<PAGE>
As filed with the Securities and Exchange Commission on June 29, 1998.
Registration No. 333-
----
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM SB-2
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
-----------
e-NET, INC.
(Name of Small Business Issuer in Its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 1711 52-1929282
(State or other jurisdiction of (Primary standard industrial (IRS employer
incorporation or organization) classification code number) identification number)
</TABLE>
12800 Middlebrook Road, Suite 200
Germantown, Maryland 20874
(301) 601-8700
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
12800 Middlebrook Road, Suite 200
Germantown, Maryland 20874
(301) 601-8700
(Address of principal place of business or intended principal place of business)
ROBERT A. VESCHI, President and Chief Executive Officer
e-NET, INC.
12800 Middlebrook Road, Suite 200
Germantown, Maryland 20874
(301) 601-8700
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
-----------
Copy to:
CHARLES A. SWEET, Esq.
Williams & Connolly
725 Twelfth Street, N.W.
Washington, D.C. 20005
(202) 434-5000
-----------
Approximate date of commencement of proposed
sale to public: As soon as practicable after the
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 Preliminary Prospectus is expected to be made
pursuant to rule 434, please check the following box. / /
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of Each Class of Amount to Proposed Maximum Proposed Maximum Amount of
Securities to be Registered be Registered Offering Price Aggregate Registration Fee
Per Security Offering Price
<S> <C> <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 for the purpose of determining the amount of the registration
fee and is based on the average of the high and low prices of Registrant's
Common Stock as reported on the NASDAQ Small-Cap Market on June 24, 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 or until the 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.
iii
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 29, 1998
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
e-Net, Inc.
1,125,000 Shares of Common Stock
This Preliminary 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 June 24, 1998, the closing price of the
Common Stock as quoted on the Nasdaq SmallCap Market was $18 7/16. No offered
stock may be sold by Selling Holders in the Offering without the availability of
a current Prospectus.
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS SPECULATIVE AND INVOLVES A
HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY
INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS"
ON PAGES 5-8 AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PRELIMINARY 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
iv
<PAGE>
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 bear all of the expenses in connection with the
registration of the Offered Stock, which expenses are estimated to be $130,000.
The Selling Holders will pay any brokerage compensation in connection with their
sale of the Offered Stock.
The date of this Preliminary Prospectus is June 29, 1998.
v
<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 Preliminary Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits thereto. The statements
contained in this Preliminary Prospectus as to the contents of any contract or
other document identified as exhibits in this Preliminary 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 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
Preliminary Prospectus, upon written or oral request of such person, a copy of
any information that is incorporated by reference in the Preliminary 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.
vi
<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 Preliminary Prospectus.
Each prospective investor is urged to read this Preliminary 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
1
<PAGE>
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.
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, LP March 1996 Main Carrier Internet Services and 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.
2
<PAGE>
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.
<TABLE>
<CAPTION>
The Offering
<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 24, 1998........................... 8,220,924 shares(1)
Warrants outstanding as of June 24, 1998............................... 375,000
Warrants exercised as of June 24, 1998................................. - 0-
Common Stock Outstanding if all Warrants are exercised................. 8,595,924
Estimated Net Proceeds if all Warrants are exercised................... 2,600,000 (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 500,000 shares of Common Stock reserved for
issuance upon exercise of outstanding options (the "Reserved Shares").
See "Dilution."
3
<PAGE>
(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 $5.25, 8.25 and 9.00
before deducting expenses payable by the Company as estimated at
$130,000.
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 Preliminary
Prospectus. See "Financial Statements."
Income Statement Items
----------------------
<TABLE>
<CAPTION>
From the Beginning of
Operations
(June 8, 1995 to Year Ended Year Ended
March 31, 1996)(1) March 31, 1997 March 31,1998
------------------ -------------- -------------
<S> <C> <C> <C>
Sales $ 294,000 $ 549,000 $ 723,000
Gross Profit 206,000 139,000 376,000
Income (Loss)
from Operations 90,000 (1,269,000) (3,904,000)
Net Loss (537,000) (6,938,000) (3,899,000)
Loss per Share $ (.18) $ (1.72) $ (.68)
Weighted Average
Shares
Outstanding 3,017,808 4,034,247 5,708,904
</TABLE>
Balance Sheet Items
-------------------
<TABLE>
<CAPTION>
Historical Pro Forma As adjusted for Exercise
March 31, 1998 March 31, 1998(2) of Warrants (3)
-------------- ----------------- ---------------
<S> <C> <C> <C>
Cash & Investments $1,816,000 $15,816,000 $ 18,416,000
Total Assets 3,722,000 17,722,000 20,322,000
Stockholders' Equity 2,847,000 16,847,000 19,447,000
</TABLE>
- --------------------------
(1) The selected financial information from the beginning of operations
(June 8, 1995) to March 31, 1996 does not include a pro forma
adjustment to reflect certain additional compensation expenses. "See
"Financial Statements."
(2) Pro forma balance sheet items illustrates the effect of net proceeds of
approximately $5,100,000 received from the sale of 750,000 shares of
common stock in April, 1998, in a private placement transaction and
approximately $8,900,000 from redemption and exercise of 1,725,000
redeemable common stock purchase warrants issued in connection with the
IPO (the "Redeemable Common Stock Purchase Warrants").
