated management of operating problems, system
configuration, system performance, system security, accounting, network
traffic optimization and re-routing, configuration and database management,
and system failure detection.
e-Net has developed a set of products called IntelliSeries-TM- to
provide a simple, inexpensive network usage and billing reporting capability.
IntelliSeries uses imaging technology and is a general-purpose search and
retrieval engine that can be used in a wide variety of user applications. One
of e-Net's clients, Sprint, uses IntelliSeries products to provide its
clients with database access to their monthly call detail record data and
frame relay performance data.
The Company believes that Telecom 2000 Products and competitors'
voice-over-data products will gain usage on DDNs, and that this increase in
usage will create greater data volume on DDNs. The Company anticipates that
this volume growth will increase the opportunity for sales of data network
management and network reporting products like e-Net's NMS and IntelliSeries
products. The Company intends to couple sales and marketing of Telecom 2000
Products with marketing activity for e-Net NMS and IntelliSeries Products.
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Strategic Relationships
e-Net has established, and intends to continue to establish, a variety
of strategic relationships that are intended to result in the embedding of
e-Net telephony-enabling technology in various DDN devices. Strategic
partners are important to the Company because they have developed products or
they deliver services established in the DDN communications market, but have
not yet implemented telephony capability within those products or services.
To date, Sprint has been the Company's largest customer. The IP Dial
Support contract provided a significant increase in revenue to the Company,
grew the Sprint technology relationship, validated the efficacy of the use of
the IntelliSeries products and increased the Company's involvement in the
Internet-related business and technology. Arising out of the growing Sprint
technology relationship under the IP Dial Support contract, Sprint became a
"beta" test site for the Company's Telecom 2000 Product in November 1996.
In June 1997, the Company announced an agreement for cooperative
marketing with Paradyne Corporation. Under the agreement, e-Net's Telecom
2000 is demonstrated and sold operating in conjunction with Paradyne's DSL
technology product called HotWire-TM-. Headquartered in Largo, Florida,
Paradyne is a leading developer and provider of products and technologies
that facilitate high-speed access to networks worldwide for communications,
computing and information. The Company believes that Paradyne's DSL products
are among the best products, in terms of price and performance, in the
telecommunications industry. The Company believes that DSL products have a
strong market potential. DSL technology delivers digital data at high speeds
on existing copper telephone lines, and the Company expects that the Regional
Bell Operating Companies ("RBOCs") may, at some point in the future, sell
access to copper telephone lines to digital data service providers at a lower
price, "unbundled" from other RBOC services. If so, digital data service
providers and the home consumer will have the opportunity to provide and
acquire more information at a lower cost with DSL. In particular, the
Company's DDN telephony products could be used to include telephone service
in those digital data service packages at a low price.
In August 1997, the Company announced an agreement with Magellan Network
Systems, Inc., ("Magellan") for product development and software integration
of Magellan billing, voice-mail and other software with e-Net's Telecom 2000
Carrier-Class Gateway products. This cooperative development and marketing
arrangement is expected to give e-Net's Telecom 2000 Carrier-Class Gateway
products the carrier-class software applications required to address the
needs of large-call-volume customers. Magellan, a privately held corporation
with headquarters in Sunnyvale, California, is a supplier of the M4000
Enhanced Services Platform, offering long distance switching, debit card,
calling card, international call-back and voicemail applications to domestic
and international carriers and service providers. All of these applications
integrate with Magellan's system management software, which provides
sophisticated system management and billing capabilities. Magellan
Communications, Inc., a related company, specializes in unified messaging
systems and voice processing equipment for many of the world's leading
telephone companies.
In December 1997, the Company announced an agreement with Summa Four,
Inc. to build e-Net's Telecom 2000 Carrier-Class Gateway. This agreement
provides a preferential and discounted arrangement under which the two
companies can purchase and license each other's products in order to deliver,
through their respective sales channels, what the Company believes will be a
unique product. Because of Summa Four's price and performance, management
believes that embedding e-Net technology on Summa Four's existing product is
the optimal approach for designing and building the Telecom 2000
Carrier-Class Gateway. Summa Four also utilizes the same family of
microprocessor that e-Net uses, which may reduce product development risk and
delay. Summa Four is a leading provider of open, programmable switching
platforms that enable telecommunications providers worldwide to build
intelligent, flexible networks that support the rapid deployment of new
wireline and wireless services. An ISO 9001 certified company, Summa Four is
headquartered in Manchester, New Hampshire, and has sales, service and
support offices in the United States, the U.K., Singapore and Japan.
In January 1998, the Company announced that it had been awarded a
contract from Com21, Inc. This agreement provides that e-Net will deliver
certain of its existing software to Com 21 and develop additional software
for Com21. The combined software delivered and developed by e-Net for Com21
is intended to be used to integrate telephone and telefax capabilities into a
cable television modem embedded in the cable television control unit
typically located on top of the consumer's television set. This new system is
expected to allow customers to plug
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their telephone, telefax and/or computer into their cable television system
to take advantage of the speed of the cable system, which far exceeds the
speed of other home data network transmission lines. Customers of cable
systems would be able to make local calls without existing RBOC fees, and
customers of cable systems that are connected to cable systems in other
localities would be able to make long distance calls through the cable
television system without incurring the long distance toll charges assessed
by traditional long-distance telephony service carriers. The contract calls
for e-Net to receive an up-front payment, milestone payments and a per-unit
royalty for the 30 months following the introduction of the product. The
contract is not exclusive, and the Company hopes to expand its offering of
telephony products in the cable television market. Com21, which is located in
Milpitas, California, develops, manufactures and markets cable modem based
communication systems. Its ComUNITY Access system provides end-to-end
Ethernet data communications over cable TV networks. The underlying ATM
architecture makes possible mixed media (voice, data, video) applications
from the same cable modem platform. Com21's systems serve business, SOHO
(small office, home office) and residential markets.
In April 1998, the Company signed a contract with IDT Corporation. Under
this agreement, the Company has a license to distribute IDT's Net2Phone
software with its retail consumer product, NetConnect. The agreement also
permits e-Net's customers who use NetConnect to make Internet telephone calls
on an ordinary telephone handset across IDT's Internet telephone network,
with the Company receiving six and one half per cent (6.5%) of IDT's gross
revenues arising from such use.
Sales and Marketing Strategy
The Company's primary sales and marketing strategy is to expand its
sales force and dedicate that force to creating strategic end-users and
reseller channels for the Company's products. This strategy commenced with
the hiring of the Company's first Vice-President of Sales in October 1997,
and the subsequent hiring of four new Account Managers. With this sales force
in place, the Company will seek to rapidly establish a few larger installed
bases of users of Telecom 2000 Products.
With the over one hundred corporate customers who have purchased the
Telecom 2000 Starter Kit, an introductory unit of Telecom 2000 Desktop
system, the Company believes it is beginning to create a class of "strategic
end users." Management believes that many of these corporate enterprises have
the capability to evolve into multi-user Telecom 2000 customers. Therefore, a
first priority of the Company's business strategy is to take advantage of
these accounts and increase their usage of e-Net's products.
Management expects to further promote this sales strategy by the
expansion of distribution arrangements through distributors and systems
integrators. The Company intends to use a "channel sales" approach to
penetrate its target markets. These channels will be based upon "value-added"
inventory/warehousing capability, sales volume commitments, geographical
positioning and other factors. e-Net has and is developing relationships with
carrier product distributors, personal computer system integrators, complex
information system builders and managers, Government-oriented resellers and
foreign-country located dealers. The Company has existing reseller
relationships with Unicent Technologies, Inc., Government Technology
Services, Inc., Socrates, Inc. and Comtel Electronic Systems Gmbh. Several
other major corporations have engaged in significant product testing dialogue
with the Company and have acquired products for testing as a preliminary step
toward developing more formal distribution arrangements.
The Company adopted a number of additional sales techniques and has
targeted certain other markets in order to enhance its primary sales
strategy. These include: entering into royalty and licensing agreements for
the Company's intellectual property (such as the Com21 contract); stressing
the advantages offered by telephone usage on the Internet and private IP
networks to the increasing number of major corporations that make routine use
of these DDNs; marketing to the increasing numbers of small businesses and
individuals that use the Internet by stressing the cost advantages and ease
of use of the Company's products; marketing on the Internet itself, through
the Company's web site, to more directly target the existing Internet users
who the Company believes are more likely to recognize the advantages of the
Company's products; marketing to PC users through print and television
advertisements, with sales promotions such as trade shows and technology
expositions, and other efforts to garner media coverage; and through the
Company's three-person telephone sales organization.
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The market for the Company's software and services has only recently
begun to develop, is rapidly evolving and is characterized by an increasing
number of market entrants who have introduced or developed products and
services for communication and commerce over DDNs. As is typical in the case
of a new and rapidly evolving industry, demand and market acceptance for
recently introduced products and services are subject to a high level of
uncertainty. The industry is young and has few proven products. While the
Company believes that its products offer significant advantages for telephony
over DDNs, there can be no assurance that DDN telephony will become
widespread, or that the Company's products for DDN telephony will become
adopted for these purposes.
Government Regulation
The Company is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses generally,
including the need to obtain Federal Communications Commission approval of
certain products that connect directly to the public telephone system, and
there are currently few laws or regulations directly applicable to access to
or commerce on the Internet or to Internet telephony. However, due to the
increasing popularity and use of the Internet, it is possible that a number
of laws and regulations may be adopted with respect to the Internet, covering
issues such as regulation of prices charged for this kind of telephony, user
privacy, and quality of products and services. The adoption of any such laws
or regulations may decrease the growth of the Internet or of Internet
telephony, which may in turn decrease the demand for the Company's products
and increase the Company's cost of doing business or otherwise have a
material adverse effect on the Company's business, operating results or
financial condition. Moreover, the applicability to the Internet of existing
laws governing issues such as property ownership, libel and personal privacy
is uncertain.
Patent, Trademark, Copyright and Proprietary Rights
In March 1996, the Company acquired all right, title and interest in and
to the 353 Patent. The Company believes that the 353 Patent is the first
patent that specifically involves telephony through DDNs. The Company
believes that the 353 Patent may provide certain strategic and technological
advantages in the emerging market for telephony through DDNs. The Company can
make no assurances, however, as to the extent of the advantages or
protection, if any, that may be granted to the Company as a result of the 353
Patent. The Company's current and anticipated product line is not wholly
dependent on the validity or applicability of the 353 Patent, and not all of
the Company's products are covered by the 353 Patent.
The Company's success and ability to compete is dependent in part upon
its proprietary technology. The source code for the Company's proprietary
software is protected both as a trade secret and as a patented work, which
the Company believes is a competitive advantage. There can be no assurance,
however, as to the extent of the advantages or protection, if any, that may
be granted to the Company as a result of its proprietary technology. The
Company also uses certain technology that it purchases or licenses from third
parties, including software that is integrated with internally developed
software and used in the Company's products to perform key functions. Of
particular note is certain standards-based compression software that the
Company currently licenses from elemedia, an affiliate of Lucent
Technologies, Inc. There can be no assurance that these third party
technology licenses will continue to be available to the Company on
commercially reasonable terms. Although the Company believes that it is not
unduly reliant on any of these third parties or their products, and the
Company is aware of alternate sources of supply, the loss of or inability to
maintain any of these technology licenses may result in delays or reductions
in product shipments until equivalent technology may be identified, licensed
and integrated. Any such delays or reductions in product shipments may
materially and adversely affect the Company's business, operating results and
financial condition.
Competition
The market for DDN products and services, including the telephony
application, is new, intensely competitive, rapidly evolving and subject to
rapid technological change. The Company expects competition to persist,
intensify and increase in the future, from start-up companies to major
technology and telecommunications companies. Almost all of the Company's
current and potential competitors have longer operating histories, greater
name recognition, larger installed customer bases and significantly greater
financial, technical and marketing resources than the Company. Such
competition may materially and adversely affect the Company's business,
operating results or financial condition.
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The sets of competitors associated with the three classes of Telecom
2000 Products are:
DDN Telephony Small Systems
A number of companies in this field have developed low-speed,
half-duplex audio/voice communications software programs which use the
Internet as a voice network and deliver voice by means of PC-based software,
mostly for home users. These products compete with the Telecom 2000 Desktop
Retail Consumer systems. Some of these competing products use the telephone
handset, while some rely on PC-based speakers and microphones. Many of these
products deliver voice sound which is delayed or which contains echo and
"jitter," producing overall low quality, but some of these products are sold
at a price substantially lower than the Company's products. Generally
designed for the home user market, these competitor products have gained
market share compared to e-Net, and some of the competitors are large
software corporations that specialize in home PC software, giving them a
competitive marketing advantage to e-Net due to their greater distribution
channel capacity and name recognition.
Some of the competitive products in this market provide computer
telephony Graphical User Interfaces ("GUIs") in accordance with the Microsoft
Telephony Applications Programmer Interface ("TAPI") standard, as does e-Net,
while some do not. The level of sophistication of the GUI varies among the
competitors. Some competitors of the Company have developed, produced and
marketed products strictly for Internet telephony, not for other DDNs, while
other competitors do not offer IP telephony but reside only on ATM-type DDNs.
e-Net believes that its products are well-positioned because they offer
telephony on all DDNs, including Ethernet in local area networks, which is
relatively uncommon among its competitors. Within this field of competitors,
some companies have developed, produced and marketed end-user/client
application products that extend or replace PBX devices with computer
software technology, like e-Net, delivering PBX-like features such as call
waiting, call holding, call transfer, conference calling, billing, voice-mail
and the like.
Microsoft Corp., VocalTec Inc., NetSpeak Corp., Altigen Communications,
Inc., Sphere Communications, Inc. and Quicknet Technologies, Inc. are some of
the companies that compete with e-Net in the small systems market.
DDN Telephony Medium Systems
The companies that offer customer-premises-based gateway products
delivering voice over DDNs that compete with Telecom 2000
Customer-Premises-based Gateway systems are, in some cases, larger and have
more significant revenues than e-Net. The greater size and market share of
such companies may offer them greater distribution channel capacity and name
recognition. Most of these companies offer telephony software features
residing in computer file servers, so that all common telephone features such
as dial-tone and off-hook detection are centralized. This approach has
allowed these competitors to complete product development earlier in the
technology cycle than e-Net; however, the Company believes that its products
are well positioned now to gain market share due to the performance and cost
advantages of their distributed architecture.
VocalTec Inc., NetSpeak Corp., Micom Communications Corporation (a
wholly-owned subsidiary of Nortel Corporation), Vienna Systems, Inc., a
Newbridge Networks, Inc. affiliate, Clarent Corporation and Inter-Tel
Communications are some of the companies that compete with e-Net in the
medium systems market.
DDN Telephony Large Systems
To the knowledge of the Company, no competitive product has the intended
and announced features, performance or design of e-Net's Telecom 2000
Carrier-Class Gateway. However, the Company has reviewed a number of
competitors' announcements that make general reference to intentions to
launch or commence IP telephony products to enable voice for Internet service
providers and data communications carriers. Data product companies with
announced plans of this general nature that may compete with the Company in
the future include Cisco Systems, Inc., Lucent Technologies, Inc., 3Com
Corporation, Cabletron Systems, Inc., and Bay Networks, Inc.
23
<PAGE>
Product Development
The Company's current development efforts are focused on new products,
product enhancements and implementing existing products within the three
classes of Telecom 2000 Products: the Telecom 2000 Desktop and Retail
Consumer systems, Telecom 2000 Customer-Premises-based Gateway, and the
Telecom 2000 Carrier-Class Gateway system.
DDN Telephony Small Systems
For the Telecom 2000 Desktop product, one development priority is the
improvement of DDN telephony network management software specific to the
Telecom 2000 Desktop product. If very large numbers of Telecom 2000 Desktop
product are installed on an private DDN intranet, the Company believes that
customers will need network traffic engineering software to optimize the
product's performance. The Company also is enhancing the conference-calling
capability of this product to create a teleconferencing bridge that will
extend the number of simultaneous conference calls on the system from the
current three-call maximum to a 24 call maximum The Company believes that the
development associated with the Telecom 2000 Desktop product network
management software and teleconferencing bridge will be completed by
September 1998.
DDN Telephony Medium Systems
A Company development priority for Telecom 2000 Customer-Premises-based
Gateway products is the implementation of a greater level of "voice
compression." Voice compression allows the products to transport more digital
telephony on DDNs without increasing the bandwidth of the DDN. DDN bandwidth
is valuable, and by compressing telephony, greater financial savings are
gained by users. The Company currently uses a relatively modest compression
scheme, known in the industry as "PCM," for its Telecom 2000
Customer-Premises-based Gateway products. The Company has also made SX7300
compression generally available, which is a significantly greater degree of
compression, for Telecom 2000 Customer-Premises-based Gateway products since
May 1998. The Company plans to have available for delivery to customers
alternative compression schemes by the end of 1998.
