<PAGE>
As filed with the Securities and Exchange Commission on May 1, 1998.
Registration No. 333-3860
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
Post-Effective Amendment No. 1
to
FORM SB-2
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
-----------
e-NET, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 1711 52-1929282
(State or other jurisdiction of (Primary standard industrial (IRS employer
incorporation or organization) classification code number) identification
number)
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 prospectus is expected to be made pursuant to rule 434,
please check the following box. [ ]
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 is a Post-Effective Amendment to the
Registration Statement on Form SB-2, Registration No. 333-3860, declared
effective on April 7, 1997 (the "IPO Registration Statement"), which registered
a primary offering of securities by e-Net, Inc. (the "Company") and an offering
of securities by a selling securityholder ("Selling Securityholder"). Pursuant
to the IPO Registration Statement, the Company registered its initial offer,
issuance and sale of 1,725,000 shares of common stock, per value $.01 per share
("Common Stock") (of which 1,500,000 were issued and sold); the offer, issuance
and sale of 1,725,000 Redeemable Common Stock Purchase Warrants (the
"Warrants"); the offer, issuance and sale of 1,725,000 shares of Common Stock
underlying the Warrants; and 250,000 shares of Common Stock sold by the Selling
Securityholder. This Post-Effective Amendment relates to the Common Stock
underlying the Warrants.
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<PAGE>
PROSPECTUS
e-Net, Inc.
1,725,000 Shares of Common Stock Underlying
1,725,000 Redeemable Common Stock Purchase Warrants
This Prospectus relates to the offering (the "Offering") by e-Net, Inc.
(the "Company" or "e-Net") of an aggregate 1,725,000 shares (the "Offered
Stock") of common stock, par value $.01 per share ("Common Stock") issuable upon
the exercise of Redeemable Common Stock Purchase Warrants (the "Warrants," and
collectively with the Offered Stock, the "Securities"). Each Warrant entitles
the holder to purchase one share of Common Stock at $5.25 per share (subject to
adjustment) exercisable through April 7, 2002. The Warrants are redeemable by
the Company for $.05 per Warrant, on not less than thirty (30) days nor more
than sixty (60) days written notice if the closing bid price for the Common
Stock equals or exceeds $10.00 per share during any thirty (30) consecutive
trading day period ending not more than fifteen (15) days prior to the date that
the notice of redemption is mailed, and provided there is then a current
effective registration statement under the Securities Act of 1933, as amended
(the "Act") with respect to the issuance and sale of Common Stock upon the
exercise of the Warrants. See "Description of Securities"
The Company's Common Stock and the Warrants are quoted on the Nasdaq
SmallCap Market ("Nasdaq") under the symbols "ETEL" and "ETELW," respectively.
On April 23, 1998, the closing prices of the Common Stock and Warrants as quoted
on the Nasdaq SmallCap Market were $11 7/8 and $6 5/8 respectively. No Warrants
may be exercised without the availability of a current Prospectus. The holders
of the Warrants do not have any of the rights, privileges or liabilities of the
Company stockholders prior to warrant exercise.
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS SPECULATIVE AND INVOLVES A
HIGH DEGREE OF RISK AND SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY
INVESTORS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK
FACTORS," ON PAGES 5-9 AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Price to Underwriting Discounts and Proceeds to the Company(1)
Public Commissions
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $5.25 None $5.25
- --------------------------------------------------------------------------------
Total $9,056,250 None $9,056,250
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) Before deducting expenses payable by the Company estimated at $65,000.
The date of this Prospectus is April 30, 1998.
<PAGE>
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Certain statements made herein that are not historical are forward-looking
within the meaning of the Private Securities Litigation Reform Act of 1995. The
words "estimate," "project," "intend," "expect," "believe," and similar
expressions are intended to identify forward-looking statements. These
forward-looking statements involve known and unknown risks and uncertainties.
Many factors could cause the actual results, performance or achievements of the
Company to be materially different from those contemplated by any future
statements, including, among others, those described below under "Risk Factors."
For additional information regarding these and other risks and uncertainties
associated with the Company's business, see "Risk Factors" below, as well as the
Company's reports filed from time to time with the Commission.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Post-Effective Amendment to a Registration Statement on Form
SB-2 (as so amended , the "Registration Statement"), pursuant to the Act, with
respect to the offer, issuance and sale of the Offered Stock (the "Offering").