(3) 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 $11,400,000 as of March 31, 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 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 March 31, 1998, the Company had a pro forma net
tangible book value of approximately $16,847,000, or
5
<PAGE>
approximately $2.05 per share which reflects the pro forma 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: 150,000 shares
at $5.25; 150,000 shares at $8.25; and 75,000 shares at $9.00 and after
deducting estimated offering expenses, pro forma net tangible book value would
have been $19,447,000 or $2.26 per share. The result will be an immediate
dilution to new investors of $2.99, $5.99, and $6.74, respectively.
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
6
<PAGE>
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.
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. 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."
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 8,600,000 shares of Common Stock issued and outstanding. The
Company will have at least 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 may cause
7
<PAGE>
current shareholders of the Company to suffer significant dilution, which may
adversely affect the market for the Company's Common Stock.
5,000,000 of the Company's 6,500,000 outstanding shares of Common Stock
as of April 15, 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 Preliminary 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.
USE OF PROCEEDS
The Company will receive no proceeds from the sale of the Offered Stock
by the Selling Holders.
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.
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 March 31, 1998, the Company had pro forma net tangible book value
of $16,847,000 or $2.05 per share, derived from the Company's balance sheet as
of March 31, 1998 adjusted to give effect to 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 $5.25, $8.25, and $9.00 per share, as applicable, and
estimated offering expenses, pro forma net
8
<PAGE>
tangible book value would have been $19,447,000 or $2.26 per share. The
result will be an immediate increase in net tangible book value per share of
$.21 (10%) to existing shareholders and an immediate dilution to new
investors of $2.99 (57%), $5.99 (73%), and $6.74 (75%) per share,
respectively. As a result, public investors will bear most of the risk of
loss since their shares are being purchased at a cost substantially above the
price that existing shareholders acquired their shares. The following table
illustrates this dilution: <TABLE><CAPTION>
<S> <C> <C> <C> <C>
Public offering prices of the Placement Agent's Stock and the Underwriter's $5.25 $8.25 $9.00
Stock ........................................................................
Pro forma net tangible book value per share, before the Offering.............. $2.05
Increase per share attributable to the sale by the Company of the Offered .21
Stock...................................................................... -----
Pro forma net tangible book value per share, after the Offering.................. 2.26 2.26 2.26
---- ---- ----
Dilution per share to new investors.............................................. $2.99 $5.99 $6.74
</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>
Shares Percentage of Aggregate Percent of Average Price
Purchased Total Shares Consideration Total Invested Per Share
<S> <C> <C> <C> <C> <C>
Existing Stockholders (Pro Forma)...... 8,225,000 96% $28,138,000 92% $3.42
Investors in this Offering............. 375,000 4% $ 2,600,000 8% $6.93
------------ --------- ----------- ---------- ----------
Total............................ 8,600,000 100% $30,738,000 100% $3.57
------------ --------- ----------- ---------- ----------
</TABLE>
No assurance can be given as to the timing of the exercise of the
Warrants or whether any or all of the Warrants will be exercised. The foregoing
analysis assumes no exercise of any options or warrants other than the Warrants.
In the event any such options or warrants are exercised, the percentage
ownership of the investors in this Offering will be reduced and the dilution per
share of Common Stock to purchasers of Common Stock in this Offering will
increase.
MARKET PRICES OF COMMON STOCK
The Company's Common Stock has traded on the Nasdaq SmallCap Market
since April 8, 1997, under the symbol "ETEL." On June 24, 1998, the closing
price of the Common Stock was $18 7/16 per share. There are approximately 84
record holders of the Company's Common Stock. The following table sets forth the
range of high and low bid prices for tile Common Stock, as quoted on Nasdaq, for
the period from April 8, 1997, the date of the Company's initial public offering
of securities, through March 31, 1998.
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
<S> <C> <C>
April 8 - June 30, 1997 $ 5.8125 $ 3.8130
July 1 - September 30, 1997 $ 5.3750 $ 3.7500
October 1 - December 31, 1997 $ 9.1250 $ 4.8750
January 1 - March 31, 1998 $ 7.5000 $ 5.0000
</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
9
<PAGE>
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 Pro Forma (1) As Adjusted (2)
March 31, 1998 ------------- ---------------
---------------
<S> <C> <C> <C>
Long-term debt...................................................... $-0- $-0- $-0-
Stockholders Equity
Common Stock, $.01 par value, 50,000,000 shares authorized, 5,750,000 shares
outstanding; pro forma 8,225,000 shares outstanding reflecting the
issuance of shares after the April 1998 Private Placement and the
redemption and exercise of the Redeemable Common Stock Purchase Warrants
in June 1998;
8,600,000 shares outstanding, as adjusted..................... 57,500 82,250 86,000
Stock Subscriptions Receivable - - -
Additional paid-in capital....................................... 14,163,000 28,138,250 30,734,500
Retained deficit................................................. (11,373,500) (11,373,500) (11,373,500)
--------------- ------------- ---------------
Total stockholders' equity.................................... 2,847,000 16,847,000 19,447,000
--------------- ------------- ---------------
Total capitalization.......................................... 2,847,000 16,847,000 19,447,000
</TABLE>
(1) The pro forma capitalization illustrates the effect of the sale of
750,000 shares of Common Sock in the April 1998 Private Placement and
the redemption and exercise of the Redeemable Common Stock Purchase
Warrants in June 1998.