Greater voice compression, generally speaking, degrades voice quality
for DDN telephony, so that DDN telephony users choose between the benefits of
low bandwidth consumption and poor voice quality or the expense of higher
bandwidth consumption with better voice quality. The Company's developments
seek to reduce the lower voice quality of compression, and to allow customers
to determine which bandwidth cost/voice quality tradeoff best suits their
needs.
DDN Telephony Large Systems
The Company's highest priority is the Telecom 2000 Carrier-Class Gateway
product, currently under development in conjunction with Summa Four. This
product development also will address compression issues relevant to Telecom
2000 Customer-Premises-Based Gateway products. Management believes that
standards compliance for compression is important for a product aimed at
telecommunications carriers. e-Net and Summa Four have chosen the compression
standard set under a scheme licensed for elemedia and known as G.723.1. Other
issues for development of this Carrier-Class gateway are maintaining
interoperability with DDN and IP telephony gateways made by other
manufacturers and insuring the efficient physical size and the environmental
tolerance of the product. The Company plans to complete development of the
Telecom 2000 Carrier-Class Gateway product in September 1998.
These product developments are currently on schedule, but there can be
no assurance that product development will occur as expected or otherwise on a
timely and cost-effective basis, or, if introduced, that these products will
achieve market acceptance. If not, then the Company's business, financial
condition and results of operations would be materially and adversely affected.
At March 31, 1998, the Company capitalized approximately $805,200, net
of amortization, in software product development costs. All other product
development costs have been expensed as incurred. The Company believes that
significant investments in research and development are required to remain
competitive. As a
24
<PAGE>
consequence, the Company intends to increase the amount of its research and
development expenditures in the future.
Year 2000 Matters
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year,
consequently, in the year 2000 such systems may be unable to accurately
process certain date-based information. The Company can potentially be
affected by this issue through the internal computer applications on which it
relies, as well as the software that it develops and sells. The Company is in
process of reviewing all of its significant third party applications and
obtaining documentation from the manufacturers that certify Year 2000
compliance. The Company also is in process of examining the architecture of
its products, as well as documentation on the third party components that are
integrated into the Company's software products; the Company believes
although at this stage no assurance can be given, that its products already
are Year 2000 compliant. The Company is also developing a test plan, for both
internal applications and software that the Company develops, to validate the
results of its initial review. Should the Company find any items that are not
Year 2000 compliant in the course of its testing, the Company will endeavor
to take the necessary actions to correct the matter. The Company expects that
its testing procedures and any required Year 2000 compliance activities will
be completed by December 31, 1998. The Company does not anticipate that Year
2000 compliance activities will have a material effect on the Company's
business, product development, financial position or results of operations.
However, there can be no assurance that the Company's systems and products
are Year 2000 compliant until the successful completion of its testing
procedures. Additionally, there can be no assurance that the systems of other
companies on which the Company relies will be Year 2000 compliant which could
result in a material adverse effect on the Company's business, financial
condition and results of operations.
Employees
The Company believes that one of its key competitive advantages is its
technical experience and expertise. The Company's core development group
includes individuals who have developed and implemented telecommunications
network management software and other Internet and intranet related products
and services as such products and services have emerged as a recognized
application over the last twelve years. As of June 24, 1995, the Company had
34 employees, including 15 in Product Development, 8 in Sales and Marketing,
and 11 in Operations and Administration.
Facilities
The Company leases approximately 5,500 square feet for its principal
executive offices, which are located at 12800 Middlebrook Road, Suite 200,
Germantown, Maryland 20874. The Company's Austin, Texas product development
facilities are approximately 4,000 square feet and are located at 12710
Research Blvd., Austin, Texas 78759. The Company also leases approximately
1,500 square feet for storage and excess capacity located at 12325 Hymeadow
Drive, Austin, Texas 78750. Base rental for the current premises is
approximately $7,900, $6,600, and $1,200 per month, respectively. The leases
require the Company to pay certain property taxes and certain operating
expenses. The Company believes that its current and anticipated facilities
are suitable and adequate for its operations.
25
<PAGE>
MANAGEMENT
The officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Title
<S> <C> <C>
Alonzo E. Short........................ 58 Chairman of the Board
Robert A. Veschi....................... 35 President, Chief Executive
Officer, Director
Donald J. Shoff........................ 43 Vice President, Finance and
Chief Financial Officer
Christina L. Swisher................... 33 Vice President, Operations
and Secretary
William W. Rogers, Jr. ................ 56 Director
Clive Whittenbury, Ph.D. .............. 64 Director
William L. Hooton...................... 46 Director
</TABLE>
Each of the directors of the Company holds office until his or her
successor is elected and qualified. At present, the Company's Bylaws provide
for not less than one director nor more than nine directors. Currently, there
are five directors in the Company. The Bylaws 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 and none of the
Company's officers and directors had been involved in any material legal
proceedings during the past five years. Mr. Veschi served as a promoter of
the Company and the consideration received for such services has been limited
to the compensation disclosed under " -- Remuneration." The officers of the
Company devote full time to the business of the Company.
The principal occupation and business experience for each officer and
director of the Company for at least the last five years are as follows:
ALONZO E. SHORT, JR., Lt. Gen., USA (ret.), 58, 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. From
1994-1997, General Short was president and chief executive officer of MICAH
Systems, Inc., a Washington, D.C. metropolitan area based information,
technologies management and consulting firm. In September 1997, General Short
joined Lockheed Martin, an aerospace, defense, and information technology
company, as a Vice-President. Since January 1996, General Short has been
instrumental in the organization and development of the business of the
Company.
ROBERT A. VESCHI, 35, has been president, chief executive officer, and a
director of the Company since January 1995. Mr. Veschi is the founder of the
Company, which began its operations in June 1995. Mr. Veschi has significant
experience in executive management, operations and the engineering, design
and development of telecommunications and computer products and systems. From
1986 to 1990, Mr. Veschi was manager of systems engineering for International
Telemanagement, Inc., a Washington, D.C. metropolitan area based information,
data and network systems firm. From 1990 to 1994, Mr. Veschi was a group
president of I-Net, Inc., a Washington, D.C. metropolitan area based
information, data and network systems firm. From December 1994 to May 1995,
for approximately six months, Mr. Veschi was president and chief executive
officer of Octacom, Inc., a Washington, D.C. metropolitan area based
information, data and network systems firm, and a wholly-owned subsidiary of
Octagon, Inc., an Orlando, Florida metropolitan area based publicly held
technical services firm. From July 1994 to May 1995, for approximately nine
months, Mr. Veschi was a vice president of telecommunications for
26
<PAGE>
Octagon, Inc., and from January 1995 to May 1995, for approximately four months,
Mr. Veschi was a member of the board of directors of such company. Since June
1995, Mr. Veschi has been instrumental in the organization, development and
promotion of the Company.
DONALD J. SHOFF, CPA, 43, has been vice president of finance and chief
financial officer since November 1997. Prior to that, Mr. Shoff was director
of finance and assisted the Company as a consultant prior to employment. Mr.
Shoff has 21 years of significant experience in both public accounting firms
and with high technology companies, both public and private. From 1977 to
1981, Mr. Shoff was a staff accountant and senior accountant on the staff of
local Washington, D.C. public accounting firms. From 1982 to 1986, Mr. Shoff
was the corporate cost accounting manager and a group controller for Science
Applications International Corporation, a high technology products and
professional services public corporation, where he was responsible for the
corporate cost accounting functions and controllership of a high technology
services operation group. From 1987 to 1992 and from 1993 to 1996, Mr. Shoff
consulted independently and as a Senior Manager of Grant Thornton LLP, a
major accounting and management consulting firm, with public and privately
held high technology companies doing business with the Federal government.
From 1992 to 1993 Mr. Shoff was vice president of finance and administration
for Comsis Corporation, a Washington, D.C. based privately held engineering
and technology company doing business with the Federal and various state
governments. Mr. Shoff holds a B.B.A. degree from the Pennsylvania State
University and is a certified public accountant.
CHRISTINA L. SWISHER, 33, has been vice president of operations since
December 1996 and secretary of the Company since February 1997. Ms. Swisher
has significant experience in the computer networking management, systems and
operations. From 1991 to 1993, Ms. Swisher was a technical and graphics
specialist with the Air Force Association, a Washington, DC area based
national services organization, where she was responsible for technical and
statistical analyses. From 1993 to 1995, Ms. Swisher was the manager for
computer networks for computer network systems and operations for I-Net,
Inc., a Washington, DC metropolitan area based information, data and network
systems firm. Since 1995, Ms. Swisher has been director of technical services
with the Company, becoming vice president of operations in December 1996.
Since June 1995, Ms. Swisher has been instrumental in the organization and
development of the business of the company.
WILLIAM W. ROGERS, JR., 56, has been a director of the Company since
January 1997. Mr. Rogers has substantial senior management, operations and
technical and engineering services experience. From 1972 to 1987, Mr. Rogers
was a general manager engaged in operations, technical and engineering
services for Boeing Computer Services, Inc. From 1987 to 1989, Mr. Rogers was
president and chief executive officer of International Telemanagement , Inc.,
a McLean, Virginia based telecommunications and systems engineering and
services company. From 1989 to 1991, Mr. Rogers was a vice president of
Fluor-Daniel, where he was responsible for telecommunications and systems
integration services. Since 1991, Mr. Rogers has been a vice president with
Computer Sciences Corporation, a McLean, Virginia based technology products,
systems and services company, where he is responsible for systems integration
and related technical services. Since January 1997, Mr. Rogers has been
instrumental in the organization and development of the Company. Mr. Rogers
holds a B.A. degree from West Virginia University.
WILLIAM L. HOOTON, 46, 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., 64, 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
27
<PAGE>
current annual revenues of approximately $2 billion. Since 1979, Dr.
Whittenbury has been executive vice president and a director of the Erickson
Group, Inc., a major international diversified products firm. Since 1994, Dr.
Whittenbury has been a director of MVSI, Inc., a publicly held (NASDAQ:
"MVSI") McLean, Virginia based laser vision robotics company. Dr. Whittenbury
is a member of the International Advisory Board for the British Columbia
Advanced Systems Institute, which manages commercialization programs in
technology at the three major Vancouver/Victoria universities, a member of
the Advisory Board of Compass Technology Partners, an investment fund, and is
chairman of the Advisory Board (Laser Directorate) for the Lawrence Livermore
National Laboratory. Dr. Whittenbury has also served as a technical advisor
to three U.S. Congressional Committees, the Grace Commission and numerous
major U.S. and foreign companies. Since June 1996, Dr. Whittenbury has been
instrumental in the organization and development of the Company. Dr.
Whittenbury holds a B.S. degree (physics) from Manchester University
(England) and a Ph.D. degree (aeronautical engineering) from the University
of Illinois.
Remuneration
Executive Compensation
The following table sets forth annual remuneration of $100,000 or more
paid for the fiscal years ended March 31, 1996 and 1997 and proposed to be
paid for the fiscal year ended March 31, 1998 to certain officers and
directors of the Company:
The following table sets forth certain compensation information for the
fiscal years ended March 31, 1996, 1997 and 1998 with regard to the Company's
chief executive officer and one other executive officer whose combined salary
and bonus was $100,000 or more in fiscal year 1998 (the "Named Officers"):
Summary Compensation Table
<TABLE>
<CAPTION>
Other
Position Annual
Name of Individual with Company Year Salary Bonus Compensation(1)
<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 --
Christina L. Swisher Vice President, Operations 1998 88,333 21,000 --
and Secretary 1997 57,917 5,607 --
1996 6,250 4,167 --
</TABLE>
- ----------------
(1) The officers of the Company may receive remuneration as part of an
overall group insurance plan providing health, life and disability
insurance benefits for employees of the Company. The amount
allocable to each Named Officer cannot be specifically ascertained,
but, in any event, did not in any reported fiscal year exceed the
lesser of $50,000 and such Named Officer's combined salary and bonus.
The Company has purchased key-man term life insurance on Mr. Veschi in
the amount of $2 million, which designates the Company as the owner and
beneficiary of the policy. The Company has agreed to grant to Ms.
Swisher options to purchase 60,000 shares of Common Stock, in
consideration of services during fiscal year 1998. However, such
options have not yet been granted by the Company and the terms thereof
have not yet been set.
Director Compensation
The directors of the Company, with the exception of Mr. Veschi, are
entitled to annual remuneration of $24,000 pursuant to oral agreements
between such directors and the Company. In addition, General Short receives
$1,000 per month under a consulting services agreement for his additional
specific business services on behalf of the Company.
Each outside director of the Company is entitled to receive reasonable
expenses incurred in attending meetings of the Board of Directors of the
Company. The members of the Board of Directors intend to meet at least
quarterly during the Company's fiscal year, and at such other times as duly
called. The Company presently has four outside directors.
Employment Agreement
28
<PAGE>
The Company has entered into an employment agreement (the "Agreement")
with Robert A. Veschi, the president and chief executive officer of the
Company, dated as of April 1, 1996. The Agreement will expire on March 31,
2001. The current annual salary under the Agreement is $175,000, which salary
may be increased to reflect annual cost of living increases and may be
supplemented by discretionary merit and performance increases as determined
by the Board of Directors of the Company. Mr. Veschi is entitled to an annual
bonus equal to 50 percent of the salary provided under this Agreement, which
bonus is not subject to any performance criteria.
The Agreement provides, among other things, for participation in an
equitable manner in any profit-sharing or retirement plan for employees or
executives and for participation in other employee benefits applicable to
employees and executives of the Company. The Agreement provides for the use
of an automobile, payment of club dues and other fringe benefits commensurate
with his duties and responsibilities. The Agreement also provides for
benefits in the event of disability. The Agreement also contains non-compete
provisions which are limited in geographical scope to the Washington, D.C.
metropolitan area.
Pursuant to the Agreement, Mr. Veschi's employment may be terminated by
the Company with cause or by Mr. Veschi with or without good reason.
Termination by the Company without cause, or by Mr. Veschi for good reason,
would subject the Company to liability for liquidated damages in an amount
equal to Mr. Veschi's current salary and a pro rata portion of his bonus for
the remaining term of the Agreement, payable in a lump sum cash payment,
without any set-off for compensation received from any new employment. In
addition, Mr. Veschi would be entitled to continue to participate in and
accrue benefits under all employee benefit plans and to receive supplemental
retirement benefits to replace benefits under any qualified plan for the
remaining term of the Agreement to the extent permitted by law.
Limitation on Liability of Directors
As permitted by Delaware law, the Company's Certificate of Incorporation
includes a provision that provides that the Company will, to the fullest
extent permitted by Section 145 of the Delaware General Corporation Law, as
amended from time to time ("DGCL"), indemnify all persons whom it may
indemnify pursuant thereto. To the fullest extent permitted by the DGCL, a
director of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for a breach of fiduciary duty as a
director. The provisions are intended to afford directors protection against,
and to limit their potential liability for, monetary damages resulting from
suits alleging a breach of the duty of care by a director; they also diminish
the potential rights of action which might otherwise be available to
shareholders by limiting the liability of officers and directors to the
maximum extent allowable under Delaware law and by affording indemnification
against most damages and settlement amounts paid by a director of the Company
in connection with any shareholders derivative action. As a consequence of
these provisions, stockholders of the Company will be unable to recover
monetary damages against directors for action taken by them that may
constitute negligence or gross negligence in performance of their duties
unless such conduct falls within an exception under DGCL or under Delaware
case law. The provision, however, does not alter the applicable standards
governing a director's fiduciary duty and does not eliminate or limit the
right of the Company or any stockholder to obtain an injunction or any other
type of equitable relief in the event of a breach of fiduciary duty.
Management of the Company believes these provisions will assist the Company
in securing and retaining qualified persons to serve as directors. The
Company is unaware of any pending or threatened litigation against the
Company or its directors that would result in any liability for which such
director would seek indemnification or similar protection.
The Company believes that the substantial increase in the number of
lawsuits being threatened or filed against corporations and their directors
has resulted in a growing reluctance on the part of capable persons to serve
as members of boards of directors of public companies. The Company also
believes that the increased risk of personal liability without adequate
insurance or other indemnity protection for its directors could result in
overcautious and less effective direction and management of the Company. The
limitation on liability and indemnification provisions are intended to
increase the protection provided directors and, thus, increase the Company's
ability to attract and retain qualified persons to serve as directors.
