<PAGE>
As filed with the Securities and Exchange Commission on September 3, 1998
Registration No. 333- 58109
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2
To
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
e-NET, INC.
(Exact name of Registrant as specified in its charter)
Delaware 7371 52-1929282
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of incorporation Industrial Classification Identification No.)
or organization) Code Number)
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 September 1, 1998, the closing price of
the Common Stock as quoted on the Nasdaq SmallCap Market was $9-1/2. 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 September 3, 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 Company, March 1996 Main Carrier Internet Services and
LP voice-over data product planning and testing
Paradyne Corporation June 1997 Cooperative development and marketing of
Digital Subscriber Line ("DSL") technology
Magellan Network Systems, Inc. August 1997 Carrier-Class Gateway Product applications
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>
<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> <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 acquisition agreement. As of the date hereof, the Company has entered
into an exclusive dealing agreement with a potential acquiree. No definitive
agreement as to that potential acquisition has been reached, and any such
transaction will be subject to numerous contingencies that must be fulfilled or
waived, including but not limited to material transaction terms and mutually
satisfactory due diligence. No assurances can be given that the Company will be
able to reach a definitive agreement on or consummate this or any other
acquisition.
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>
<S> <C> <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 of Average
Shares of Total Aggregate 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>
10
<PAGE>
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.
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 September 1, 1998, the closing
price of the Common Stock was $9 1/2 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
Apri1, 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.
15
<PAGE>
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.
16
<PAGE>
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.
17
<PAGE>
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
18
<PAGE>
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(TM) 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.
19
<PAGE>
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
20
<PAGE>
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.
21
<PAGE>
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.
22
<PAGE>
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.
28
<PAGE>
Employment Agreement
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
29
<PAGE>
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.
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
Exercise After
Position with Number of Exercise of
Name and Address Company of Shares Warrant Warrant (1)
---------------- ------------- --------- --------- --------------
<S> <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)(9).............................. Stockholder 537,500 6.33 6.06
Thomas T. Prousalis (10).......................... Stockholder 450,000 5.30 5.07
All Officers and Directors as a
Group (7 persons) ........................... 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 any
shares that are beneficially owned by MVSI, Inc. Dr. Whittenbury is, to the
Company's knowledge, a director of MVSI, Inc. To the Company's knowledge,
MVSI, Inc. beneficially owns at least 250,000 shares of Common Stock but
the Company is uncertain as to MVSI, Inc.'s exact beneficial ownership as
of the date hereof.
(6) c/o CACI, 14200 Park Meadow Drive, Suite 200, Chantilly, Virginia 20151.
(7) 1030 Delf Drive, McLean, Virginia 22101. Does not include any shares that
are beneficially owned by MVSI, Inc. Gen. Ratkovich is, to the Company's
knowledge, a significant shareholder, chairman and chief executive officer
of MVSI, Inc. To the Company's knowledge, MVSI, Inc. beneficially owns at
least 250,000 shares of Common Stock but the Company is uncertain as to
MVSI, Inc.'s exact beneficial ownership as of the date hereof.
(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) Includes vested options to purchase 50,000 shares of Common Stock.
(10) 1919 Pennsylvania Avenue, N.W., Suite 800, Washington, D.C. 20006. Does not
include any shares that are beneficially owned by MVSI, Inc. Mr. Prousalis
is, to the Company's knowledge, a significant shareholder of MVSI, Inc. To
the Company's knowledge, MVSI, Inc. beneficially owns at least 250,000
shares of Common Stock but the Company is uncertain as to MVSI, Inc.'s
exact beneficial ownership as of the date hereof.
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
Securities Percentage
Amount of Owned After of
Amount of Securities Being Offering Securities
Securities Owned Registered (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 10,000 Shares of 10,000 Shares of 0 *
Campbell III, TTEES PA Merchant Group Common Stock (Issued Common Stock
Ltd 401(k) Pension & Profit Sharing Plan...... 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 10,000 Shares of 10,000 Shares of 0 *
Corporation Custodian F/B/O Frank J. Common Stock (Issued Common Stock
Campbell III Account # 698-101714............. 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 7,500 Shares of 7,500 Shares of 0 *
Corporation Custodian FBO Amir L. Ecker Common Stock (Issued Common Stock
IRA Acct # 698-103058......................... 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
Securities Percentage
Amount of Owned After of
Amount of Securities Being Offering Securities
Securities Owned Registered (1)(2) Owned (2)
---------------- ---------------- ----------- -----------
<S> <C> <C> <C> <C>
Lincoln Trust Company FBO Perry D. 10,000 Shares of 10,000 Shares of 0 *
Snavely IRA Account # 61076323................ 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 5,000 Shares of 5,000 Shares of 0 *
JTTEN......................................... 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
Securities Percentage
Amount of Owned After of
Amount of Securities Being Offering Securities
Securities Owned Registered (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
Stock) (3)
</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>
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
ASSETS
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
-------------- --------------
<S> <C> <C>
Current Assets
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 Unamortized
--------------------- Subscription Cost of Additional Total
No. of and Notes Bridge Paid-in Retained Stockholders'
Shares Amount Receivable Financing Capital Deficit Equity
--------- ------- ------------ ----------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, 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
equity..................... 250,000 2,500 -- -- 1,272,581 -- 1,275,081
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
The 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
---------- ------------
---------- ------------
Number of Options
-----------------
Year Ended March 31,
------------------------
1998 1997
---------- ---------
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
ASSETS
<TABLE>
<CAPTION>
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 ........................................................................ $ (1,879,178) $ (587,317)
------------- -------------
------------- -------------
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 assets............... (16,255) (166,510)
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 subscriptions..... -- -- 23 -- -- 23
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>
<CAPTION>
------------------------------------------------- -------------------------------------------------
<S> <C> <C>
TABLE OF CONTENTS
e-Net, Inc.
Page
----
1,125,000 Shares
of Common Stock
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 PROSPECTUS
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 September 3, 1998
Index to Financial Statements...............F-1
Report of Independent Certified Public
Accountants..............................F-2
Until October 13, 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.
------------------------------------------------- -------------------------------------------------
</TABLE>
<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.
In connection with the foregoing sales, the Registrant relied upon
the exemption from registration provided by Section 4(2) of the Act. The
Registrant made a determination that each of the purchasers was a
sophisticated investor. The purchasers represented their intention to acquire
the securities for investment only and not with a view to distribution
thereof. All purchasers had adequate access to sufficient information about
the Registrant to make an informed investment decision. All of the foregoing
restricted securities were appropriately marked with a restrictive legend.
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.
**** Previously filed.
***** Filed herewith
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 September 3,
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 September 3, 1998
- -----------------------------------------------------
Alonzo E. Short, Jr., Lt. Gen., USA (ret.)
/s/Robert A. Veschi President, Chief Executive September 3, 1998
- ----------------------------------------------------- Officer, Director
Robert A. Veschi
/s/Donald J. Shoff Chief Financial Officer (Chief September 3, 1998
- ----------------------------------------------------- Accounting Officer)
Donald J. Shoff
* Director September 3, 1998
- -----------------------------------------------------
William L. Hooton
* Director September 3, 1998
- -----------------------------------------------------
Clive Whittenbury, Ph.D.
* Director September 3, 1998
- -----------------------------------------------------
William W. Rogers, Jr.
</TABLE>
* Attorney-in-Fact
/s/Robert A. Veschi
------------------------
Robert A. Veschi
<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
September 3, 1998