(2) 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
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.
10
<PAGE>
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 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
11
<PAGE>
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 extraordinary interest expense associated with the bridge
loans reflects the highly speculative nature of the loans at the time.
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.
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.
12
<PAGE>
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.
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 also successfully completed a private placement of
Common Stock in April 1998 of 750,000 shares with net proceeds of approximately
$5,100,000. In May 1998, the Company announced that it met the requirements for
redeeming its 1,725,000 outstanding Warrants on June 19, 1998, which were
exercisable for Common Stock at $5.25 per Warrant for one share of Common Stock.
Warrant exercises should yield net proceeds to the Company of approximately
$8,900,000. 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.
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 Initial Public
Offering, the private placement, Warrant exercises, 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 short-term cash requirements as needed. However, while
operating activities have provided and may provide cash in certain periods, to
the extent the Company has
13
<PAGE>
experienced or experiences growth, the Company's operating and product
development activities have used and 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, or that the Company will be able to
obtain financing from additional sources.
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
14
<PAGE>
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.
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
15
<PAGE>
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 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.
16
<PAGE>
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.
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
17
<PAGE>
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 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.
18
<PAGE>
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.
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.
19
<PAGE>
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.
The sets of competitors associated with the three classes of Telecom
2000 Products are:
20
<PAGE>
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
21
<PAGE>
future include Cisco Systems, Inc., Lucent Technologies, Inc., 3Com Corporation,
Cabletron Systems, Inc., and Bay Networks, Inc.
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.
22
<PAGE>
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 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.
23
<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
Christina L. Swisher 33 Vice President, Operations and Secretary
Donald J. Shoff 43 Vice President of Finance and Chief
Financial Officer
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 currently holds office until his
or her successor is elected and qualified. At present, the Company's By-laws
provide for not less than one director nor more than nine directors. Currently,
there are five directors in the Company. The By-laws permit the Board of
Directors to fill any vacancy and such director may serve until the next annual
meeting of shareholders or until his successor is elected and qualified.
Officers serve at the discretion of the Board of Directors. There are no family
relationships among any officers or directors of the Company. Mr. Veschi has
served as a promoter of the Company and the consideration received for such
services has been limited to the compensation disclosed under " Remuneration."
The officers of the Company devote full time to the business of the Company.
The principal occupation and business experience for each officer and
director of the Company for at least the last five years is 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.
24
<PAGE>
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 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
25
<PAGE>
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 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"):
26
<PAGE>
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
Other
Annual
Name of Individual Position with Company Year Salary Bonus Compensation(1)
- ------------------ --------------------- ---- ------ ----- ---------------
<S> <C> <C> <C> <C> <C>
Robert A. Veschi President, Chief Executive 1998 175,000 87,500 ---
Officer, Director 1997 175,000 87,500 ---
1996 --- 25,000 ---
Christina L. Swisher Vice President, Operations 1998 88,333 21,000 ---
and Secretary 1997 57,917 5,607 ---
1996 6,250 4,167 ---
</TABLE>
(1) The officers of the Company may receive remuneration as part of an
overall group insurance plan providing health, life and disability
insurance benefits for employees of the Company. The amount allocable
to each Named Officer cannot be specifically ascertained, but, in any
event, did not in any reported fiscal year exceed the lesser of $50,000
and such Named Officer's combined salary and bonus. The Company has
purchased key-man term life insurance on Mr. Veschi in the amount of $2
million, which designates the Company as the owner and beneficiary of
the policy. The Company has agreed to grant to Ms. Swisher options to
purchase 60,000 shares of Common Stock, in consideration of services
during fiscal year 1998. However, such options have not yet been
granted by the Company and the terms thereof have not yet been set.
Director Compensation
The directors of the Company, with the exception of Mr. Veschi, are
entitled to annual remuneration of $24,000 pursuant to oral agreements between
such directors and the Company. In addition, General Short receives $1,000 per
month under a consulting services agreement for his additional specific business
services on behalf of the Company.
Each outside director of the Company is entitled to receive reasonable
expenses incurred in attending meetings of the Board of Directors of the
Company. The members of the Board of Directors intend to meet at least quarterly
during the Company's fiscal year, and at such other times as duly called. The
Company presently has four outside directors.
Employment Agreement
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.
27
<PAGE>
Pursuant to the Agreement, Mr. Veschi's employment may be terminated by
the Company with cause or by Mr. Veschi with or without good reason. Termination
by the Company without cause, or by Mr. Veschi for good reason, would subject
the Company to liability for liquidated damages in an amount equal to Mr.