Additionally, the Company has procured directors liability insurance
coverage, but there is no assurance that it will provide coverage to the
extent of the director's claims for indemnification. In such event, the
Company may be forced to bear a portion or all of the cost of the director's
claims for indemnification and, the value of the Company stock may be
adversely affected as a result. There is also no assurance that the Company
will be able to continue to procure directors liability insurance. It is
uncertain whether the Company's directors would continue to serve in such
capacities if improved protection from liability were not provided.
29
<PAGE>
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
Company's Common Stock owned as of June 24, 1998 and, as adjusted, to reflect
the exercise of the Warrants, by (i) each person who is known by the Company
to own beneficially more than five percent of the Company's Common Stock;
(ii) each of the Company's officers and directors; and (iii) all officers and
directors as a group. No assurance can be given as to the timing of exercise
of the Warrants or whether all or any of the Warrants will be exercised.
<TABLE>
<CAPTION>
Percentage of Shares
--------------------------
Before After
Position with Number Exercise of Exercise of
Name and Address Company of Shares Warrant Warrant (1
---------------- ------- --------- ------- ----------
<S> <C> <C> <C> <C> <C>
Alonzo E. Short, Jr., Lt. Gen.,
USA (ret.) (2) .............................. Chairman of the 90,000 1.06% 1.01%
Board
Robert A. Veschi (3).............................. President, Chief 1,375,000 16.19 15.51
Executive
Officer, Director
Christina Swisher (3) ............................ Vice President, 120,000 1.41 1.35
Secretary
Donald J. Shoff (3) .............................. Vice President, 50,000 .59 .56
Chief Financial
Officer
William L. Hooton (4) ............................ Director 50,000 .59 .56
Clive W. Whittenbury, Ph.D. (5) .................. Director 50,000 .59 .56
William W. Rogers, Jr. (6) ....................... Director 5,000 .06 .06
Edward Ratkovich, Maj. Gen.
USA (ret.) (7) .............................. Stockholder 500,000 5.89 5.64
Arthur Henley (8) ................................ Stockholder 537,500 6.33 6.06
Thomas T. Prousalis (9) .......................... Stockholder 450,000 5.30 5.07
All Officers and Directors as a
Group (7 persons) (10)....................... 1,740,000 20.49% 19.62%
</TABLE>
- ------------------
(1) Does not include the exercise of options or warrants other than the
Warrants.
(2) c/o Lockheed Martin, 5203 Leesburg Pike, Suite 1501, Falls Church, Virginia
22041.
(3) c/o e-Net, Inc., 12800 Middlebrook Road, Suite 200, Germantown,
Maryland 20874.
(4) 13333 Glen Taylor Lane, Herndon, Virginia 22071.
(5) 511 Trinity Avenue, Yuba City, California 95991. Does not include 250,000
shares that are, to the Company's knowledge, beneficially owned by MVSI,
Inc. Dr. Whittenbury is, to the Company's knowledge, a director of MVSI,
Inc.
(6) c/o CACI, 14200 Park Meadow Drive, Suite 200, Chantilly, Virginia 20151.
(7) 1030 Delf Drive, McLean, Virginia 22101. Does not include 250,000 shares
that are, to the Company's knowledge, beneficially owned by MVSI, Inc. Gen.
Ratkovich is, to the Company's knowledge, a significant shareholder,
chairman and chief executive officer of MVSI, Inc.
(8) 10705 Bay Laurel Trail, Austin, Texas 78750. Includes vested options to
purchase 50,000 shares of Common Stock. Also includes 487,500 shares owned
by The Arthur Henley Family Trust.
(9) 1919 Pennsylvania Avenue, N.W., Suite 800, Washington, D.C. 20006. Does not
include 250,000 shares that are, to the Company's knowledge, beneficially
owned by MVSI, Inc. Mr. Prousalis is, to the Company's knowledge, a
significant shareholder of MVSI, Inc.
(10) Includes vested options to purchase 50,000 shares of Common Stock.
30
<PAGE>
SELLING HOLDERS
On April 15, 1998, the Company completed the Private Placement,
resulting in the issuance of the Issued Private Placement Stock and the
Placement Agent's Warrant. See "Description of Securities." This Prospectus
relates to the offer and sale by the following Selling Holders of the Issued
Private Placement Stock, and the Placement Agent's Stock underlying the
Placement Agent's Warrant. Although the Company will receive the net proceeds
from the exercise of the Placement Agent's Warrant, it will not receive any
additional proceeds from the sale by any of the following Selling Holders of
the Private Placement Stock. The following table sets forth certain
information about the Selling Holders for whom the Company is registering
Private Placement Stock for resale to the public. To the best of the
Company's knowledge, none of the Selling Holders has any plan, arrangement,
understanding, agreement, commitment or intention to sell their securities.
None of the following individuals or entities has held any position or office
within the Company nor has had any other material relationship with the
Company other than in connection with the Private Placement.
<TABLE>
<CAPTION>
Amount of
Amount of Securities Percentage
Amount of Securities Being Owned After of
Securities Owned Registered Offering Securities
(1)(2) Owned (2)
------------------- ---------------- ----------- ------------
<S> <C> <C> <C> <C>
Atlas Capital Partners, L.P. ................. 10,000 Shares of 10,000 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
Bryn Mawr Trust Co. A/C RA Hansen & FJ
Campbell III, TTEES PA Merchant Group
Ltd 401(k) Pension & Profit Sharing Plan...... 10,000 Shares of 10,000 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
Frank J. Campbell, III........................ 7,000 Shares of 7,000 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
Donaldson, Lufkin & Jenrette Securities
Corporation Custodian F/B/O Frank J.
Campbell III Account # 698-101714............. 10,000 Shares of 10,000 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
Coutts (Jersey) Limited JY798967.............. 100,000 Shares of 100,000 Shares of 0 1.17
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
Gerard E. Dorsey.............................. 10,000 Shares of 10,000 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
Amir L. Ecker................................. 12,500 Shares of 12,500 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
Donaldson Lufkin Jenrette Securities
Corporation Custodian FBO Amir L. Ecker
IRA Acct # 698-103058......................... 7,500 Shares of 7,500 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
The Ecker Family Partnership.................. 7,500 Shares of 7,500 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
Lancaster Investment Partners, L.P. .......... 200,000 Shares of 200,000 Shares of 0 2.33
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Amount of
Amount of Securities Percentage
Amount of Securities Being Owned After of
Securities Owned Registered Offering Securities
(1)(2) Owned (2)
------------------- ---------------- ----------- ------------
<S> <C> <C> <C> <C>
Lincoln Trust Company FBO Perry D.
Snavely IRA Account # 61076323................ 10,000 Shares of 10,000 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
Losty Capital Management...................... 37,500 Shares of 37,500 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
Ronald B. Mandell............................. 2,000 Shares of 2,000 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
Irving L. Mazer, Esq. ........................ 10,000 Shares of 10,000 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
James F. Meara, Jr. .......................... 5,000 Shares of 5,000 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
Felix S. Miksis............................... 1,000 Shares of 1,000 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
Harry Mittelman Revocable Trust............... 15,000 Shares of 15,000 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
Mustang Partners, L.P. ....................... 75,000 Shares of 75,000 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
Porter Partners, L.P. ........................ 50,000 Shares of 50,000 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
ProFutures Special Equities Fund, L.P. ....... 60,000 Shares of 60,000 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
Leonid S. Roytman and Alla S. Roytman
JTTEN......................................... 5,000 Shares of 5,000 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
Schottenfeld Associates, L.P. ................ 15,000 Shares of 15,000 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
Perry D. Snavely, Jr. ........................ 22,500 Shares of 22,500 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
Dr. Gershon Stern............................. 7,500 Shares of 7,500 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Amount of
Amount of Securities Percentage
Amount of Securities Being Owned After of
Securities Owned Registered Offering Securities
(1)(2) Owned (2)
------------------- ---------------- ----------- ------------
<S> <C> <C> <C> <C>
Robert M. Stern............................... 1,250 Shares of 1,250 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
Susan J. Spector.............................. 1,250 Shares of 1,250 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
Talmor Capital Management Inc. ............... 2,500 Shares of 2,500 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
Richard C. Walling............................ 50,000 Shares of 50,000 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
Carolyn Wittenbraker.......................... 5,000 Shares of 5,000 Shares of 0 *
Common Stock (Issued Common Stock
Private Placement (Issued Private
Stock) Placement Stock)
SUBTOTAL...................................... 750,000 750,000
Pennsylvania Merchant Group Ltd. ............. 75,000 Shares of 75,000 Shares of 0 *
Common Stock Common Stock
(Placement Agent's (Placement
Stock) (1) Agent's Stock) (1)
TOTAL......................................... 825,000 825,000
</TABLE>
* Less than 1%.
- -------------------------
(1) Assumes exercise of all Warrants.
(2) Assumes sale of all Offered Stock being registered.
In April of 1997, the Company completed its Initial Public Offering,
resulting in the issuance of the Common Stock Representative Warrants and the
Warrant Representative Warrants. (The Warrants underlying the Warrant
Representative Warrants are the Underlying Warrants.) See "Description of
Securities." This Prospectus relates to the offer and sale by the following
Selling Holders of the Underwriter's Stock underlying the Common Stock
Representative Warrants and the Underwriter's Stock underlying the Underlying
Warrants. The following table sets forth certain information about the Selling
Holders for whom the Company is registering such Underwriter's Stock for resale
to the public. To the best of the Company's knowledge, none of the Selling
Holders has any plan, arrangement, understanding, agreement or commitment to
sell their securities. None of the following individuals or entities has held
any position or office within the Company nor has had any other material
relationship with the Company other than in connection with the Initial Public
Offering.
<TABLE>
<CAPTION>
Amount of
Securities Percentage
Amount of Owned After of
Amount of Securities Being Offering Securities
Recipient Securities Owned Registered (1)(2) Owned (2)
--------- ---------------- ---------------- ------------ ----------
<S> <C> <C> <C> <C>
Robert T. Kirk.......................... 240,000 Shares of Common 240,000 Shares of 0 2.79
Stock (Underwriter's Common Stock
Stock) (3) (Underwriter's
Stock) (3)
Michael Morrisett....................... 15,000 Shares of Common 15,000 Shares of 0 *
Stock (Underwriter's Common Stock
Stock) (3) (Underwriter's
Stock) (3)
Marie Lima.............................. 15,000 Shares of Common 15,000 Shares of 0 *
Stock (Underwriter's Common Stock
Stock) (3) (Underwriter's
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Amount of
Securities Percentage
Amount of Owned After of
Amount of Securities Being Offering Securities
Recipient Securities Owned Registered (1)(2) Owned (2)
------------ ------------------ ------------------ ------------ -----------
<S> <C> <C> <C> <C>
Stock) (3)
David A. Carter......................... 15,000 Shares of Common 15,000 Shares of 0 *
Stock (Underwriter's Common Stock
Stock) (3) (Underwriter's
Stock) (3)
Wendy Tand Gusrae....................... 15,000 Shares of Common 15,000 Shares of 0 *
Stock (Underwriter's Common Stock
Stock) (3) (Underwriter's
Stock) (3)
Total................................... 300,000 Shares of 300,000 Shares of
Common Stock Common Stock
(Underwriter's Stock) (Underwriter's
(3) Stock) (3)
</TABLE>
* Less than 1%.
(1) Assumes exercise of all Warrants.
(2) Assumes sale of all Offered Stock being registered.
(3) One-half of this amount is Underwriter's Stock underlying Common Stock
Representative Warrants, and one-half of this amount is Underwriter's Stock
underlying the Underlying Warrants.
CERTAIN TRANSACTIONS
In January 1995, in connection with the founding of the Company, the
Company issued 300 shares of its Common Stock to Alonzo E. Short, Jr., 4,332
shares to Robert A. Veschi, 400 shares to Christina L. Swisher, 167 shares to
William L. Hooton, 167 shares to Donald J. Shoff, 1,583 shares to Arthur
Henley and 1,500 shares to Thomas T. Prousalis, Jr. Each such founding
shareholder was assessed $0.01 per share for his or her Common Stock, which
amount was equivalent to its par value at the time. Taking into account a
600:1 stock split effective as of March 1996 (the "Forward Split") and a 2:1
reverse stock split effective as of March 1997 (the "Reverse Split"), each
such shareholder acquired at that time the equivalent of 90,000, 1,300,000,
120,000, 50,000, 50,000, 475,000 and 450,000 shares of today's Common Stock.
In March 1996, the Company was loaned $500,000 by Edward Ratkovich,
$250,000 by Robert Foise, $200,000 by Armstrong Industries and $50,000 by
Martin Sumichrast. Principal and interest computed at the rate of eight
percent annually was to become due at the earlier of June 1, 1997 or the
expected June 1996 closing date of a proposed initial public offering of
Company securities. As additional consideration for these loans, the Company
issued 500,000 bridge units to Mr. Ratkovich, 250,000 to Mr. Foise, 200,000
to Armstrong Industries and 50,000 to Mr. Sumichrast. Each bridge unit
contained one share of Common Stock, one Class A Warrant and one Class B
Warrant. In June 1996, the loan principal was converted into paid-in capital
and accounted for as consideration for the bridge units. The Class A Warrants
and Class B Warrants were canceled in March 1997 in exchange for each such
shareholder receiving additional shares of Common Stock such that, even
taking the Reverse Split into account, each such shareholder had 500,000,
250,000, 200,000 and 50,000 shares of today's Common Stock.
In August 1996, the Company entered into a letter of intent with MVSI,
Inc. ("MVSI"), a Washington, D.C. area based NASDAQ-listed technology
products and services company, in which the Company agreed to be acquired and
become a wholly-owned subsidiary of MVSI in an exchange of securities. To the
Company's knowledge, Edward Ratkovich is a significant shareholder and the
chairman and chief executive officer of MVSI, Thomas T. Prousalis, Jr. is a
significant shareholder of MVSI and Clive Whittenbury is a director of MVSI.
Pursuant to the letter of intent, MVSI loaned the Company $500,000 for
working capital. In October 1996, the Company entered into an agreement to be
acquired by MVSI, subject to shareholder approval. MVSI loaned an additional
$500,000 to the Company in November 1996. However, in January 1997, the
parties mutually agreed to terminate the acquisition, primarily due to market
conditions that involved a significant decrease in the bid price of MVSI's
common stock and, thereby, the value of the purchase price.
As part of a mutual cooperation agreement, in January 1997 MVSI loaned
the Company an additional $250,000 under a convertible debenture. The
aggregate principal amount of the convertible debenture at that time
34
<PAGE>
was $1,275,081, reflecting the total amount of loan advances made to the
Company by MVSI. The terms provided for outstanding principal to bear annual
interest of nine percent, and for principal to be convertible into Common
Stock upon the completion of the Company's initial public offering at a ratio
calculated using the offering price per share. In March 1997, MVSI converted
the convertible debenture into 250,000 shares of Common Stock.
In March 1996, the Company acquired all right, title and interest in the
353 Patent from Arthur Henley and Scott Grau in consideration of a five
percent overriding royalty interest against gross profits involving the use
of the 353 Patent. The Company agreed to allocate $1,000,000 of its capital
to develop and exploit the market opportunities of the 353 Patent by December
31, 1996, or the 353 Patent would be subject to repurchase by its inventors.
The Company satisfied this commitment timely.
The Company paid legal fees of approximately $380,000 during the year
ended March 31, 1997, to Thomas T. Prousalis, Jr., an attorney who is a
significant stockholder of the Company, relating to the Initial Public
Offering. The Company also paid $100,000 during the year ended March 31,
1997, to Mr. Prousalis for services relating to an offering that was
abandoned in September 1996.
The Company rents an aircraft for business purposes from an entity owned
by Robert A. Veschi, the Company's President and Chief Executive Officer. For
the years ended March 31, 1998 and 1997, the Company paid $62,936 and
$27,796, respectively for the rental of the aircraft.
On April 16, 1997, the Company entered into a consulting agreement with
Alonzo E. Short, Jr., Lt. Gen., USA (ret.), the Chairman of the Board, to
provide services for a fixed monthly amount of $1,000. The amounts paid to
the stockholder under that agreement totaled $12,000 for the fiscal year
ending March 31, 1998.
All ongoing and future transactions between the Company and any
affiliate will be entered into on terms at least as favorable as could be
obtained from unaffiliated, independent third parties.