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto. The statements contained in
this Prospectus as to the contents of any contract or other document identified
as exhibits in this Prospectus are not necessarily complete, and in each
instance, reference is made to a copy of such contract or document filed as an
exhibit to the Registration Statement, each statement being qualified in any and
all respects by such reference. For further information with respect to the
Company and the securities offered hereby, reference is made to the Registration
Statement and exhibits thereof which may be inspected without charge at the
principal office of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, DC 20549.
In April 1997, the Company became subject to the reporting requirements of
the Securities Exchange Act of 1934, and in accordance therewith, files reports,
proxy statements and other information with the Commission. Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549; at its New York Regional Office, Room 1400, 7 World Trade Center,
New York, New York 10048; and at its Chicago Regional Office, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and copies of such material can be
obtained from the Public Reference Section at prescribed rates. The Company
intends to furnish its shareholders with annual reports containing audited
financial statements and such other reports as the Company deems appropriate or
as may be required by law.
The Company will provide without charge to each person who receives a
Prospectus, upon written or oral request of such person, a copy of any
information that is incorporated by reference in the Prospectus (not including
exhibits to the information that is incorporated by reference unless the
exhibits are themselves specifically incorporated by reference). Such requests
may be directed to Stockholder Relations, e-Net, Inc., 12800 Middlebrook Road,
Suite 200, Germantown, Maryland 20874, telephone (301) 601-8700.
-ii -
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and must be read in
conjunction with, the more detailed information and financial statements,
including notes thereto, appearing elsewhere in this Prospectus. Each
prospective investor is urged to read this Prospectus in its entirety.
The Company
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 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, currently being sold, and the Telecom 2000 Consumer System, now under
development. 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
-1 -
<PAGE>
"gateway" to DDNs, consolidating customer site-originated telephone calling for
DDN-based transport efficiency and lower cost than traditional methods. The
third class, Telecom 2000 Carrier-Class Gateways, now under development,
comprises gateway products with a large number of ports, which are expected to
offer over 1,000 simultaneous call capacity in a single chassis, to meet
interconnection and compression standards and to be appropriate for sales to
telephone carriers.
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 has begun to
take orders for it. 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 expects to announce its Telecom 2000 Retail Consumer system in March
1998 and expects this product to be available for sales 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 19, 1998 Retail consumer product
telephone software bundling
and network access
</TABLE>
In April 1997, the Company completed its initial public offering of
securities (the "Initial Public Offering") and gained the listing of its Common
Stock on the NASDAQ SmallCap Market as "ETEL." e-Net was founded in January
1995. The Company maintains principal executive offices at 12500 Middlebrook
Road, Germantown, Maryland, 20874, telephone number 301-601-8700.
See "Risk Factors," "Management" and "Certain Transactions" for a
discussion of certain factors that should be considered in evaluating the
Company and its business.
-2 -
<PAGE>
The Offering
<TABLE>
<CAPTION>
<S> <C>
Securities Offered ......................... 1,725,000 shares of Common Stock
underlying 1,725,000 Warrants.
Each Warrant entitles the
registered holder thereof to
purchase one share of Common Stock
for $5.25 (subject to adjustment)
during the five-year period ending
on April 7, 2002.
Common Stock outstanding as of
April 23, 1998 ........................... 6,500,000 shares(1)
Warrants outstanding as of
April 23, 1998 ........................... 1,725,000 (2)
Warrants exercised as of April 23, 1998 .... - 0-
Common Stock Outstanding if all Warrants
are exercised ............................ 8,225,000
Estimated Net Proceeds if all Warrants
are exercised ............................ $9,056,250(3)
Use of Proceeds ............................ Administrative expenses, operating
costs and working capital,
including telecommunications
products support and development,
capital equipment, marketing and
sales. See "Use of Proceeds."
NASDAQ Small Cap Market Symbols ............ Common Stock: ETEL
Warrants: ETEL W
</TABLE>
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(1) Excludes an aggregate of 2,600,000 shares of Common Stock reserved for
issuance upon exercise of outstanding options and warrants.
(2) Does not include (a) the issuance to the Company's placement agent in a
private placement of 750,000 shares of Common Stock completed in April 15,
1998 (the "Private Placement") for nominal consideration of a five-year
warrant to purchase up to 75,000 shares of Common Stock at an exercise
price equal to $9.00 (the "Placement Agent's Warrant"), or (b) the
issuance to the underwriter for the Initial Public Offering of warrants to
purchase 150,000 shares of Common Stock and 150,000 warrants exercisable
for a five-year period ending on April 7, 2002 at exercise prices of $8.25
and $0.21, respectively (the "Underwriter's Warrant").
(3) Assumes exercise of all Warrants at an exercise price of $5.25 before
deducting expenses payable by the Company as estimated at $65,000.