Veschi's current salary and a pro rata portion of his bonus for the remaining
term of the Agreement, payable in a lump sum cash payment, without any set-off
for compensation received from any new employment. In addition, Mr. Veschi would
be entitled to continue to participate in and accrue benefits under all employee
benefit plans and to receive supplemental retirement benefits to replace
benefits under any qualified plan for the remaining term of the Agreement to the
extent permitted by law.
Limitation on Liability of Directors
As permitted by Delaware law, the Company's Certificate of
Incorporation includes a provision that provides that the Company will, to the
fullest extent permitted by Section 145 of the Delaware General Corporation Law,
as amended from time to time ("DGCL"), indemnify all persons whom it may
indemnify pursuant thereto. To the fullest extent permitted by the DGCL, a
director of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for a breach of fiduciary duty as a director.
The provisions are intended to afford directors protection against, and to limit
their potential liability for, monetary damages resulting from suits alleging a
breach of the duty of care by a director; they also diminish the potential
rights of action which might otherwise be available to shareholders by limiting
the liability of officers and directors to the maximum extent allowable under
Delaware law and by affording indemnification against most damages and
settlement amounts paid by a director of the Company in connection with any
shareholders derivative action. As a consequence of these provisions,
stockholders of the Company will be unable to recover monetary damages against
directors for action taken by them that may constitute negligence or gross
negligence in performance of their duties unless such conduct falls within an
exception under DGCL or under Delaware case law. The provision, however, does
not alter the applicable standards governing a director's fiduciary duty and
does not eliminate or limit the right of the Company or any stockholder to
obtain an injunction or any other type of equitable relief in the event of a
breach of fiduciary duty. Management of the Company believes these provisions
will assist the Company in securing and retaining qualified persons to serve as
directors. The Company is unaware of any pending or threatened litigation
against the Company or its directors that would result in any liability for
which such director would seek indemnification or similar protection.
The Company believes that the substantial increase in the number of
lawsuits being threatened or filed against corporations and their directors has
resulted in a growing reluctance on the part of capable persons to serve as
members of boards of directors of public companies. The Company also believes
that the increased risk of personal liability without adequate insurance or
other indemnity protection for its directors could result in overcautious and
less effective direction and management of the Company. The limitation on
liability and indemnification provisions are intended to increase the protection
provided directors and, thus, increase the Company's ability to attract and
retain qualified persons to serve as directors. Additionally, the Company has
procured directors liability insurance coverage, but there is no assurance that
it will provide coverage to the extent of the director's claims for
indemnification. In such event, the Company may be forced to bear a portion or
all of the cost of the director's claims for indemnification and, the value of
the Company stock may be adversely affected as a result. There is also no
assurance that the Company will be able to continue to procure directors
liability insurance. It is uncertain whether the Company's directors would
continue to serve in such capacities if improved protection from liability were
not provided.
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.
28
<PAGE>
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
--------------------
Number
Name and Address Position with Company of Shares Before After
Exercise of Exercise of
Warrant (1) Warrant (2)
<S> <C> <C> <C> <C>
Alonzo E. Short, Jr., Lt. Gen., Chairman of the Board 90,000 1.09 1.05
USA (ret.) (3)
Robert A. Veschi (4) President, Chief Executive 1,375,000 16.72 15.99
Officer, Director
Christina Swisher (4) Vice President, Secretary 120,000 1.46 1.40
Donald J. Shoff (4) Vice President, Chief 50,000 .61 .58
Financial Officer
William L. Hooton (5) Director 50,000 .61 .58
Clive W. Whittenbury, Ph.D. (6) Director 50,000 .61 .58
William W. Rogers, Jr. (7) Director 5,000 .06 .06
Edward Ratkovich, Maj. Gen. Stockholder 500,000 6.08 5.81
USA (ret.) (8)
Arthur Henley (9) Stockholder 487,500 5.93 5.67
Thomas T. Prousalis (10) Stockholder 450,000 5.47 5.23
All Officers and Directors as a 1,740,000 21.16 20.23
Group (7 persons)
</TABLE>
(1) Stated on a pro forma basis to give effect to the Private Placement in
April 1998, and the redemption and exercise of the Redeemable Common Stock
Purchase Warrants in June 1998.
(2) Does not include the exercise of options or warrants other than the
Warrants.
(3) c/o Lockheed Martin, 5203 Leesburg Pike, Suite 1501, Falls Church,
Virginia 22041.
(4) c/o e-Net, Inc., 12800 Middlebrook Road, Suite 200, Germantown, Maryland
20874.
(5) 13333 Glen Taylor Lane, Herndon, Virginia 22071.
(6) 511 Trinity Avenue, Yuba City, California 95991. Does not include
250,000 shares owned by MVSI, Inc., of which Dr. Whittenbury is, to the
Company's knowledge, a director.
(7) c/o CACI, 14200 Park Meadow Drive, Suite 200, Chantilly, Virginia 20151.
(8) 1030 Delf Drive, McLean, Virginia 22101. Does not include 250,000 owned by
MVSI, Inc., of which Gen. Ratkovich is, to the Company's knowledge, a
significant shareholder, chairman and chief executive officer.
29
<PAGE>
(9) 10705 Bay Laurel Trail, Austin, Texas 78750.