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 8,220,924 issued
and outstanding shares of Common Stock. Holders of the Common Stock do not
have preemptive rights to purchase additional shares of Common Stock or other
subscription rights. The Common Stock carries no conversion rights and is not
subject to redemption or to any sinking fund provisions. All shares of Common
Stock are entitled to share equally in dividends from sources legally
available therefor when, as and if declared by the Board of Directors and,
upon liquidation or dissolution of the Company, whether voluntary or
involuntary, to share equally in the assets of the Company available for
distribution to stockholders. All outstanding shares of Common Stock are
validly authorized and issued, fully paid and nonassessable, and all shares
to be sold and issued as contemplated hereby, will be validly authorized and
issued, fully paid and nonassessable. The Board of Directors is authorized to
issue additional shares of Common Stock, not to exceed the amount authorized
by the Company's Certificate of Incorporation, and to issue options and
warrants for the purchase of such shares, on such terms and conditions and
for such consideration as the Board may deem appropriate without further
stockholder action. The above description concerning the Common Stock of the
Company does not purport to be complete. Reference is made to the Company's
Certificate of Incorporation and By-laws which are available for inspection
upon proper notice at the Company's offices, as well as to the applicable
statutes of the State of Delaware for a more complete description concerning
the rights and liabilities of stockholders.
Each holder of Common Stock is entitled to one vote per share on all
matters on which such stockholders are entitled to vote. Since the shares of
Common Stock do not have cumulative voting rights, the holders of more than
50 percent of the shares voting for the election of directors can elect all
the directors if they choose to do so and, in such event, the holders of the
remaining shares will not be able to elect any person to the Board of
Directors.
35
<PAGE>
Warrants
Placement Agent's Warrant
In connection with the Private Placement, the Company issued to the
Placement Agent at a nominal purchase price the Placement Agent's Warrant for
the purchase of 75,000 shares of Common Stock constituting the Placement
Agent's Stock. The Company has agreed to indemnify the Placement Agent and
certain other persons with respect to certain liabilities, including
liabilities under the Securities Act. The Placement Agent's Warrant is
exercisable for a five-year period ending on April 16, 2003 on a net basis at
an exercise price equal to $9.00.
Underwriter's Warrants
In connection with the Initial Public Offering, the Company issued
to the Underwriter at a nominal purchase price Common Stock Representative
Warrants to purchase up to 150,000 shares of Common Stock constituting
Underwriter's Stock and Warrant Representative Warrants to purchase 150,000
Underlying Warrants to purchase 150,000 Shares of Common Stock also
constituting Underwriter's Stock. The Common Stock Representative Warrants
are exercisable for a five-year period ending on April 7, 2002 at an exercise
price of $8.25 per share. The Warrant Representative Warrants are exercisable
for a five-year period ending on April 7, 2002 at an exercise price of is
$0.20625 per Underlying Warrant. Each Underlying Warrant is exercisable for a
five (5) year period ending on April 7, 2002 to purchase one Share of Common
Stock at an exercise price of $8.25 per share of Common Stock.
Transfer Agent and Registrar
The transfer agent and registrar for the securities of the Company is
American Stock Transfer & Trust Company located at 40 Wall Street, New York,
New York 10005.
Reports to Securityholders
The Company will furnish to holders of its securities annual reports
containing audited financial statements. The Company may issue other
unaudited interim reports to its securityholders as it deems appropriate.
36
<PAGE>
PLAN OF DISTRIBUTION
The Offered Stock may be sold from time to time by the Selling Holders
or by pledgees, donees, transferees or other successors-in interest. The
Offered Stock may be sold in transactions on the Nasdaq SmallCap Market, in
privately negotiated transactions, through the writing of options on the
shares, or a combination of such methods of sale, at fixed prices that may be
changed, at market prices prevailing at the time of the sale, at prices
related to such prevailing market prices or at negotiated prices. The Selling
Holders may effect such transactions by the sale of the Offered Stock to or
through broker-dealers, and such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the Selling Holders
and/or the purchasers of the Offered Stock for whom such broker-dealers may
act as agent or to whom they may sell as principal, or both. Usual and
customary or specifically negotiated brokerage fees or commissions may be
paid by the Selling Holders in connection with sales of the Offered Stock. No
underwriting arrangements have been entered into by the Selling Holders.
The Selling Holders and intermediaries through whom the Offered Stock is
sold may be deemed "underwriters," within the meaning of the Act, with
respect to the Offered Stock and any profits realized or commissions received
may be deemed underwriting compensation.
The Selling Shareholders may also pledge the Offered Stock to a
broker-dealer and upon default under such pledge the broker-dealer may effect
sales of the Offered Stock pledged pursuant to this Prospectus. In addition,
the Offered Stock covered by this Prospectus may be sold in private
transactions or under Rule 144, rather than pursuant to this Prospectus.
In order to comply with the securities laws of certain states, if
applicable, the Offered Stock will be sold in such jurisdictions, if
required, only through registered or licensed brokers or dealers.
The Company will not receive any of the proceeds from the sale of the
Offered Stock by the Selling Holders. The Company has agreed to bear the
expenses of registration of the Offered Stock under federal and state
securities laws, other than commissions, fees and discounts of underwriters,
brokers, dealers and agents, and to indemnify the Selling Holders against
certain liabilities, including liabilities under the Act.
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 Offered Stock being offered hereby will be passed
upon for the Company by Williams & Connolly, Washington D.C.
EXPERTS
The financial statements of e-Net, Inc. as of March 31, 1998 and 1997
and for the years ended March 31, 1998 and 1997 have been included herein in
reliance on the reports dated May 27, 1998 of Grant Thornton LLP, Independent
Certified Public Accountants, and upon the authority of said firm as experts
in accounting and auditing.
37
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants
Dated as of May 27, 1998 F-2
Financial Statements
Balance Sheets as of March 31, 1998 and 1997 F-3
Statements of Operations for the years ended March 31, 1998 and 1997 F-4
Statements of Cash Flows for the years ended March 31, 1998 and 1997 F-5
Statements of Stockholders' Equity as of March 31, 1998 and 1997 F-6
Notes to Financial Statements F-7
Report of Independent Certified Public Accountants
Dated as of August 7, 1998 F-15
Unaudited Financial Statements
Balance Sheets as of June 30 and March 31, 1998 F-16
Statements of Operations for the three months ended June 30, 1998 and 1997 F-17
Statements of Cash Flows for the three months ended June 30, 1998 and 1997 F-18
Statements of Stockholders' Equity as of June 30, 1998 F-19
Notes to Unaudited Financial Statements F-20
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
e-Net, Inc.
We have audited the accompanying balance sheets of e-Net, Inc. (a
Delaware Corporation), as of March 31, 1998 and 1997, and the related statements
of operations, cash flows and stockholders' equity for the years then ended.
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, 1998 and 1997, and the results of its operations and
its cash flows for the years then ended, in conformity with generally
accepted accounting principles.
Grant Thornton LLP
Vienna, Virginia
May 27, 1998
F-2
<PAGE>
e-NET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
March 31, 1998 March 31, 1997
-------------- --------------
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 855,743 $ 379,441
Short-term investments 960,248 --
Accounts receivable 334,602 113,181
Inventory 202,917 --
Prepaid expenses 176,264 14,800
--------------- --------------
Total Current Assets 2,529,774 507,422
Deposits 14,821 7,530
Property, Plant and Equipment, Net 372,403 203,125
Software Development Costs 805,188 520,853
Deferred Initial Public Offering Costs -- 964,706
--------------- --------------
$ 3,722,186 $ 2,203,636
--------------- --------------
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable--trade $ 314,010 $ 105,301
Accrued liabilities 561,093 330,580
Capital lease obligation -- 4,480
--------------- --------------
Total Current Liabilities 875,103 440,361
Accrued Initial Public Offering Costs -- 887,843
--------------- --------------
Total Liabilities 875,103 1,328,204
Stockholders' Equity
Common stock, $.01 par value, 50,000,000 shares
authorized, 5,750,000 and 4,250,000 shares
outstanding at March 31, 1998 and 1997, respectively 57,500 42,500
Stock subscriptions and notes receivable (46) (46)
Additional paid-in capital 14,163,090 8,307,627
Retained deficit (11,373,461) (7,474,649)
--------------- --------------
Total Stockholders' Equity 2,847,083 875,432
--------------- --------------
$ 3,722,186 $ 2,203,636
--------------- --------------
--------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
e-NET, INC.
STATEMENTS OF OPERATIONS
For the Years ended
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Sales
Products $ 347,451 $ 24,000
Services 375,388 525,037
------- -------
Total sales 722,839 549,037
Cost of product sold and service provided
Products 155,109 12,822
Services 191,995 397,205
------- -------
Total cost of product sold and service provided 347,104 410,027
Gross profit 375,735 139,010
Operating Expenses
Selling, general and administrative 3,474,852 1,171,212
Research and development 804,830 236,846
------- -------
Loss from Operations (3,903,947) (1,269,048)
Interest and Financing Charges
Interest expense--bridge financing -- (5,385,135)
Cost of abandoned stock registration -- (284,575)
Interest expense (5,214) (19,356)
Other expenses (195,403) (442)
Interest income 205,752 20,963
------- ------
Loss Before Income Taxes (3,898,812) (6,937,593)
Income Tax Provision -- --
------- -------
Net Loss $ $
(3,898,812) (6,937,593)
----------- -----------
----------- -----------
Loss per Share $ (.68) $ (1.72)
----------- -----------
----------- -----------
Weighted Average Shares Outstanding 5,708,904 4,034,247
</TABLE>
The accompanying notes are an integral part of these statements
F-4
<PAGE>
e-NET, INC.
STATEMENTS OF CASH FLOWS
For the Years ended
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Increase (Decrease) in Cash and
Cash Equivalents
Cash Flows from Operating Activities
Net loss $ (3,898,812) $ (6,937,593)
Adjustments to reconcile net loss to net cash from
operating activities
Interest expense--private placement -- 5,385,135
Depreciation and amortization 346,387 34,402
Loss on retirement of property and equipment 1,779 --
Stock Based Compensation 62,244 --
Changes in operating assets and liabilities
(Increase) in accounts receivable (221,421) (59,504)
(Increase) in inventory (202,917) --
(Increase) in prepaid expenses and deposits (168,755) (22,330)
Increase in accounts payable and accrued 439,222 432,849
liabilities
(Decrease) increase in deferred revenue -- (20,000)
--------------- --------------
Net Cash (Used in) Provided by Operating Activities (3,642,273) (1,187,041)
--------------- --------------
Cash Flows from Investing Activities
Capital expenditures (336,528) (125,502)
Short term investments (960,248) --
Capitalized software development costs (465,251) (520,853)
--------------- --------------
Net Cash Used in Investing Activities (1,762,027) (646,355)
--------------- --------------
Cash Flows from Financing Activities
Proceeds from initial public offering 5,885,082 --
Payment of shareholder/officer loans -- (12,050)
Proceeds from issuance of bridge notes payable -- 500,000
Proceeds from issuance of debt instrument converted to -- 1,250,000
equity
Payments on capital leases (4,480) (6,210)
Payment of public offering costs -- (76,863)
--------------- --------------
Net Cash Provided by Financing Activities 5,880,602 1,654,877
--------------- --------------
Net (Decrease) Increase in Cash and Cash Equivalents 476,302 (178,519)
Cash and Cash Equivalents at Beginning of Period 379,441 557,960
--------------- --------------
Cash and Cash Equivalents at End of Period $ 855,743 $ 379,441
--------------- --------------
--------------- --------------
Supplemental Disclosures:
Income Taxes Paid $ -- $ --
--------------- --------------
--------------- --------------
Interest Paid $ 326 $ 6,284
--------------- --------------
--------------- --------------
Noncash investing and financing activities
</TABLE>
In the year ended March 31, 1997, the Company issued 250,000 shares of common
stock upon conversion of a convertible debenture with a principal amount of
$1,250,000, plus accrued interest of $25,081.
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
------------- Subscription Unamortized Additional Total
No. of and Notes Cost of Bridge Paid-in Retained Stockholders'
Shares Amount Receivable Financing Capital Deficit Equity
------ ------- ----------- ------------- ---------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31, 1996 3,750,000 37,500 (125,100) (2,885,135) 3,662,600 (537,056) 152,809
Bridge loan converted to
capital -- -- -- 500,000 -- -- 500,000
Issuance of common stock
associated with the
financing costs from
the issuance of bridge
units 500,000 5,000 -- (3,000,000) 3,495,000 -- 500,000
Cancellation of note
receivables in exchange
for common stock (250,000) (2,500) 125,000 -- (122,500) -- --
Amortization of the costs
of bridge financing -- -- -- 5,385,135 -- -- 5,385,135
Conversion of debt to 250,000 2,500 -- -- 1,272,581 -- 1,275,081
equity
Reclassification adjustment -- -- 54 -- (54) -- --
Net loss -- -- -- -- -- (6,937,593) (6,937,593)
--------- ------ --------- ---------- --------- ---------- ----------
Balance, March 31, 1997 4,250,000 $42,500 $ 46 $ -- $8,307,627 $(7,474,649) $ 875,432
--------- ------ --------- ---------- ---------- ---------- ----------
Issuance of common stock
associated with the Initial
Public Offering 1,500,000 15,000 -- -- 5,793,219 -- 5,808,219
Stock based Compensation -- -- -- -- 62,244 -- 62,244
Net loss -- -- -- -- -- (3,898,812) (3,898,812)
--------- ------ --------- ---------- ---------- ---------- ----------
Balance, March 31, 1998 5,750,000 $ 57,500 $ (46) $ -- $14,163,090 $(11,373,461) $2,847,083
--------- ------ --------- ---------- ---------- ---------- ----------
--------- ------ --------- ---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
e-Net, Inc., was incorporated on January 9, 1995, and the Company
commenced operations on June 8, 1995. e-Net, Inc., a Delaware corporation
("e-Net" or the "Company"), develops, produces, markets and supports open
telecommunications software and related hardware that enable, enhance, and
manage telephone communications over the Internet, private Internet Protocol
("IP") networks and "intranets," and other types of digital data networks
(collectively, "Digital Data Networks" or "DDNs"). The Company's Telecom
2000(TM) products ("Telecom 2000 Products") provide a user-friendly method of
high fidelity telephone communications through DDNs. Through the use of
Telecom 2000 Products, organizations can reduce their telephone expenses by
extending their telephone services to remote offices and mobile employees, in
some cases bypassing long distance service charges, while using their
existing internal DDNs. The Company has two office locations: corporate
headquarters in Germantown, Maryland and research and development in Austin,
Texas. The significant accounting policies used in the preparation of the
accompanying financial statements are as follows:
Inventory
Inventory is stated at the lower of cost or market value. Cost is
determined by the first-in, first-out method. The elements of cost include
subcontracted costs and materials handling charges.
Revenue Recognition
Revenue is recognized on the sale of software products upon shipment
unless future obligations exist wherein a portion of the revenue is deferred
until the obligation is satisfied. Revenue from services rendered is
recognized either as the services are rendered based upon fixed hourly rates
or at contractually determined fixed monthly fees.
For the year ended March 31, 1998, the Company derived 56% and 19% of
its sales from two customers, respectively.
For the year ended March 31, 1997, the Company derived 78% and 21% of
its sales from two customers, respectively.
Accounts Receivable
Accounts receivable are stated at the unpaid balances, less allowance on
uncollectible accounts, if any. Management periodically reviews its
outstanding accounts receivable to assess collectibility of balances based on
past experience and evaluation of current adverse situations which may affect
collectibility of receivables. At March 31, 1998 and 1997, management
established an allowance for uncollectible accounts in the amount of $3,200.
Use of Estimates in the Preparation of Financial Statements
Preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Property and Equipment
Property and equipment are carried at cost, net of an allowance for
accumulated depreciation and amortization. Depreciation is computed on
equipment and furniture, using a straight-line method over a three-year
period.
Investments
The Company's investments in debt securities, which typically mature in
one year or less, are generally held to maturity and valued at amortized
cost, which approximates fair value. The aggregate fair value at March 31,
1998 and 1997 was $ 960,248 and $ -0-, respectively for investments in United
States Treasury debt securities. Securities investments that the Company has
the positive intent and ability to hold to maturity are classified as
held-to-maturity securities and recorded at cash and cash equivalents when
maturity is three months or less and as short-term investments when maturity
is longer than three months and less than one year.