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<PAGE>
Selected Financial Information
The selected financial information set forth below is derived from, and
should be read in conjunction with, the more detailed financial statements
(including the notes thereto) appearing elsewhere in this Prospectus. See
"Financial Statements."
Income Statement Items
<TABLE>
<CAPTION>
From the Beginning
of
Operations
(June 8, 1995 to 12 Months Ended 9 Months Ended 9 Months Ended
March 31, 1996)(1) March 31, 1997 December 31, 1997 December 31, 1996
------------------ -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Sales $294,000 $549,000 $ 378,000 $ 439,000
Gross Profit 206,000 139,000 170,000 135,000
Income (Loss)
from Operations 90,000 (1,269,000) (2,394,000) (617,000)
Net Loss (537,000) (6,938,000) (2,322,000 (6,330,000)
Loss per Share $(.18) $(1.72) $(.41) $(1.59)
Weighted
Average Shares
Outstanding 3,017,808 4,034,247 5,695,455 3,972,727
</TABLE>
Balance Sheet Items
<TABLE>
<CAPTION>
As adjusted for
Historical Pro Forma Exercise
December 31, 1997 December 31, 1997(2) of Warrants (3)
----------------- -------------------- ---------------
<S> <C> <C> <C>
Cash & Investments $3,149,000 $ 8,324,000 $17,316,000
Total Assets 4,883,000 10,058,000 19,050,000
Stockholders' Equity 4,423,000 9,598,000 18,590,000
</TABLE>
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(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
$5,175,000 received from the sale of 750,000shares of common stock in
April, 1998, in a private placement transaction.
(3) Adjusted to reflect the exercise of 1,725,000 warrants.
-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 $9,800,000 as of December 31, 1997. 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.
-5 -
<PAGE>
Immediate and Substantial Dilution
An investor in the securities offered hereby will experience immediate and
substantial dilution. As of December 31, 1997, the Company had a pro forma net
tangible book value of approximately $9,598,000, or approximately $1.48 per
share which reflects the effect of the Private Placement on April 15, 1998.
After giving effect to the sale of the securities offered hereby at $5.25 per
Share, after deducting estimated offering expenses, pro forma net tangible book
value would have been $18,590,000, or $2.26 per share. The result will be an
immediate dilution to new investors of $2.99.
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 this Offering, but there can be no assurance
that such funds will be sufficient for these purposes. The Company may require
substantial amounts of the proceeds of the Initial Public Offering, the Private
Placement and this Offering 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, 1998, 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
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<PAGE>
support new software products and enhancements on a timely basis that meet
changing customer needs and respond to technological developments and emerging
industry standards, particularly client/server and Internet communications and
security protocols. There can be no assurance that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of services and products, or that new services and
products and enhancements will meet the requirements of the marketplace and
achieve market acceptance. Further, because the Company has only recently
commenced sales of its Telecom 2000 Products, there can be no assurance that,
despite testing by the Company and by current and potential customers, errors
will not be found in the Company's products, or, if discovered, successfully
corrected in a timely manner. If the Company is unable to develop and introduce
services and products in a timely manner in response to changing market
conditions or customer requirements, the Company's business, financial condition
and results of operations would be materially and adversely affected.
Broad Discretion in Application of Proceeds
Management of the Company has broad discretion to adjust the application
and allocation of the net proceeds of this Offering, in order to address changed
circumstances and opportunities. As a result of the foregoing, the success of
the Company will continue to be substantially dependent upon the discretion and
judgment of the management of the Company with respect to the application and
allocation of the net proceeds of the Company's initial public offering and of
the Offering contemplated hereby. Pending use of such proceeds, the net proceeds
of this Offering will be invested by the Company in temporary, short-term
interest-bearing obligations. See "Summary - Use of Proceeds."
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.
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<PAGE>
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 Offered Stock offered hereby is sold,
there will be a total of 8,225,000 shares of Common Stock issued and
outstanding. However, the total number of shares of Common Stock issued and
outstanding does not include up to 75,000 shares of Common Stock issuable upon
exercise of the Placement Agent's Warrant, up to 300,000 shares of Common Stock
issuable upon the exercise of the Underwriter's Warrants, and up to 500,000
shares of Common Stock issuable upon the exercise of employee stock options.
After reserving a total of 875,000 shares of Common Stock for issuance upon the
exercise of all other options and warrants, including the Placement Agent's
Warrant and the Underwriter's Warrants, if all of the Warrants are exercised,
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 current shareholders of
the Company to suffer significant dilution, which may adversely affect the
market for the Company's Common Stock.