(10) 1919 Pennsylvania Avenue, N.W., Suite 800, Washington, D.C. 20006. Does not
include 250,000 shares owned by MVSI, Inc., of which Mr. Prousalis is, to
the Company's knowledge, a significant shareholder.
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 Preliminary
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 Amount of Securities Amount of Percentage of
Owned Being Registered Securities Owned Securities
After Offering Owned if more
(1)(2) Than 1%
<S> <C> <C>
Atlas Capital Partners, L.P. 10,000 Shares of Common 10,000 Shares of Common 0
Stock (Issued Private Stock (Issued Private
Placement Stock) Placement Stock)
Bryn Mawr Trust Co. A/C RA 10,000 Shares of Common 10,000 Shares of Common
Hansen & FJ Campbell III, Stock (Issued Private Stock (Issued Private
TTEES PA Merchant Group Ltd Placement Stock) Placement Stock)
401(k) Pension & Profit
Sharing Plan
Frank J. Campbell, III 7,000 Shares of Common 7,000 Shares of Common 0
Stock (Issued Private Stock (Issued Private
Placement Stock) Placement Stock)
Donaldson, Lufkin & Jenrette 10,000 Shares of Common 10,000 Shares of Common 0
Securities Corporation Stock (Issued Private Stock (Issued Private
Custodian F/B/O Frank J. Placement Stock) Placement Stock)
Campbell III Account #
698-101714
Coutts (Jersey) Limited 100,000 Shares of Common 10,000 Shares of Common 0
JY798967 Stock (Issued Private Stock (Issued Private
Placement Stock) Placement Stock)
Gerard E. Dorsey 10,000 Shares of Common 10,000 Shares of Common 0
Stock (Issued Private Stock (Issued Private
Placement Stock) Placement Stock)
Amir L. Ecker 12,500 Shares of Common 12,500 Shares of Common 0
Stock (Issued Private Stock (Issued Private
Placement Stock) Placement Stock)
Donaldson Lufkin Jenrette 7,500 Shares of Common 7,500 Shares of Common 0
Securities Corporation Stock (Issued Private Stock (Issued Private
Custodian FBO Amir L. Ecker Placement Stock) Placement Stock)
IRA Acct # 698-103058
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Amount of Securities Amount of Securities Amount of Percentage of
Owned Being Registered Securities Owned Securities
After Offering Owned if more
(1)(2) Than 1%
<S> <C> <C>
The Ecker Family Partnership 7,500 Shares of Common 7,500 Shares of Common 0
Stock (Issued Private Stock (Issued Private
Placement Stock) Placement Stock)
Lancaster Investment 200,000 Shares of Common 200,000 Shares of 0
Partners, L.P. Stock (Issued Private Common Stock (Issued
Placement Stock) Private Placement Stock)
Lincoln Trust Company FBO 10,000 Shares of Common 10,000 Shares of Common 0
Perry D. Snavely IRA Account Stock (Issued Private Stock (Issued Private
# 61076323 Placement Stock) Placement Stock)
Losty Capital Management 37,500 Shares of Common 37,500 Shares of Common 0
Stock (Issued Private Stock (Issued Private
Placement Stock) Placement Stock)
Ronald B. Mandell 2,000 Shares of Common 2,000 Shares of Common 0
Stock (Issued Private Stock (Issued Private
Placement Stock) Placement Stock)
Irving L. Mazer, Esq. 10,000 Shares of Common 10,000 Shares of Common 0
Stock (Issued Private Stock (Issued Private
Placement Stock) Placement Stock)
James F. Meara, Jr. 5,000 Shares of Common 5,000 Shares of Common 0
Stock (Issued Private Stock (Issued Private
Placement Stock) Placement Stock)
Felix S. Miksis 1,000 Shares of Common 1,000 Shares of Common 0
Stock (Issued Private Stock (Issued Private
Placement Stock) Placement Stock)
Harry Mittelman Revocable 15,000 Shares of Common 15,000 Shares of Common 0
Trust Stock (Issued Private Stock (Issued Private
Placement Stock) Placement Stock)
Mustang Partners, L.P. 75,000 Shares of Common 75,000 Shares of Common 0
Stock (Issued Private Stock (Issued Private
Placement Stock) Placement Stock)
Porter Partners, L.P. 50,000 Shares of Common 50,000 Shares of Common 0
Stock (Issued Private Stock (Issued Private
Placement Stock) Placement Stock)
ProFutures Special Equities 60,000 Shares of Common 60,000 Shares of Common 0
Fund, L.P. Stock (Issued Private Stock (Issued Private
Placement Stock) Placement Stock)
Leonid S. Roytman and Alla 5,000 Shares of Common 5,000 Shares of Common 0
S. Roytman JTTEN Stock (Issued Private Stock (Issued Private
Placement Stock) Placement Stock)
Schottenfeld Associates, L.P. 15,000 Shares of Common 15,000 Shares of Common 0
Stock (Issued Private Stock (Issued Private
Placement Stock) Placement Stock)
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Amount of Securities Amount of Securities Amount of Percentage of
Owned Being Registered Securities Owned Securities
After Offering Owned if more
(1)(2) Than 1%