F-7
<PAGE>
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128 for the fiscal year ended March 31, 1998. SFAS No. 128 replaces the
presentation of primary and fully diluted earnings per share with a
presentation of basic earnings per share and diluted earnings per share, if
dilutive shares are outstanding. Basic earnings per share excludes dilution
and is computed by dividing income or loss available to common stockholders
by the weighted-average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock were converted into
common stock, but such securities or contracts are excluded if their effects
would be anti-dilutive. Pursuant to the requirements of Staff Accounting
Bulletin ("SAB") No. 98 of the Securities and Exchange Commission, issued in
February 1998, common equivalent shares which have an anti-dilutive effect on
net loss per share are no longer included in computing net loss per share for
the periods presented. All prior-period loss per share data has been restated
in accordance with SFAS No. 128 and SAB No. 98.
Basic loss per common share was calculated by dividing net loss by the
weighted average number of common shares outstanding during the period.
Diluted loss per share was calculated the same as basic loss per share since
the Company has a net loss for all periods presented which would make the
conversion of securities or other contracts to common stock anti-dilutive.
<TABLE>
<CAPTION>
Year Ended
March 31
1998 1997
----- -----
<S> <C> <C>
Net Loss $ (3,898,812) $ (6,937,593)
Loss per common share - basic & diluted $ (.68) $ (1.72)
Number of common shares - basic & diluted 5,708,904 4,034,247
</TABLE>
Software Development Costs
In accordance with the Statement of Financial Accounting Standards No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed," the Company has capitalized certain software development
costs incurred after establishing technological feasibility. Costs incurred
prior to such feasibility and certain hardware-related, development costs
have been expensed as incurred as research and development costs. Software
costs are amortized based upon the greater of amortization computed using the
estimated useful life of the software or units sold as a function to expected
units to be sold when the product is available for general release to
customers. At March 31, 1998, the Company has capitalized $986,104 in
software development costs and has recorded accumulated amortization of
$180,916.
Critical to the recoverability of the capitalized software costs is the
generation of related sales sufficient to recover such costs. Should sufficient
sales fail to materialize, the carrying amount of capitalized software costs may
be reduced accordingly in the future.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
cash held in checking and investment accounts with maturity dates of three
months or less to be cash equivalents. The carrying amount approximates fair
value because of the short-term maturity of the instruments.
Accounting Pronouncements Issued and Related Disclosures
In 1997 the Financial Accounting Standards Board issued statement of
Financial Accounting Standards No. 131 - "Disclosures about Segments of an
Enterprise and Related Information," which established standards for
reporting information about operating segments. In 1997 the Financial
Accounting Standards Board also issued statement of Financial Accounting
Standards No. 130 -"Reporting Comprehensive Income," which established
standards for reporting and displaying comprehensive income and its
components. The Company is required to adopt these two standards with its
March 31, 1999 financial statements. The Company will be analyzing both
standards during 1998 to determine what disclosures will be required.
F-8
<PAGE>
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE B--SIGNIFICANT TRANSACTIONS
Private Placement Transaction
In April 1998, the Company offered for sale to accredited investors
750,000 shares of the Company's restricted common stock, par value $.01 per
share, at $7.50 per share. The share price was based upon the average of the
last reported sales prices for the Common Stock for the five (5) business
days immediately preceding the date upon which the Offering Price is
determined, which was April 3, 1998. The transaction was completed in April
1998, and resulted in proceeds, net of transaction costs, to the Company of
approximately $5,100,000.
Warrant Redemption
In May 1998, the Company authorized the redemption of its publicly
traded Redeemable Common Stock Purchase Warrants (warrants). The Company
issued 1,725,000 warrants in its initial public offering, effective April 7,
1997. Under the terms governing these Warrants, the Company may, for $.05 per
warrant, redeem the warrants that have not already been exercised and
converted to a share of common stock at an exercise price of $5.25, if the
Company's common stock closing bid price equals or exceeds $10.00 per share
for a thirty consecutive trading day period. Such a period ended on May 14,
1998. The redemption is scheduled for June 19, 1998 and the transaction, if
all warrants are exercised and converted into common stock, is anticipated to
result in proceeds, net of transaction costs, to the Company of approximately
$8,900,000.
Pro Forma data presented below reflects the condensed balance sheet at
March 31, 1998, as if the private placement and warrant redemption
transactions had closed on March 31, 1998:
<TABLE>
<CAPTION>
Pro forma Pro forma
Historical Adjustment Balance Sheet
----------- ---------- ---------------
<S> <C> <C> <C>
Assets
Assets
Cash and cash equivalents $ 1,815,991 $ 14,000,000 $ 15,815,991
Other assets 1,906,195 -- 1,906,195
-------------- -------------- ---------------
Total Assets $ 3,722,186 $ 14,000,000 $ 17,722,186
-------------- -------------- ---------------
-------------- -------------- ---------------
Liabilities and Stockholders' Equity
Liabilities $ 875,103 -- $ 875,103
-------------- -------------- ---------------
Total Liabilities 875,103 -- 875,103
-------------- -------------- ---------------
Stockholders' Equity
Common stock 57,500 24,750 82,250
Additional paid-in capital, stock subscriptions
and notes receivable 14,163,044 13,975,250 28,138,294
Retained deficit (11,373,461) -- (11,373,461)
-------------- -------------- ---------------
Total Stockholders' Equity 2,847,083 14,000,000 16,847,083
-------------- -------------- ---------------
Total Liabilities and Stockholders' Equity $ 3,722,186 $ 14,000,000 $ 17,722,186
-------------- -------------- ---------------
-------------- -------------- ---------------
</TABLE>
A pro forma statement of operations is not presented, as the historical
statement of operations reflects the transactions for the entire period. Pro
forma share information is presented below.
<TABLE>
<CAPTION>
<S> <C>
Pro forma loss per share $ (.48)
--------------
--------------
Pro forma weighted average shares outstanding 8,183,904
--------------
--------------
</TABLE>
F-9
<PAGE>
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE C--COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
Property and Equipment
Property and equipment consist of the following at March 31:
<TABLE>
<CAPTION>
1998 1997
------ -----
<S> <C> <C>
Furniture and office equipment $ 568,719 $ 258,590
Leasehold improvements 23,438 2,602
------------ --------------
592,157 261,192
Less accumulated depreciation (219,754) (58,067)
------------ --------------
Property and equipment--net $ 372,403 $ 203,125
------------ --------------
------------ --------------
</TABLE>
Accrued Liabilities
Accrued liabilities consist of the following at March 31:
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Accrued salaries $ 119,151 $ 43,042
Accrued vacation 91,961 32,819
Accrued profit-sharing plan 80,000 32,216
Accrued bonuses 233,100 202,250
Accrued deferred rent 24,582 16,773
Accrued taxes and payroll liabilities 1,139 3,480
Other accrued costs 11,160 --
------------ -------------
$ 561,093 330,580
------------ -------------
------------ -------------
</TABLE>
F-10
<PAGE>
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE D--INCOME TAXES
For the periods ended March 31, 1997 and 1998, no benefit from income
taxes associated with net operating losses has been reflected due to
uncertainty as to the realizability of tax benefits associated with net
operating losses to date. Financing expense associated with the issuance of
bridge units is non-deductible and is being treated as a capital transaction
for income tax reporting purposes.
The income tax provision consists of the following for the period
ended March 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Deferred
Federal $ 1,211,257
State 227,395
Valuation allowance (1,438,652)
---------------
Net provision $ --
---------------
---------------
</TABLE>
The effective tax rate for the period ended March 31, 1998, was 0%. A
reconciliation between the U.S. federal statutory rate and the effective tax
rate follows:
<TABLE>
<CAPTION>
<S> <C>
Tax (benefit) at U.S. federal statutory rates $ (1,325,596)
Increase (decrease) resulting from:
State tax (benefit) (154,393)
Permanent differences 41,337
Valuation allowance 1,438,652
---------------
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, 1998:
<TABLE>
<CAPTION>
<S> <C>
Net loss for January 1 through March 31, 1998 $ 599,035
Capitalized software (339,766)
Other assets 467
Accrued expenses 47,819
Accrued warranty and patent expenses 1,485
Depreciation expense (7,193)
Net operating loss 1,692,895
Valuation allowance (1,994,742)
---------------
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.
F-11
<PAGE>
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE E--COMMITMENTS AND CONTINGENT LIABILITIES
Lease Commitment
The Company has three leases for office space that provide for aggregate
monthly rent payments of approximately $15,000. At March 31, 1998,
approximate future rental commitments are as follows: <TABLE><CAPTION>
Year ending March 31,
<S> <C>
1999 $ 267,631
2000 265,045
2001 266,378
Thereafter 227,006
-------------
$ 1,026,060
</TABLE>
Rent expense for the years ended March 31, 1998, and March 31, 1997,
totaled $201,000 and $79,000 respectively.
Employment Agreement
The Company has an employment agreement with an officer with minimum
future annual salary commitments of the Company under the agreements as
follows:
<TABLE>
<CAPTION>
Year ending March 31, Salary Bonus Total
--------------------- ------ ----- -----
<S> <C> <C> <C>
1999 $ 175,000 $ 87,500 $ 262,500
2000 175,000 87,500 262,500
2001 175,000 87,500 262,500
------------ ---------- ----------
$ 525,000 $ 262,500 $ 787,500
------------ ---------- -----------
------------ ---------- -----------
</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.
F-12
<PAGE>
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE F--RELATED PARTY TRANSACTIONS
The Company paid legal fees of approximately $380,000 during the year
ended March 31, 1997, to an attorney who is a stockholder of the Company
relating to the initial public offering that became effective in April 1997.
The Company also paid $100,000 during the year ended March 31, 1997, to the
same attorney and stockholder for services relating to the offering that was
abandoned in September 1996.
The Company rents an aircraft for business purposes from an entity
owned by the Company's president. For the years ended March 31, 1998 and
1997, the Company paid $63,000 and $28,000, respectively for the rental of
the aircraft.
The Company entered into a consulting agreement with the chairman of
the board to provide services for a fixed monthly amount of $1,000. For the
years ended March 31, 1998 and 1997, the Company paid $ 12,000 and $ -0-,
respectively under the consulting agreement.
NOTE G--DEFINED CONTRIBUTION PLAN
Company established a Profit Sharing Plan and Trust (the Plan) in
December 1995. Employees who were employed by the Company on the effective
date of the Plan (January 14, 1995) were automatically eligible for
participation. Employees hired after the effective date become eligible to
participate if they are at least 21 years of age and have completed one year
of service with the Company. Contributions are made at the discretion of
management. Contributions to the Plan for the years ended March 31, 1998 and
1997, were approximately $80,000 and $32,000, respectively. In January 1997,
the Plan was converted into a retirement plan qualified under section 401(k)
of the Internal Revenue Code (the 401(k) Plan). The 401(k) Plan allows the
Company to determine the matching amount on an annual basis. The initial
matching amount was established at 50% of employee deferrals up to 5% of
eligible wages. Contributions to the 401(k) Plan for the year ended March 31,
1998, were approximately $14,000.
NOTE H--STOCK OPTION PLANS
At March 31, 1998, the Company has two stock-based compensation plans
which are described below. As permitted under generally accepted accounting
principles, grants under those plans are accounted for following APB Opinion
No. 25 and related interpretations. Accordingly, only the compensation cost
associated with grants to non-employees or non-directors of the Company have
been recognized in the amount of $62,244. The fair value for options issued
in 1998 has been estimated at $2,400,000 as of the grant date using the Black
Scholes model with the following weighted average assumptions: risk free
interest rate of 5.31%; volatility factor of the expected market price of
92.4%; and a weighted average expected life of the option of 3 years. Because
option valuation models require the input of highly subjective assumptions
and because changes in the assumptions can materially affect the fair value
estimate, the existing model may not necessarily provide a reliable measure
of the fair value of its stock options. Had compensation cost for the two
stock-based compensation plans been determined based on the grant date fair
values of the awards (the method prescribed in SFAS No. 123), reported net
loss and loss per common share would have been reduced to the pro forma
amounts shown below.
<TABLE>
<CAPTION>
Year Ended
March 31
1998 1997
----- -----
<S> <C> <C>
Net Loss $ (3,898,812) $ (6,937,593)
As reported (4,978,812)
Pro forma (6,937,593)
Loss per common share - basic & diluted
As reported $ (.68) $ (1.72)
Pro forma (.87) (1.72)
</TABLE>
F-13
<PAGE>
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE H--STOCK OPTION PLANS (Continued)
Stock option plans:
In April, 1997, the Board of Directors approved the adoption of the
e-Net, Inc. 1997 Non-Qualified Stock Option Plan, including the allocation of
up to 500,000 shares for option grants. The options are exercisable at fair
market value measured at the grant date with varying vesting schedules.
Options granted and vested under the plan to non-employees or directors in
the twelve months ended March 31, 1998 were recorded as compensation expense
of $62,244. Since the plan's inception, the Company has granted 272,000
options, of which 177,120 are exercisable at March 31, 1998. Generally, stock
options are granted at fair market value as determined by a moving average of
trading activity prior to the grant date.
During 1998, the Company committed to issue 502,179 non-qualified stock
options under terms and conditions substantially the same as the 1997 Plan
described above, contingent on the adoption of a new plan. The committed
non-qualified stock options intended for the 1998 Plan are included in the
tables below as if the plan was adopted and the options had been granted as
of March 31, 1998.
<TABLE>
<CAPTION>
Stock Options
Weighted
Average
Outstanding Exercise Price
------------ -----------------
<S> <C> <C>
Balance at March 31, 1997
Granted 770,953 $ 4.49
Exercised -- --
Canceled (3,000) 4.14
---------- -----------
Balance at March 31, 1998 767,953 $ 4.49
---------- -----------
---------- -----------
</TABLE>
Number of Options
<TABLE>
<CAPTION>
Year Ended
March 31,
1998 1997
----- -----
<S> <C> <C>
Exercisable, end of year 177,120 --
Weighted-average fair value per option of Options
granted during the year $ 3.14 --
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$ 3.82 to $ 4.58 622,076 7.5 $ 4.14 150,410 $ 4.14
$ 4.59 to $ 5.34 10,877 7.7 4.88 10,877 4.88
$ 5.35 to $ 6.11 77,000 7.8 5.64 2,000 5.75
$ 6.12 to $ 6.87 38,000 7.9 6.40 500 6.64
$ 6.88 to $ 7.63 20,000 7.6 7.37 13,333 7.24
------- -------
Totals 767,953 7.5 $ 4.49 177,120 $ 4.44
------- -------
------- -------
</TABLE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
F-14
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
e-Net, Inc.
We have reviewed the accompanying balance sheet of e-Net, Inc. (a
Delaware Corporation) as of June 30, 1998, and the related statements of
operations, stockholders' equity and cash flows for the three-month period
then ended. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the balance sheet as of March 31, 1998, and the related
statements of operations, stockholders' equity and cash flows for the year
then ended (not presented herein), and in our report dated May 27, 1998, we
expressed an unqualified opinion on those financial statements. In our
opinion, the information set forth in the accompanying condensed balance
sheet as of March 31, 1998, is fairly stated, in all material respects, in
relation to the balance sheet from which it has been derived.
Grant Thornton LLP
Vienna, Virginia
August 7, 1998
F-15
<PAGE>
e-NET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
June 30, 1998 March 31, 1998
-------------- ----------------
(Unaudited) (Audited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 9,726,123 $ 855,743
Short-term investments 3,878,085 960,248
Accounts receivable 649,965 334,602
Inventory 277,209 202,917
Prepaid expenses 192,518 176,264
-------------- --------------
Total Current Assets 14,723,900 2,529,774
Deposits and Other Assets 14,821 14,821
Property, and Equipment, Net 468,111 372,403
Software Development Costs, Net 780,698 805,188
-------------- --------------
$ 15,987,530 $ 3,722,186
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable--trade $ 417,496 $ 314,010
Accrued liabilities 475,799 561,093
-------------- --------------
Total Current Liabilities 893,295 875,103
Long Term Debt -- --
-------------- --------------
Total Liabilities 893,295 875,103
Stockholders' Equity
Common stock, $.01 par value, 50,000,000 shares
authorized, 8,220,924 and 5,750,000 shares outstanding
at June 30 and March 31, 1998, respectively 82,209 57,500
Stock subscriptions and notes receivable (23) (46)
Additional paid-in capital 28,264,688 14,163,090
Retained deficit
(13,252,639) (11,373,461)
-------------- --------------
Total Stockholders' Equity 15,094,235 2,847,083
-------------- --------------
$ 15,987,530 $ 3,722,186
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-16
<PAGE>
e-NET, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months ended June 30,
<TABLE>
<CAPTION>
1998 1997
---- -----
<S> <C> <C>
Sales
Products $ 303,895 $ 1,170
Services 129,375 86,834
-------------- --------------
Total sales 433,270 88,004
Cost of product sold and service provided
Products 190,323 630
Services 43,248 37,943
-------------- --------------
Total cost of product sold and service provided 233,571 38,573
Gross profit 199,699 49,431
Operating Expenses
Selling, general and administrative 1,532,884 638,549
Research and development 554,737 22,992
-------------- --------------
Loss from Operations (1,887,922) (612,110)
Interest and Financing Charges
Interest and financing expense -- (10,103)
Other expenses (68,789) (32,213)
Interest income 77,533 67,109
-------------- --------------
Loss Before Income Taxes (1,879,178) (587,317)
-------------- --------------
Income Tax Provision -- --
Net Loss $ $ (587,317)
-------------- --------------
(1,879,178)
Loss per Share $ (.28) $ (.11)
-------------- --------------
-------------- --------------
Weighted Average Shares Outstanding 6,795,362 5,585,165
</TABLE>
The accompanying notes are an integral part of these statements.