<S> <C> <C>
Perry D. Snavely, Jr. 22,500 Shares of Common 22,500 Shares of Common 0
Stock (Issued Private Stock (Issued Private
Placement Stock) Placement Stock)
Dr. Gershon Stern 7,500 Shares of Common 7,500 Shares of Common 0
Stock (Issued Private Stock (Issued Private
Placement Stock) Placement Stock)
Robert M. Stern 1,250 Shares of Common 1,250 Shares of Common 0
Stock (Issued Private Stock (Issued Private
Placement Stock) Placement Stock)
Susan J. Spector 1,250 Shares of Common 1,250 Shares of Common 0
Stock (Issued Private Stock (Issued Private
Placement Stock) Placement Stock)
Talmor Capital Management 2,500 Shares of Common 2,500 Shares of Common 0
Inc. Stock (Issued Private Stock (Issued Private
Placement Stock) Placement Stock)
Richard C. Walling 50,000 Shares of Common 50,000 Shares of Common 0
Stock (Issued Private Stock (Issued Private
Placement Stock) Placement Stock)
Carolyn Wittenbraker 5,000 Shares of Common 5,000 Shares of Common 0
Stock (Issued Private Stock (Issued Private
Placement Stock) Placement Stock)
SUBTOTAL 750,000 750,000
Pennsylvania Merchant Group 75,000 Shares of Common 75,000 Shares of Common 0
Ltd. Stock (Placement Agent's Stock (Placement
Stock) (1) Agent's Stock) (1)
TOTAL 825,000 825,000
</TABLE>
(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 Preliminary 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.
32
<PAGE>
<TABLE>
<CAPTION>
Recipient Amount of Securities Amount of Securities Amount of Percentage of
Owned (1) Being Registered Securities Owned Securities Owned
After Offering if more Than 1%
(1)(2)
<S> <C> <C> <C>
Robert T. Kirk 240,000 Shares of Common 240,000 Shares of Common
Stock (Underwriter's Stock (Underwriter's 0
Stock) (3) Stock) (3)
Michael Morrisett 15,000 Shares of Common 15,000 Shares of Common
Stock (Underwriter's Stock (Underwriter's 0
Stock) (3) Stock) (3)
Marie Lima 15,000 Shares of Common 15,000 Shares of Common
Stock (Underwriter's Stock (Underwriter's 0
Stock) (3) Stock) (3)
David A. Carter 15,000 Shares of Common 15,000 Shares of Common
Stock (Underwriter's Stock (Underwriter's 0
Stock) (3) Stock) (3)
Wendy Tand Gusrae 15,000 Shares of Common 15,000 Shares of Common
Stock (Underwriter's Stock (Underwriter's 0
Stock) (3) Stock) (3)
Total 300,000 Shares of Common 300,000 Shares of Common
Stock (Underwriter's Stock (Underwriter's 0
Stock) (3) Stock) (3
</TABLE>
(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 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
33
<PAGE>
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 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
34
<PAGE>
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.
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.
35
<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 Preliminary 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 Preliminary
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.
36
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants.................................. 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
</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
Vienna, Virginia
May 27, 1998
<PAGE>
e-NET, INC.
BALANCE SHEETS
ASSETS
March 31,
<TABLE>
<CAPTION>
1998 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 liabilities 439,222 432,849
(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 equity - 1,250,000
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
------------------ ------------------
------------------ ------------------
</TABLE>
Noncash investing and financing activities
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>
Stock Unamortized
Common Stock Subscriptions Cost of Additional Total
No. of and Notes Bridge Paid-in Retained Stockholders'
Shares Amount Receivable Financing Capital Deficit Equity
--------- --------- ------------- ------------ ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, 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)
----------- --------- -------------- ------------ ---------- ---------- -----------
(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
------------------ ------------------
------------------ ------------------
Accrued Liabilities
Accrued liabilities consist of the following at March 31:
1998 1997
-------------------- ----------------
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
As reported $(3,898,812) $(6,937,593)
Pro forma (4,978,812) (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 stock option plan are included
in the tables below as if the plan was adopted and the options had been granted
as of March 31, 1998.