F-17
<PAGE>
e-NET, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended June 30,
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Increase (Decrease) in Cash and
Cash Equivalents
Cash Flows from Operating Activities
Net loss $ (1,879,178) $ (587,317)
Adjustments to reconcile net loss to net cash from
operating activities
Depreciation and amortization 109,556 10,000
Stock-based compensation 13,388 --
Changes in operating assets and liabilities
(Increase) in accounts receivable (315,362) (24,735)
(Increase) in inventory (74,292) (71,317)
(Increase) in prepaid expenses, deposits and other (16,255) (166,510)
assets
Increase (Decrease) in accounts payable and
accrued liabilities 18,192 73,823
-------------- --------------
Net Cash Used in Operating Activities (2,143,951) (913,702)
-------------- --------------
Cash Flows from Investing Activities
Capital expenditures (150,774) (64,161)
Capitalized software development costs (30,000) (130,745)
Investments in short term securities (2,917,837) (2,802,973)
-------------- --------------
Net Cash Used in Investing Activities (3,098,611) (2,997,879)
-------------- --------------
Cash Flows from Financing Activities
Net proceeds from private placement of common stock and exercise of common
stock warrants in 1998 and initial
public offering of common stock in 1997 14,088,210 5,870,082
Issuance of common stock 24,709 15,000
Payments of common stock subscriptions receivable 23 --
Payments on capital leases -- (2,286)
Net Cash Provided by Financing Activities 14,112,942 5,882,796
-------------- --------------
Net Increase in Cash and Cash Equivalents 8,870,380 1,971,215
Cash and Cash Equivalents at Beginning of Period 855,743 379,441
-------------- --------------
Cash and Cash Equivalents at End of Period $ 9,726,123 $ 2,350,656
-------------- --------------
-------------- --------------
Supplemental Disclosures:
Income Taxes Paid $ -- $ --
-------------- --------------
-------------- --------------
Interest Paid $ -- $ 103
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-18
<PAGE>
e-NET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Stock
------------------ Subscriptions Additional Total
No. of and Notes Paid-in Retained Stockholders'
Shares Amount Receivable Capital Deficit Equity
------- ------- ------------- ----------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1998 5,750,000 $ 57,500 $ (46) $ 14,163,090 $ (11,373,461) $ 2,847,083
Sale of common stock in
private placement 750,000 7,500 -- 5,114,188 -- 5,121,688
Exercise of common stock
warrants 1,720,924 17,209 -- 8,974,022 -- 8,991,231
Stock-based compensation -- -- -- 13,388 -- 13,388
Payment of stock -- -- 23 -- -- 23
subscriptions
Net loss -- -- -- -- (1,879,178) (1,879,178)
--------- -------- --------- ------------ --------------- ----------------
Balance, June 30, 1998 8,220,924 $ 82,209 $ (23) $ 28,264,688 $ (13,252,639) $ 15,094,235
--------- -------- --------- ------------ --------------- ----------------
--------- -------- --------- ------------ --------------- ----------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-19
<PAGE>
e-NET, INC.
NOTES TO UNADUDITED FINANCIAL STATEMENTS
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited financial statements include the accounts of
e-Net, Inc. (the "Company"). Such statements have been prepared in accordance
with generally accepted accounting principles for interim financial
information and pursuant to the regulations of the Securities and Exchange
Commission; accordingly, they do not include all of the information and notes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments considered
necessary for a fair presentation (consisting of normal recurring accruals)
have been included. The results of operations for the quarter ended June 30,
1998 are not necessarily indicative of the results for the fiscal year ending
March 31, 1999. The accompanying unaudited financial statements should be
read in conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-KSB for the fiscal year ended March
31, 1998.
NOTE B--SIGNIFICANT TRANSACTIONS
Private Placement Transaction
In April 1998, the Company offered for sale to accredited investors
750,000 shares of the Company's restricted common stock, par value $.01 per
share, at $7.50 per share. The share price was based upon the average of the
last reported sales prices for the Common Stock for the five (5) business
days immediately preceding the date upon which the Offering Price is
determined, which was April 3, 1998. The transaction was completed in April
1998, and resulted in proceeds, net of transaction costs, to the Company of
approximately $5,100,000.
Warrant Redemption
In May 1998, the Company authorized the redemption of its publicly
traded Redeemable Common Stock Purchase Warrants (Warrants). The Company had
issued 1,725,000 warrants in its initial public offering, effective April 7,
1997. Under the terms governing these Warrants, the Company was entitled to
redeem, for $.05 per Warrant, the Warrants that had not already been
exercised and converted to a share of common stock at an exercise price of
$5.25, if the Company's common stock closing bid price equaled or exceeded
$10.00 per share for a thirty consecutive trading day period. Such a period
ended on May 14, 1998. The redemption occurred in June 19, 1998 and the
exercise of Warrants prior to this date resulted in proceeds, net of
transaction costs, to the Company of approximately $9,000,000.
NOTE C--INVENTORY
Inventory is stated at the lower of cost or market value. Cost is
determined by the first-in, first-out method. The elements of cost include
subcontracted costs and materials handling charges.
NOTE D--SOFTWARE DEVELOPMENT COSTS
The Company has capitalized certain software development costs incurred
after establishing technological feasibility. Software costs will be
amortized over the estimated useful life of the software once the product is
available for general release to customers. The useful life of capitalized
software development costs is estimated to be three years. At June 30, 1998,
the Company has capitalized $780,698, net of accumulated amortization. Should
sufficient product sales fail to materialize, the carrying amount of
capitalized software costs may be reduced accordingly in the future.
Amortization expense for the three-month period ended June 30, 1998 and 1997
were $54,490 and $-0-, respectively.
NOTE E--LINE OF CREDIT FACILITY
On May 31, 1998, the Company signed a one (1) year promissory note for a
$1,000,000 line of credit facility which is secured by investments,
receivables and fixed assets of the Company.
F-20
<PAGE>
e-NET, INC.
NOTES TO UNADUDITED FINANCIAL STATEMENTS (Continued)
NOTE F--NON-QUALIFIED STOCK OPTION PLAN
At June 30, 1998, the Company had two stock-based compensation plans. As
permitted under generally accepted accounting principles, grants under those
plans are accounted for following APB Opinion No. 25 and related
interpretations. Accordingly, only the compensation cost associated with
grants to non-employees or non-directors of the Company have been recognized
in the amount of $13,388. All options granted to employees are
non-compensatory.
NOTE G--INCOME TAXES
The Company has generated net operating losses since its inception. At
June 30, 1998, the Company recorded a valuation allowance in an amount equal
to the deferred tax asset due to the uncertainty of generating future taxable
income.
NOTE H--CONCENTRATION
Approximately 73% of the Company's accounts receivable balance at June
30, 1998 were from four customers, and approximately 73% of the Company's
sales for the quarter ended June 30, 1998, were from four customers.
F-21
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.......................... 1
Risk Factors................................ 5
Use of Proceeds............................. 10
Dilution.................................... 10
Market Prices for Common Stock.............. 11
Capitalization.............................. 11
Dividend Policy............................. 11
Management's Discussion and Analysis
or Plan of Operation...................... 12
Business.................................... 17
Management.................................. 26
Principal Stockholders...................... 30
Selling Holders............................. 31
Certain Transactions........................ 34
Description of Securities................... 35
Plan of Distribution........................ 37
Legal Proceedings........................... 37
Legal Matters............................... 37
Experts..................................... 37
Index to Financial Statements...............F-1
Report of Independent Certified Public
Accountants..............................F-2
</TABLE>
Until __________ ___, 1998 (40 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.
e-Net, Inc.
1,125,000 Shares
of Common Stock
----------
PROSPECTUS
----------
August 25, 1998
<PAGE>
PART TWO
INFORMATION NOT REQUIRED IN PROSPECTUS
Limitation on Liability of Directors
As permitted by Delaware law, the Company's Certificate of Incorporation
includes a provision that provides that the Company will, to the fullest
extent permitted by Section 145 of the Delaware General Corporation Law, as
amended from time to time ("DGCL"), indemnify all persons whom it may
indemnify pursuant thereto. To the fullest extent permitted by the DGCL, a
director of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for a breach of fiduciary duty as a
director. The provisions are intended to afford directors protection against,
and to limit their potential liability for, monetary damages resulting from
suits alleging a breach of the duty of care by a director; they also diminish
the potential rights of action which might otherwise be available to
shareholders by limiting the liability of officers and directors to the
maximum extent allowable under Delaware law and by affording indemnification
against most damages and settlement amounts paid by a director of the Company
in connection with any shareholders derivative action. As a consequence of
these provisions, stockholders of the Company will be unable to recover
monetary damages against directors for action taken by them that may
constitute negligence or gross negligence in performance of their duties
unless such conduct falls within an exception under DGCL or under Delaware
case law. The provision, however, does not alter the applicable standards
governing a director's fiduciary duty and does not eliminate or limit the
right of the Company or any stockholder to obtain an injunction or any other
type of equitable relief in the event of a breach of fiduciary duty.
Management of the Company believes these provisions will assist the Company
in securing and retaining qualified persons to serve as directors. The
Company is unaware of any pending or threatened litigation against the
Company or its directors that would result in any liability for which such
director would seek indemnification or similar protection.
The Company believes that the substantial increase in the number of
lawsuits being threatened or filed against corporations and their directors
has resulted in a growing reluctance on the part of capable persons to serve
as members of boards of directors of public companies. The Company also
believes that the increased risk of personal liability without adequate
insurance or other indemnity protection for its directors could result in
overcautious and less effective direction and management of the Company. The
limitation on liability and indemnification provisions are intended to
increase the protection provided directors and, thus, increase the Company's
ability to attract and retain qualified persons to serve as directors.
Additionally, the Company has procured directors liability insurance
coverage, but there is no assurance that it will provide coverage to the
extent of the director's claims for indemnification. In such event, the
Company may be forced to bear a portion or all of the cost of the director's
claims for indemnification and, the value of the Company stock may be
adversely affected as a result. There is also no assurance that the Company
will be able to continue to procure directors liability insurance. It is
uncertain whether the Company's directors would continue to serve in such
capacities if improved protection from liability were not provided.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
Item 25. Other Expenses of Issuance and Distribution.
The following is an itemization of expenses payable by the Company from
the net proceeds of the Offering, incurred by the Company in connection with
the issuance and distribution of the Offered Stock. All expenses are
estimated.
<TABLE>
<CAPTION>
<S> <C>
SEC Registration and Filing Fee....................................................... $7,031
Nasdaq Registration and Filing Fee.................................................... -0-
Financial Printing.................................................................... 5,000
Transfer Agent Fees................................................................... -0-
Accounting Fees and Expenses.......................................................... 10,000
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Legal Fees and Expenses............................................................... 100,000
Blue Sky Fees and Expenses............................................................ -0-
Miscellaneous......................................................................... 8,969
---------
Total......................................................................... 131,000
---------
---------
</TABLE>
Item 26. Recent Sales of Unregistered Securities.
The following information describes issuance of all securities of the
Company in private transactions not registered under the Act.
In January 1995, the Company issued 10,000 shares of its Common Stock to
16 persons, including the officers and directors of the Company, in a private
placement transaction in consideration of $100, or its par value at the time
of issuance. Taking into account the Splits, such shares of Common Stock were
the equivalent of 3,000,000 shares of today's Common Stock. The securities
issued by the Company in these transactions were "restricted" securities
within the meaning of that term as defined in Rule 144 and were issued
pursuant to the "private placement" exemption under Section 4(2) of the Act
for sales of securities by an issuer not involving any public offering. The
purchasers in these transactions were sophisticated and/or "accredited"
investors as such terms are used in Regulation D under the Act.
In March 1996, the Company issued 250,000 shares of its Common Stock to
ATG Group, Inc., a Brookville, New York based investment firm, in a private
placement transaction for aggregate consideration of $250,000, represented by
a full recourse promissory note for the entire purchase price. Taking into
account the Reverse Split, such shares of Common Stock were the equivalent of
125,000 shares of today's Common Stock. However, in June 1996, ATG Group,
Inc. agreed to cancel its shares of the Company's Common Stock in
consideration of the cancellation of its $250,000 promissory note.
In March 1996, the Company was loaned $500,000 by Edward Ratkovich,
$250,000 by Robert Foise, $200,000 by Armstrong Industries and $50,000 by
Martin Sumichrast. Principal and interest computed at the rate of eight
percent annually was to become due at the earlier of June 1, 1997 or the
expected June 1996 closing date of a proposed initial public offering of
Company securities. As additional consideration for these loans, the Company
issued 500,000 bridge units to Mr. Ratkovich, 250,000 to Mr. Foise, 200,000
to Armstrong Industries and 50,000 to Mr. Sumichrast. Each bridge unit
contained one share of Common Stock, one Class A Warrant and one Class B
Warrant. In June 1996, the loan principal was converted into paid-in capital
and accounted for as consideration for the bridge units. The Class A Warrants
and Class B Warrants were canceled in March 1997, in exchange for each such
shareholder receiving additional shares of Common Stock such that, even
taking the Reverse Split into account, each such shareholder had 500,000,
250,000, 200,000 and 50,000 shares of today's Common Stock. The securities
issued by the Company in these transactions were "restricted" securities
within the meaning of that term as defined in Rule 144 and were issued
pursuant to the "private placement" exemption under Section 4(2) of the Act
for sales of securities by an issuer not involving any public offering. The
purchasers in these transactions were "accredited" persons as that term is
used in Regulation D under the Act.
In August 1996, the Company entered into a letter of intent with MVSI,
Inc. ("MVSI"), a Washington, D.C. area based NASDAQ-listed technology
products and services company, in which the Company agreed to be acquired and
become a wholly-owned subsidiary of MVSI in an exchange of securities. To the
Company's knowledge, Edward Ratkovich is a significant shareholder and the
chairman and chief executive officer of MVSI, Thomas T. Prousalis, Jr. is a
significant shareholder of MVSI and Clive Whittenbury is a director of MVSI.
Pursuant to the letter of intent, MVSI loaned the Company $500,000 for
working capital. In October 1996, the Company entered into an agreement to be
acquired by MVSI, subject to shareholder approval. MVSI loaned an additional
$500,000 to the Company in November 1996. However, in January 1997, the
parties mutually agreed to terminate the acquisition, primarily due to market
conditions that involved a significant decrease in the bid price of MVSI's
common stock and, thereby, the value of the purchase price.
As part of a mutual cooperation agreement, in January 1997 MVSI loaned
the Company an additional $250,000 under a convertible debenture. The
aggregate principal amount of the convertible debenture at that time was
$1,275,081, reflecting the total amount of loan advances made to the Company
by MVSI. The terms provided for outstanding principal to bear annual interest
of nine percent, and for principal to be convertible into Common
II-2
<PAGE>
Stock upon the completion of the Company's initial public offering at a ratio
calculated using the offering price per share. In March 1997, MVSI converted the
convertible debenture into 250,000 shares of Common Stock. The securities issued
by the Company in these transactions were "restricted" securities within the
meaning of that term as defined in Rule 144 and were issued pursuant to the
"private placement" exemption under Section 4(2) of the Act for sales of
securities by an issuer not involving any public offering. The purchaser in this
transaction was an "accredited" person as that term is used in Regulation D
under the Act.