<TABLE>
<CAPTION>
Stock Options
-------------
Weighted
Average
Outstanding Exercise Price
<S> <C> <C>
Balance at March 31, 1997 - -
Granted 770,953 $4.49
Exercised - -
Canceled (3,000) 4.14
------------ ----
Balance at March 31, 1998 767,953 $4.49
</TABLE>
<TABLE>
<CAPTION>
Number of Options
Year Ended
March 31
1998 1997
---------- -------
<S> <C> <C>
Exercisable, end of year 177,120 -
Weighted-average fair value per option of
Options granted during the year $ 3.14 -
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ------------ --------- ------------ --------
<S> <C> <C> <C> <C> <C>
$ 3.82 to $ 4.58 622,076 7.5 $4.14 150,410 $4.14
$ 4.59 to $ 5.34 10,877 7.7 4.88 10,877 4.88
$ 5.35 to $ 6.11 77,000 7.8 5.64 2,000 5.75
$ 6.12 to $ 6.87 38,000 7.9 6.40 500 6.64
$ 6.88 to $ 7.63 20,000 7.6 7.37 13,333 7.24
Totals 767,953 7.5 $4.49 177,120 $4.44
</TABLE>
F-14
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
F-15
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Preliminary Prospectus Summary.............................................................. 1
Risk Factors................................................................................ 5
Use of Proceeds............................................................................. 8
Dilution.................................................................................... 8
Market Prices of Common Stock............................................................... 9
Capitalization.............................................................................. 9
Dividend Policy............................................................................. 10
Management's Discussion and Analysis of Financial Condition and Results of Operations....... 10
Business.................................................................................... 14
Management.................................................................................. 24
Principal Stockholders...................................................................... 29
Selling Holders............................................................................. 30
Certain Transactions........................................................................ 33
Description of Securities................................................................... 34
Plan of Distribution........................................................................ 36
Legal Proceedings........................................................................... 36
Legal Matters............................................................................... 36
Experts..................................................................................... 36
Index to Financial Statements............................................................... F-1
Report of Independent Certified Public Accountants.......................................... F-2
</TABLE>
Until __________ ___, 1998 (40 days after the effective date of this
Preliminary Prospectus), all broker-dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may be
required to deliver a Prospectus. This is in addition to the obligation of
dealers to deliver a Prospectus with respect to their unsold allotments or
subscriptions.
e-Net, Inc.
1,125,000 Shares of Common Stock
PRELIMINARY PROSPECTUS
, 1998
------------
F-16
<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.
II-1
<PAGE>
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....................... *
Financial Printing....................................... *
Transfer Agent Fees...................................... *
Accounting Fees and Expenses............................. *
Legal Fees and Expenses.................................. *
Blue Sky Fees and Expenses............................... *
Miscellaneous............................................ *
Total.............................................. *
</TABLE>
* To be completed by amendment.
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"
II-2
<PAGE>
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 Stock upon the
completion of the Company's initial public offering at a ratio calculated using
the offering price per share. In March 1997, MVSI converted the convertible
debenture into 250,000 shares of Common Stock. The securities issued by the
Company in these transactions were "restricted" securities within the meaning of
that term as defined in Rule 144 and were issued pursuant to the "private
placement" exemption under Section 4(2) of the Act for sales of securities by an
issuer not involving any public offering. The purchaser in this transaction was
an "accredited" person as that term is used in Regulation D under the Act.
In April 1998, the Company issued 750,000 shares of Common Stock in a
private placement to various investors at a price of $7.50 per share, or an
aggregate of $5,625,000. Pennsylvania Merchant Group served as the placement
agent for this transaction, for a fee of six percent of the gross proceeds of
the offering, or $337,500, plus a five year warrant to purchase 75,000 shares of
Common Stock at an exercise price of $9.00 per share. The securities issued by
the Company in these transactions were "restricted" securities within the
meaning of that term as defined in Rule 144 and were issued pursuant to the
exemption provided by Rule 506 of Regulation D under the Act for sales of
securities by an issuer not involving any public offering. The purchasers in
this transaction were "accredited" persons as that term is used in Regulation D
under the Act.
All of the foregoing restricted securities were appropriately marked
with a restrictive legend and were issued for investment purposes only and not
with a view to redistribution, absent registration. All of the foregoing
purchasers were fully informed and advised concerning the Registrant, its
business, financial and other matters. The Registrant was informed that each
purchaser was able to bear the economic risk of its investment and was aware
that the securities were not registered under the Act and cannot be re-offered
or re-sold until they have been so registered or until there is an available
exemption from the registration requirements of the Act. The Company's transfer
agent and registrar was instructed to mark "stop transfer" on its ledgers to
assure that these securities not be transferred absent registration or a
determination that there is an available exemption from the registration
requirements of the Act.
II-3
<PAGE>
Item 27. Exhibits
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.*
5.1 Opinion of Williams & Connolly ****
10.0 Employment Agreement, Robert A. Veschi, dated April 1, 1996
(management contract or compensatory plan or arrangement).*
10.1 United States Patent, Notice of Allowance, dated January 23, 1996.*
10.2 Assignment of Patent Rights, dated March 22, 1996.*
10.3 Sprint Agreement, dated March 1, 1996.*
10.4 Financial Advisory
Agreement with Barron Chase Securities, Inc., dated April 10, 1997.*
10.5 Merger and Acquisition Agreement with Barron Chase Securities, Inc.,
dated April 10, 1997.*
10.6 Mutual Cooperation Agreement with MVSI, Inc., dated January 14, 1997.*
10.7 Lockheed Martin Agreement, dated January 3, 1997.*
10.8 Product Sales Agreement with Diamond Telecom, dated March 6, 1998.**
10.9 Software Development Agreement with Com21, dated January 22, 1998.**
10.10 Distributor Agreement with Comtel Electronic System GMBH, dated April
9, 1998.**
10.11 Joint Market Agreement with Paradyne Corporation, dated May 29,
1997.**
10.12 Form of Product Sales Agreement with PC Importers Inc. d/b/a Unicent
Technologies.**
10.13 1997 Nonqualified Stock Option Plan (management contract or
compensatory plan or arrangement).**
10.14 Government Reseller Agreement with Government Technology Services,
Inc., dated August 27, 1997.**
10.15 Memorandum of Understanding with Summa Four, Inc., dated April 17,
1998.**
10.16 Net2Phone Bundling Agreement with IDT Corporation, dated April 23,
1998.**
11.0 Computation of Per Share Loss ***
21.0 Subsidiaries.***
23.0 Consent of Grant Thornton LLP. ****
23.1 Consent of Williams & Connolly ****
25.0 Power of Attorney (contained on page II-6)
- ------------------
* 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.
**** To be filed by amendment
II-4
<PAGE>
Item 28. Undertakings
The undersigned Registrant hereby undertakes to provide to
participating broker-dealers, at the closing, certificates in such denominations
and registered in such names as required by the participating broker-dealers, to
permit prompt delivery to each purchaser.
The undersigned Registrant also undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by
section 10(a)(3) of the Securities Act of
1933;
(ii) To reflect in the Prospectus any facts or
events arising after the effective date of
the registration statement (or the most
recent post-effective amendment thereof)
which, individually or in the aggregate,
represent a fundamental change in the
information set forth in the registration
statement:
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement;
Provided, however, that paragraphs (a)(1)(i) and
(a)(1)(ii) do not apply if the registration statement
is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports
filed by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the
registration statement.
(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-5
<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 June __, 1998.
e-NET, INC.
By: /s/ Robert A. Veschi
----------------------
Robert A. Veschi
President
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement on Form SB-2 has been signed by the
following persons in the capacities and on the dates stated. Each person whose
signature appears below hereby constitutes and appoints Robert A. Veschi as such
person's true and lawful attorney-in-fact and agent with full power of
substitution for such person and in such person's name, place and stead, in any
and all capacities, to sign and to file with the Securities and Exchange
Commission, any and all amendments and post-effective amendments to this
Registration Statement, with exhibits thereto and other documents in connection
therewith, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully to all intents and purposes as
such person might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or any substitute therefor, may lawfully
do or cause to be done by virtue thereof.
<TABLE>
<CAPTION>
Name Title Date
- ---- ----- ----
<S> <C> <C>
/s/Alonzo E. Short, Jr. Chairman of the Board June __, 1998
- --------------------------------------------
Alonzo E. Short, Jr., Lt. Gen., USA (ret.)
/s/Robert A. Veschi President, Chief Executive June __, 1998
- --------------------------------------------
Robert A. Veschi Officer, Director
/s/Donald J. Shoff Chief Financial Officer June __, 1998
- --------------------------------------------
Donald J. Shoff (Chief Accounting Officer)
/s/William L. Hooton Director June __, 1998
- --------------------------------------------
William L. Hooton
/s/Clive Whittenbury Director June __, 1998
- --------------------------------------------
Clive Whittenbury, Ph.D.
/s/William W. Rogers, Jr. Director June __, 1998
- --------------------------------------------
William W. Rogers, Jr.
</TABLE>
II-6
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
to
FORM SB-2
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
-----------
e-NET, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT INDEX
No. Document
--- --------
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.*
5.1 Opinion of Williams & Connolly ****
10.0 Employment Agreement, Robert A. Veschi, dated April 1, 1996
(management contract or compensatory plan or arrangement).*
10.1 United States Patent, Notice of Allowance, dated January 23, 1996.*
10.2 Assignment of Patent Rights, dated March 22, 1996.*
10.3 Sprint Agreement, dated March 1, 1996.*
10.4 Financial Advisory Agreement with Barron Chase Securities, Inc.,
dated April 10, 1997.*
10.5 Merger and Acquisition Agreement with Barron Chase Securities, Inc.,
dated April 10, 1997.*
10.6 Mutual Cooperation Agreement with MVSI, Inc., dated January 14,
1997.*
10.7 Lockheed Martin Agreement, dated January 3, 1997.*
10.8 Product Sales Agreement with Diamond Telecom, dated March 6, 1998.**
10.9 Software Development Agreement with Com21, dated January 22, 1998.**
10.10 Distributor Agreement with Comtel Electronic System GMBH, dated April
9, 1998.**
10.11 Joint Market Agreement with Paradyne Corporation, dated May 29,
1997.**
10.12 Form of Product Sales Agreement with PC Importers Inc. d/b/a Unicent
Technologies.**
10.13 1997 Nonqualified Stock Option Plan (management contract or
compensatory plan or arrangement).**
10.14 Government Reseller Agreement with Government Technology Services,
Inc., dated August 27, 1997.**
10.15 Memorandum of Understanding with Summa Four, Inc., dated April 17,
1998.**
10.16 Net2Phone Bundling Agreement with IDT Corporation, dated April 23,
1998.**
11.0 Computation of Per Share Loss ***
21.0 Subsidiaries.***
23.0 Consent of Grant Thornton LLP. ****
23.1 Consent of Williams & Connolly ****
25.0 Power of Attorney (contained on page II-6)
- ------------------
* 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.
**** To be filed by amendment