In April 1998, the Company issued 750,000 shares of Common Stock in a
private placement to various investors at a price of $7.50 per share, or an
aggregate of $5,625,000. Pennsylvania Merchant Group served as the placement
agent for this transaction, for a fee of six percent of the gross proceeds of
the offering, or $337,500, plus a five year warrant to purchase 75,000 shares
of Common Stock at an exercise price of $9.00 per share. The securities
issued by the Company in these transactions were "restricted" securities
within the meaning of that term as defined in Rule 144 and were issued
pursuant to the exemption provided by Rule 506 of Regulation D under the Act
for sales of securities by an issuer not involving any public offering. The
purchasers in this transaction were "accredited" persons as that term is used
in Regulation D under the Act.
All of the foregoing restricted securities were appropriately marked
with a restrictive legend and were issued for investment purposes only and
not with a view to redistribution, absent registration. All of the foregoing
purchasers were fully informed and advised concerning the Registrant, its
business, financial and other matters. The Registrant was informed that each
purchaser was able to bear the economic risk of its investment and was aware
that the securities were not registered under the Act and cannot be
re-offered or re-sold until they have been so registered or until there is an
available exemption from the registration requirements of the Act. The
Company's transfer agent and registrar was instructed to mark "stop transfer"
on its ledgers to assure that these securities not be transferred absent
registration or a determination that there is an available exemption from the
registration requirements of the Act.
Item 27. Exhibits
<TABLE>
<CAPTION>
No. Document
--- --------
<S> <C>
3.0 Certificate of Incorporation, filed January 9, 1995.*
3.1 Certificate of Correction to Certificate of Incorporation, filed April
14, 1998**
3.2 Certificate of Amendment to Certification of Incorporation, filed
April 14, 1998**
3.3 By-laws, as amended.*
4.0 Specimen Copy of Common Stock Certificate.*
4.1 Form of Warrant Certificate.*
4.2 Form of Representative's Warrant Agreement.*
4.3 Form of Warrant Agreement.*
4.4 Consent and Amendment No. 1 to Representative's Warrant Agreement.****
5.1 Opinion of Williams & Connolly ****
10.0 Employment Agreement, Robert A. Veschi, dated April 1, 1996
(management contract or compensatory plan or arrangement).*
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 with Barron Chase Securities, Inc., dated
April 10, 1997.*
10.5 Merger and Acquisition Agreement with Barron Chase Securities, Inc.,
dated April 10, 1997.*
10.6 Mutual Cooperation Agreement with MVSI, Inc., dated January 14, 1997.*
10.7 Lockheed Martin Agreement, dated January 3, 1997.*
10.8 Product Sales Agreement with Diamond Telecom, dated March 6, 1998.**
10.9 Software Development Agreement with Com21, dated January 22, 1998.**
10.10 Distributor Agreement with Comtel Electronic System GMBH, dated April
9, 1998.**
10.11 Joint Market Agreement with Paradyne Corporation, dated May 29,
1997.**
10.12 Form of Product Sales Agreement with PC Importers Inc. d/b/a Unicent
Technologies.**
10.13 1997 Nonqualified Stock Option Plan (management contract or
compensatory plan or arrangement).**
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.14 Government Reseller Agreement with Government Technology Services,
Inc., dated August 27, 1997.**
10.15 Memorandum of Understanding with Summa Four, Inc., dated April 17,
1998.**
10.16 Net2Phone Bundling Agreement with IDT Corporation, dated April 23,
1998.**
10.17 Joint Marketing Agreement with Magellan Network Systems, Inc., dated
August 27, 1997****
11.0 Computation of Per Share Loss ***
21.0 Subsidiaries.***
23.0 Consent of Grant Thornton LLP. ****
23.1 Consent of Williams & Connolly (included in Exhibit 5.1)****
25.0 Power of Attorney *****
</TABLE>
- ------------------
* Incorporated by reference from the Company's Registration Statement on
Form SB-2, Registration No. 333-3860, as amended and declared effective
on April 7, 1997 (the "IPO Registration Statement").
** Incorporated by reference from Post-Effective Amendment No. 1 to the IPO
Registration Statement, as declared effective on May 8, 1998.
*** Incorporated by reference from the Company's Annual Report on Form 10-KSB,
filed June 29, 1998.
**** Filed herewith.
***** Previously filed.
Item 28. Undertakings
The undersigned Registrant hereby undertakes to provide to participating
broker-dealers, at the closing, certificates in such denominations and
registered in such names as required by the participating broker-dealers, to
permit prompt delivery to each purchaser.
The undersigned Registrant also undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement:
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and authorized this
Registration Statement on Form SB-2 to be signed on its behalf by the
undersigned, in the County of Montgomery, State of Maryland, on August 24, 1998.
e-NET, INC.
By: /s/ Robert A. Veschi
-----------------------------------
Robert A. Veschi
President
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
* Chairman of the Board August 24, 1998
- -----------------------------------------------------
Alonzo E. Short, Jr., Lt. Gen., USA (ret.)
/s/Robert A. Veschi President, Chief Executive August 24, 1998
- -----------------------------------------------------
Robert A. Veschi Officer, Director
/s/Donald J. Shoff Chief Financial Officer (Chief August 24, 1998
- ----------------------------------------------------- Accounting Officer)
Donald J. Shoff
* Director August 24, 1998
- -----------------------------------------------------
William L. Hooton
* Director August 24, 1998
- -----------------------------------------------------
Clive Whittenbury, Ph.D.
* Director August 24, 1998
- -----------------------------------------------------
William W. Rogers, Jr.
</TABLE>
* Attorney-in-Fact
/s/Robert A. Veschi
-----------------------------
Robert A. Veschi
II-5
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
to
FORM SB-2
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
-----------
e-NET, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
No. Document
--- --------
<S> <C>
3.0 Certificate of Incorporation, filed January 9, 1995.*
3.1 Certificate of Correction to Certificate of Incorporation, filed April
14, 1998**
3.2 Certificate of Amendment to Certification of Incorporation, filed
April 14, 1998**
3.3 By-laws, as amended.*
4.0 Specimen Copy of Common Stock Certificate.*
4.1 Form of Warrant Certificate.*
4.2 Form of Representative's Warrant Agreement.*
4.3 Form of Warrant Agreement.*
4.4 Consent and Amendment No. 1 to Representative's Warrant Agreement.****
5.1 Opinion of Williams & Connolly ****
10.0 Employment Agreement, Robert A. Veschi, dated April 1, 1996
(management contract or compensatory plan or arrangement).*
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 with Barron Chase Securities, Inc., dated
April 10, 1997.*
10.5 Merger and Acquisition Agreement with Barron Chase Securities, Inc.,
dated April 10, 1997.*
10.6 Mutual Cooperation Agreement with MVSI, Inc., dated January 14, 1997.*
10.7 Lockheed Martin Agreement, dated January 3, 1997.*
10.8 Product Sales Agreement with Diamond Telecom, dated March 6, 1998.**
10.9 Software Development Agreement with Com21, dated January 22, 1998.**
10.10 Distributor Agreement with Comtel Electronic System GMBH, dated April
9, 1998.**
10.11 Joint Market Agreement with Paradyne Corporation, dated May 29,
1997.**
10.12 Form of Product Sales Agreement with PC Importers Inc. d/b/a Unicent
Technologies.**
10.13 1997 Nonqualified Stock Option Plan (management contract or
compensatory plan or arrangement).**
10.14 Government Reseller Agreement with Government Technology Services,
Inc., dated August 27, 1997.**
10.15 Memorandum of Understanding with Summa Four, Inc., dated April 17,
1998.**
10.16 Net2Phone Bundling Agreement with IDT Corporation, dated April 23,
1998.**
10.17 Joint Marketing Agreement with Magellan Network Systems, Inc., dated
August 27, 1997****
11.0 Computation of Per Share Loss ***
21.0 Subsidiaries.***
23.0 Consent of Grant Thornton LLP. ****
23.1 Consent of Williams & Connolly (included as part of Exhibit 5.1)****
25.0 Power of Attorney *****
</TABLE>
- ------------------
* Incorporated by reference from the Company's Registration Statement on
Form SB-2, Registration No. 333-3860, as amended and declared effective
on April 7, 1997 (the "IPO Registration Statement").
** Incorporated by reference from Post-Effective Amendment No. 1 to the IPO
Registration Statement, as declared effective on May 8, 1998.
*** Incorporated by reference from the Company's Annual Report on Form 10-KSB,
filed June 29, 1998.
**** Filed herewith.
***** Previously filed.
<PAGE>
Exhibit 4.4
CONSENT AND AMENDMENT NO. 1 TO THE
REPRESENTATIVE'S WARRANT AGREEMENT
This Consent and Amendment No. 1 between the Company and Robert T. Kirk, an
individual ("Kirk"), dated as of August __, 1998 ("Amendment No. 1") to the
Representative's Warrant Agreement (the "Agreement") dated as of April 7, 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 Company and the Representative entered into the Agreement
providing for the issuance by the Company to the Representative and/or persons
related to the Representative as those persons are defined in Rule 2710 of the
NASD Rules of Conduct (the "Holder"), 150,000 warrants (the "Common Stock
Representative Warrants") to purchase 150,000 shares of the Company's common
stock (the "Shares") and 150,000 warrants (the "Warrant Representative Warrants"
and, together with the Common Stock Representative Warrants, the "Warrants") to
purchase 150,000 of the Company's Common Stock Purchase Warrants (the
"Underlying Warrants") exercisable to purchase 150,000 shares of the Company's
common stock;
WHEREAS, the Warrants were issued to the Holders by the Company on April 7,
1997;
WHEREAS, Section 15 of the Agreement provides that the terms and provisions
of the 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 the Warrants,
the Shares, the Underlying Warrants and the common stock issuable upon the
exercise of the Underlying Warrants (collectively, the "Registrable Shares")
based on underlying numbers of shares of common stock;
WHEREAS, Section 15 of the Agreement provides that notice of any
modification, waiver or amendment shall be promptly provided to any Holder not
consenting to such modification, waiver or amendment;
WHEREAS, Kirk, as the Holder of a majority of the Registrable Shares based
on underlying numbers of shares of common stock, and the Company wish to amend
the Agreement to reflect the original intent of the parties thereto; and
WHEREAS, the Company wishes to provide notice of this Amendment No. 1 to
the non-consenting Holders pursuant to the Agreement.
<PAGE>
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Amendment of Section 3.1(ii) of the Agreement
Section 3.1(ii) is hereby amended by deleting the words after the word "by"
in the twelfth line thereto through the period at the end of that sentence and
inserting the following:
(ii) the then per share Market Value or Purchase Price, whichever is
greater.
2. Miscellaneous
a. The Agreement, as hereby amended, is ratified and confirmed in all
respects and shall remain in full force and effect in accordance with its terms.
b. All references to the Agreement shall mean such Agreement as amended
hereby and as it may in the future be amended, restated, supplemented or
modified from time to time.
c. This Amendment No. 1 shall be construed and interpreted in accordance
with the laws of the State of Florida without giving effect to the rules of said
State governing the conflicts of laws.
d. The Company shall cause this Amendment No. 1 to be mailed to each Holder
listed on Annex A hereof by first class registered mail, return receipt
requested.
e. This Amendment No. 1 may be executed in counterparts and each of such
counterparts shall for all purposes be deemed an original, and such counterparts
shall together constitute but one and the same instrument.
[SIGNATURES APPEAR ON THE FOLLOWING PAGE]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to
be duly executed, as of the day and year first above written.
e-Net, Inc.
/s/ Robert A. Veschi
-------------------------
By: Robert A. Veschi
Title: President
/s/ Robert T. Kirk
-------------------------
Robert T. Kirk
<PAGE>
Annex A
HOLDERS
Michael Morrisett
8626 S. Florence
- -----------------
Tulsa, Oklahoma 74137
- -----------------
Marie Lima
1630 N.W. 18th Avenue
- -----------------
Delray Beach, Florida 33446
- -----------------
David A. Carter
2735 N.W. 19th Way
- -----------------
Boca Raton, FL 33431
- -----------------
Wendy Tand Gusrae
15208 Tall Oak Avenue
Delray Beach, FL 33446
<PAGE>
Exhibit 5.1
WILLIAMS & CONNOLLY
725 Twelfth Street, N.W.
Washington, D.C. 20005
202-434-5000
August 24, 1998
e-Net, Inc.
12800 Middlebrook Road, Suite 200
Germantown, Maryland 20787
Re: Shares of Common Stock, par value $0.01, of e-Net, Inc. (the
"Company") to be offered and sold pursuant to the Company's
Registration Statement on Form SB-2, as filed on June 29, 1998, as
amended by Amendment No. 1 thereto, as filed on August , 1998 (such
shares of Common Stock, the "Common Stock" and such amended
Registration Statement, as it may be further amended from time to
time, the "Registration Statement")
Ladies & Gentlemen:
We have acted as special counsel to the Company in connection with the
registration of 1,125,000 shares of Common Stock pursuant to the Registration
Statement of which: (A) 825,000 shares of Common Stock were issued or reserved
for issuance pursuant to a private placement in April 1998 (the "Private
Placement") comprised of (i) 750,000 shares of Common Stock issued in the
Private Placement (the "Issued Private Placement Stock"), and (ii) 75,000 shares
of Common Stock underlying a five-year warrant issued to Pennsylvania Merchant
Group Ltd., the placement agent for the Private Placement (the "Placement
Agent"), with an exercise price of $9.00 per share (such warrant, the "Placement
Agent's Warrant" and such underlying shares, the "Placement Agent's Stock"); and
(B) 300,000 shares of Common Stock (the "Underwriter's Stock" and, together with
the Private Placement Stock, the "Offered Stock") underlying: (i) five-year
warrants issued at the direction of Barron Chase Securities, Inc., the
underwriter (the "Underwriter") of the Company's initial public offering of
securities in April 1997 to purchase 150,000 shares of Common Stock, with an
exercise price of $8.25 per share (the "Common Stock Representative Warrants");
and (ii) five-year warrants to purchase
<PAGE>
e-Net, Inc.
August 24, 1998
Page 2
150,000 shares of Common Stock, with an exercise price of $8.25 per share, which
warrants (the "Underlying Warrants") underlie five-year warrants issued at the
direction of the Underwriter to purchase the Underlying Warrants, with an
exercise price of $0.20625 per Underlying Warrant (the "Warrant Representative
Warrants" and collectively with the Common Stock Representative Warrants and the
Underlying Warrants, the "Underwriter's Warrants" and collectively with the
Underwriter's Warrants and the Placement Agent's Warrant, the "Warrants").
We are members of the Bar of the District of Columbia. We do not hold
ourselves out as experts on, nor do we express any opinion as to or with respect
to the applicability of, the laws of any jurisdiction other than the laws of the
District of Columbia, the federal laws of the United States, and the General
Corporation Law of the State of Delaware (the "Opining Jurisdictions").
We express no opinion with respect to any of the following legal issues:
(a) state or federal securities laws or regulations; (b) fraudulent transfer and
fraudulent conveyance laws; or (c) federal and state tax laws and regulations.
In connection with this Opinion, we have examined: (i) the Registration
Statement; (ii) the prospectus related thereto (the "Prospectus"); (iii) the
Common Stock Purchase Agreement dated as of April 15, 1998 (the "Common Stock
Purchase Agreement") by and among the Company, the Placement Agent and each of
the purchasers named on the signature pages thereto pursuant to which the Issued
Private Placement Stock was issued; (iv) the Placement Agent's Warrant issued by
the Company to the Placement Agent dated as of April 15, 1998; and (v) the
Representative Warrant Agreement dated as of April 7, 1997 ("the "Representative
Warrant Agreement") by and between the Company and the Underwriter pursuant to
which the Underwriter's Warrants were issued. The Common Stock Purchase
Agreement, the Placement Agent's Warrant and the Representative Warrant
Agreement are collectively referred to herein as the "Agreements." In addition
to the foregoing, we have reviewed such documents and given consideration to
such matters of law and fact as we have deemed appropriate, in our professional
judgment, to render this Opinion. We have also relied, without further
independent investigation, as to certain matters of fact, on information
obtained from public officials, from officers of the Company and from other
sources believed by us to be responsible.
The assumptions, opinions and conclusions stated below are subject to: (a)
bankruptcy, insolvency, reorganization, receivership, moratorium and other
similar laws affecting the rights and remedies of creditors generally; and (b)
general principles of equity and the exercise of judicial discretion.
We have assumed, without further investigation, the following: (a) all
natural persons who are involved have sufficient legal capacity to enter into
all relevant
<PAGE>
e-Net, Inc.
August 24, 1998
Page 3
Agreements, in such capacity as is provided thereby, and to perform
the transactions contemplated by such Agreements (collectively, the
"Transactions") or to carry out their roles in the Transactions; (b) each party
to the Transactions has satisfied those legal requirements that are applicable
to it to the extent necessary to make the Agreements to which it is a party
enforceable against it; (c) each party to the Transactions has complied with all
legal requirements pertaining to its status as such status relates to its rights
to enforce the Agreements against the other parties to the Transactions; (d)
each document submitted to us for review is accurate and complete, each such
document that is an original is authentic, each such document that is a copy
conforms to an authentic original, and all signatures on each such document are
genuine; (e) each certificate issued by a government official concerning a
person or entity's property or status is accurate, complete and authentic and
all official public records (including their proper indexing and filing) are
accurate and complete; (f) the conduct of the parties to the Transactions has
complied with any requirement of good faith, fair dealing and unconscionability;
(g) the parties have acted in good faith and without notice of any defense
against the enforcement of any rights created by the Transactions; (h) there are
no agreements or understandings among the parties, written or oral, and there is
no usage of trade or course of prior dealing among the parties that would, in
either case, define, supplement or qualify the terms of the Agreements; (i) all
statutes, judicial and administrative decisions, and rules and regulations of
governmental agencies constituting the law of the Opining Jurisdictions are
generally available (i.e., in terms of access and distribution following
publication or other release) to lawyers practicing in the Opining
Jurisdictions, and are in a format which makes legal research reasonably
feasible; (j) the constitutionality or validity of a relevant statute, rule,
regulation or agency action is not in issue unless a reported decision in the
Opining Jurisdiction has specifically addressed but not resolved, or has
established, its unconstitutionality or validity; (k) the parties will obtain
all permits and governmental approvals required in the future, and take all
actions similarly required, relevant to subsequent consummation of the
Transactions or performance of the Agreements; (l) all parties to the
Transactions will act in accordance with, and will refrain from taking any
action that is forbidden by, the terms and conditions of the Agreements; and (m)
the Transactions and the execution, delivery and performance of the Agreements
will not (i) breach, or result in a default under, any existing obligation of a
party to the Transactions to a contract to which such party is a party or by
which its property is bound, or (ii) breach or otherwise violate any existing
obligation of any court and administrative order, writ, judgment or decree that
names any such party and is specifically directed to it or its property. Each
assumption specifically described in this Opinion is made with the express
consent and approval of the Company. However, we have not relied on information
(including certificates or other documentation) or assumptions, otherwise
appropriate in the circumstances, if we have knowledge that the information or
<PAGE>
e-Net, Inc.
August 24, 1998
Page 3
assumptions are false or if we have knowledge of facts that under the
circumstances would make the reliance unreasonable.
This Opinion speaks only as of its date. We have no obligation to advise
the Company (or any third party) of changes in law or fact that occur after the
date of this Opinion, even though the change may affect the legal analysis, a
legal conclusion or an informational confirmation in this Opinion.
Based upon the foregoing and subject to the qualifications contained below,
we are of the opinion that the Issued Private Placement Stock was validly
authorized and, assuming that (a) the pertinent provisions of the Securities Act
of 1933 and such "blue sky" and other securities laws as may be applicable were
complied with and (b) such Issued Private Placement Stock was duly delivered
against payment therefor as contemplated by the Common Stock Purchase Agreement,
such Issued Private Placement Stock is validly issued, fully paid, and
nonassessable.
Based upon the foregoing and subject to the qualifications contained in the
next paragraph, we are of the opinion that the Placement Agent's Stock and the
Underwriter's Stock are validly authorized and, when (a) the pertinent
provisions of the Securities Act of 1933 and such "blue sky" and other
securities laws as may be applicable have been complied with and (b) such
Placement Agent's Stock and Underwriter's Stock have been duly delivered against
payment therefor upon exercise of the Placement Agent's Warrant, the Common
Stock Representative Warrants and the Underlying Warrants, as the case may be,
all as contemplated by the Placement Agent's Warrant and the Representative
Warrant Agreement, such Placement Agent's Stock and Underwriter's Stock will be
validly issued, fully paid, and nonassessable.
We note that the Company intended to increase the number of its authorized
shares of Common Stock from 10,000 to 50,000,000 (the "Increase") by means of a
Certificate of Amendment to its Certificate of Incorporation, which amendment
was filed with the Delaware Secretary of State on January 25, 1996 (the "Prior
Amendment"). The Increase, however, was not formally ratified by the
shareholders of the Company until a special meeting held on March 15, 1996. On
April 14, 1998, the Company filed a Certificate of Correction (the "Correction")
correcting the effective date of the Increase from January 25, 1996 to March 15,
1996. While the matter is not entirely free from doubt, in our opinion it is
very unlikely that the Correction was not effective to cause the Increase. Also
in our opinion, the Correction should be effective to correct the effective date
of the Increase to March 15, 1996.
<PAGE>
e-Net, Inc.
August 24, 1998
Page 5
This Opinion deals only with the specific legal issues it explicitly
addresses. Accordingly, the express opinions set forth above concerning a
particular legal issue do not address any other matters.
We consent to the filing of this opinion as an Exhibit to the Registration
Statement. In giving this consent, we do not admit that we are in the category
of persons whose consent is required under Section 7 of the Securities Act of
1933 or the rules and regulations thereunder.
Very truly yours,
/s/ Williams & Connolly
-----------------------
WILLIAMS & CONNOLLY
<PAGE>
Exhibit 10.17
JOINT MARKETING AGREEMENT
Between Magellan Network Systems, Inc. ("Magellan"), a California corporation
with a principal place of business at 1292 Hamerwood Avenue, Sunnyvale,
California 94089, and e-Net, Inc. ("e-Net"), a Delaware corporation with
principal offices at 12800 Middlebrook Road, Germantown, Maryland 20874-9204,
WHEREAS, Magellan is the owner and manufacturer of proprietary software products
and supplier of turnkey telecommunication switching solutions, and
WHEREAS, e-Net is the owner and manufacturer of a proprietary data telephony
(voice over data network) product called Telecom 2000-TM-, and
WHEREAS, the parties have jointly researched, and continue to research, the
efficacy of combining their products for sales to prospective customers, and of
combining their products with third-party products providing technical
performance and functionality enhancements to both of the parties' product
offerings, with an intended market of telecommunications carriers and
telecommunications equipment manufacturers, and the parties have decided that it
is in their mutual and respective best interests to enter into a program
intended to promote sales under this Agreement.
NOW, THEREFORE, in order to establish the terms and conditions under which the
parties' mutual and respective goals may be accomplished, in exchange of the
mutual covenants and premises below, consideration deemed adequate, the parties
agree as follows:
1.0 Definitions
MAGELLAN PRODUCT shall mean Magellan's proprietary software products, switching
systems and all products related to or derived therefrom, for purposes of
clarification and not limitations, algorithms, electronic computer protocols,
routines, subroutines or programs developed by or on behalf of Magellan or
otherwise owned by or in the custody of Magellan.
E-NET PRODUCT shall mean e-Net's proprietary data telephony (voice over data
network) product called Telecom 2000-TM-, and all products related to or
derived from Telecom 2000-TM- and/or related to or derived from US Patent No.
5,526,353 including specifically, for purposes of clarification and not
limitation, algorithms, electronic computer protocols, routines, subroutines or
programs developed by or on behalf of e-Net or otherwise owned by or in the
custody of e-Net.
<PAGE>
PROJECT shall mean a mutual effort by the parties to promote, sell, deliver, and
support a combination of the product technology capabilities of MAGELLAN PRODUCT
and E-NET PRODUCT, and selected third-party product in a marketing endeavor
further known as "Data Telephony for Telecommunications Carriers."
2.0 Scope of Agreement
(a) e-Net shall:
1) Sell and license E-NET PRODUCT to Magellan under mutually acceptable terms;
2) Give reasonable cooperation to the Project and Magellan in terms of
advertising, media and press relations, trade expositions and shows, and dealer
and distributor support;
3) Make management, marketing and technical personnel reasonably available to
assist the Project and Magellan to resolve issues and achieve joint and
respective sales goals;
4) Provide training, technical data and product documentation to the Project
and Magellan, where such training, technical data and product documentation
is reasonably required to achieve joint and respective sales goals, but such
provision shall be under mutually acceptable terms;
5) Make available after-sale support to the Project and Magellan including
maintenance, software support and spare parts, technical data and product
documentation, under mutually acceptable terms; and
6) Perform design enhancements, modifications, or improvements of E-NET
PRODUCT when required by the Project in the joint determination of the
parties, under mutually acceptable terms.
(b) Magellan shall:
1) Sell and license MAGELLAN PRODUCT to e-Net under mutually acceptable terms;
2) Give reasonable cooperation to the Project and e-Net in terms of advertising,
media and press relations, trade expositions and shows, and dealer and
distributor support;
3) Make management, marketing and technical personnel reasonably available to
assist the Project and e-Net to resolve issues and achieve joint and respective
sales goals;
4) Provide training, technical data and product documentation to the Project and
e-Net, where such training, technical data and product documentation is
reasonably required to achieve joint and respective sales goals, but such
provision shall be under mutually acceptable terms;
5) Make available after-sale support to the Project and e-Net including
maintenance, software support and spare parts, technical data and product
documentation, under mutually acceptable terms; and
- 2 -
<PAGE>
6) Perform design enhancements, modifications, or improvements of MAGELLAN
PRODUCT when required by the Project in the joint determination of the parties,
under mutually acceptable terms.
3.0 Restrictions on Use of Products, Trademarks, Trade Names, and Publicity
All use by a party of the other's product is restricted as
follows:
(a) A party is strictly prohibited from reverse engineering,
reverse compilation, or reverse assembly of the other's
product;
(b) A party is strictly prohibited from making a copy or copies
of the other's product;
(c) A party is strictly prohibited from sublicensing or otherwise
transferring the other's product;
(d) A party shall not use the trademarks or trade names of the
other; and
(e) A party shall not publicize this Agreement without the consent of the
other party.
4.0 Term
This Agreement shall be for a term of one year, subject to termination by either
party at any time, except that obligations of nondisclosure and proprietary
rights shall survive termination, and, further, the specific agreements of the
parties pertaining to after-sale support (clauses 2.a.5 and 2.b.5) may survive
termination hereof.
5.0 Ownership and Proprietary Rights
(a) Ownership of Magellan Products. All rights, title and interest to MAGELLAN
PRODUCT shall at all times remain the exclusive property of Magellan. All
applicable copyrights, trade secrets, patents and other intellectual property
rights to MAGELLAN PRODUCT shall remain the exclusive property of Magellan. No
title to MAGELLAN PRODUCT is transferred to e-Net. e-Net shall not remove the
copyright, trademark and proprietary rights notices of Magellan, and shall
prohibit any such removal by its officers, agents, employees, and contractors.
e-Net acknowledges that MAGELLAN PRODUCT is proprietary and confidential and
constitutes valuable trade secrets of Magellan. e-Net agrees to safeguard
MAGELLAN PRODUCT with not less than the same degree of care as is exercised in
connection with e-Net's own most proprietary and confidential materials.
All aspects of MAGELLAN PRODUCT, including without limitation, programs, methods
of processing, specific design and structure of individual programs and their
interaction and unique programming techniques employed therein, if any, shall
remain the sole and exclusive property of Magellan, and shall not be used,
- 3 -
<PAGE>
sold, revealed, disclosed or otherwise communicated, directly or indirectly, by
e-Net to any person, company, or institution other than as set forth herein,
excepting such technical and business development communications, product
demonstrations, and detailed technical discussions as e-Net reasonably may deem
necessary to perform the Project.
(b) Ownership of e-Net Products. All rights, title and interest to E-NET PRODUCT
shall at all times remain the exclusive property of e-Net. All applicable
copyrights, trade secrets, patents and other intellectual property rights to
E-NET PRODUCT shall remain the exclusive property of e-Net. No title to E-NET
PRODUCT is transferred to Magellan. Magellan shall not remove the copyright,
trademark and proprietary rights notices of e-Net, and shall prohibit any such
removal by its officers, agents, employees, and contractors.
Magellan acknowledges that E-NET PRODUCT is proprietary and confidential and
constitutes valuable trade secrets of e-Net. Magellan agrees to safeguard E-NET
PRODUCT with not less than the same degree of care as is exercised in connection
with Magellan's own most proprietary and confidential materials.
All aspects of E-NET PRODUCT, including without limitation, programs, methods of
processing, specific design and structure of individual programs and their
interaction and unique programming techniques employed therein, if any, shall
remain the sole and exclusive property of e-Net, and shall not be used, sold,
revealed, disclosed or otherwise communicated, directly or indirectly, by
Magellan to any person, company, or institution other than as set forth herein,
excepting such technical and business development communications, product
demonstrations, and detailed technical discussions as Magellan reasonably may
deem necessary to perform the Project.
6.0 Limitation of Liability
IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER OR TO ANY OTHER THIRD PARTY
BASED ON CONTRACT, TORT OR OTHERWISE FOR LOSS OF REVENUES, LOST PROFITS, LOST
SAVINGS, OR INDIRECT, CONSEQUENTIAL, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES
ARISING OUT OF OR RELATING IN ANY WAY TO THIS AGREEMENT, EXCEPT THAT A PARTY MAY
BE FOUND SO LIABLE FOR ANY DAMAGES ARISING OUT OF OR RELATING TO A PARTY'S
INTENTIONAL OR GROSSLY NEGLIGENT VIOLATION OF CALUSES 3.a, 5.a or 5.b.
7.0 General
7.1 Compliance With Law
- 4 -
<PAGE>
The parties agree that they are each responsible at their own expense for
compliance with all laws, and shall indemnify and save harmless the other from
any claim by a third party arising out of or related to non-compliance with law.
7.2 Jurisdiction.
The Agreement shall be governed by and construed in accordance with the laws of
the State of Delaware.
7.3 Dispute Resolution.
Disputes hereunder are to be settled by arbitration under the rules and
administration of the American Arbitration Association ("AAA"). Such
arbitration shall be heard by three arbitrators, all of whom have credentials
in the fields of telecommunications, intellectual property, or both. Each
party shall reselect one arbitrator, and those two shall select the third and
final arbitrator. Each party shall bear their own costs during the
arbitration, and AAA fees and costs will be divided and paid equally during
the arbitration, but the panel of arbitrators shall be empowered to assess
costs against a party, as well as other damages or sanctions. The arbitration
shall take place in Atlanta, Georgia, governed by Delaware law of
corporations and contracts.
7.4 Independent Contractors
It is expressly agreed that e-Net and Magellan are acting thereunder as
independent contractors, and under no circumstances shall any of the employees
of one party be deemed the employees of the other for any purpose.
7.5 Notice
Any notice required to be given by either party to the other shall be deemed
given ten (10) days after being deposited in the postal system in registered or
certified form with return receipt requested, postage paid, addressed to the
notified party at the address set forth above.
7.6 Assignment
A party may not assign this Agreement to any portion thereof without the
approval of the other party, which shall not be unreasonably withheld.
7.7 Amendment; Waiver
Any provision of this Agreement may only be amended or waived if such amendment
or waiver is in writing; and, if an amendment, executed by all parties hereto
and, if a waiver, executed by the party which is waiving the term, condition or
right.
7.8 Severability; Entire Agreement
Any provision of this Agreement that is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such
- 5 -
<PAGE>
prohibition or unenforceability without invalidating the remaining provisions
hereof, and any such prohibition or unenforceability in any jurisdiction shall
not invalidate or render unenforceable such provisions in any other
jurisdiction. This Agreement constitutes the entire understanding of the parties
with relation to the subject matter hereof, and may be amended only by a writing
in accordance with clause 7.7 above.
7.9 Headings
The headings of the various sections of this Agreement have been inserted for
ease of reference only and shall be deemed not to be a part of this Agreement.
MADE AND ENTERED INTO this 27 day of August, 1997 by the undersigned authorized
representatives of the parties.
e-Net, Inc. Magellan Corporation
- ----------- --------------------
/s/Robert A. Veschi /s/
- ----------------------------- ------------------------------
(Signature) (Signature)
Robert A. Veschi
- ----------------------------- ------------------------------
(Name) (Name)
President & CEO CFO
- ----------------------------- ------------------------------
(Title) (Title)
- 6 -
<PAGE>
Exhibit 23.0
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated May 27, 1998 accompanying the
financial statements of e-Net, Inc. as of March 31, 1998 and 1997, and for the
years then ended, contained in the Registration Statement and Prospectus. We
consent to the use of the aforementioned reports in the Registration Statement
and to the use of our name as it appears under the caption "Experts."
GRANT THORNTON LLP
Vienna, Virginia
August 24, 1998