4,750,000 of the Company's 6,500,000 outstanding shares of Common Stock as
of April 23, 1998 are "restricted securities" and, in the future, may be sold
upon compliance with Rule 144 under the Act. 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. Assuming that all of
the Warrants are exercised and the shares of Common Stock offered hereby are
sold, but that there is no exercise of any other issued and outstanding options
or warrants, the Company will have 8,225,000 shares of its Common Stock issued
and outstanding, of which 4,750,000 shares will be "restricted securities."
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 82,250 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.
Exercise of Warrants May Have Dilutive Effect on Market
The Company's outstanding warrants, including the Warrants, the
Underwriter's Warrants and the Placement Agent's Warrant, will provide, during
their term, an opportunity for the holder to profit, upon exercise, from a rise
in any market price of the Common Stock, with resulting dilution in the
ownership interest in the
-8 -
<PAGE>
Company held by the then present stockholders. Holders of warrants most likely
would exercise those warrants and purchase the underlying Common Stock at a time
when the Company may be able to obtain capital by a new offering of securities
on terms more favorable than those provided by such Warrants, in which event the
terms on which the Company may be able to obtain additional capital would be
adversely affected.
Risks Inherent in Event of Warrant Redemption
Any holder who does not exercise his Warrant prior to the time the
Warrants are redeemed after notice by the Company will forfeit his rights to
purchase the shares of Offered Stock underlying the Warrants. In the event that
the Company determines to issue the redemption notice, holders of Warrants will
be confronted with certain risks associated therewith. Because the redemption
price is a nominal amount ($.05 per Warrant) upon redemption, investors may be
forced (i) to exercise their Warrants when it may be financially disadvantageous
for such holder to do so, (ii) to sell the Warrants, if a public trading market
exists, notwithstanding possible adverse market conditions, or (iii) to accept
the nominal redemption price. Under no circumstances shall the Company exercise
any of its Warrant redemption rights at any time that a current Prospectus is
not available so as to permit Warrant exercise.
Continuing Registration Required to Exercise Warrants
The Company will be able to issue shares of Offered Stock upon exercise of
the Warrants only if there is then a current prospectus relating to the Offered
Stock and only if such Offered Stock is qualified for sale or exempt from
qualification under applicable state securities laws of the jurisdictions in
which the various holders of the Warrants reside. The Company is required to
file post-effective amendments to the related registration statement to reflect
in this Prospectus any facts or events arising after the effective date of the
registration statement or the most recent post-effective amendment thereto which
individually or in the aggregate, represent a fundamental change in the
information set forth therein In accordance with Section 10(a)(3) of the
Securities Act of 1933, when a prospectus is used more than nine months after
the effective date of the related registration statement, the information
contained therein generally must be as of a date not more than sixteen months
prior to such use. The Company has undertaken to keep current the registration
statement containing this Prospectus in order to permit the purchase and sale of
the Offered Stock underlying the Warrants, but there can be no assurance that
the Company will be able to do so. The Company may decide not to seek to qualify
for sale the shares of Offered Stock in all of the states in which the holder of
the Warrants reside and even if the Company seeks to so qualify, no assurance
can be given that such qualification will occur. The Warrants may be deprived of
any value and the market for the Warrants may be limited if a current prospectus
covering the Offered Stock is not kept effective or if such Offered Stock is not
qualified or exempt from qualification in the jurisdictions in which the holders
of the Warrants then reside.
USE OF PROCEEDS
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. No such acquisitions are being
negotiated as of the date of this Prospectus, and no portion of the net proceeds
has been allocated for any specific acquisition.
The Company reserves the right to allocate the proceeds of the Offering as
management may perceive its needs from time to time in response to these and
related contingencies. Pending such uses, the net proceeds will be invested in
short-term, interest bearing investment grade securities and money market
instruments.
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<PAGE>
Although the Company is unable to predict the precise period for which the
proceeds from the Offering will provide financing, management believes that the
Company should have sufficient working capital to meet its cash requirements for
the 12 month period following the date of the Prospectus. Although the Company
currently has an unused $1,00,000 line of credit, the Company may need to seek
additional funds through other loans or other financing arrangements during this
period of time. No such other arrangements exist and there can be no assurance
that they may be obtained in the future should the need for additional financing
arise. See "Risk Factors - Possible Need for Additional Financing."
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 December 31, 1997, the Company had pro forma net tangible book value
of $9,598,000 or $1.48 per share, derived from the Company's balance sheet as of
December 31, 1997 adjusted to give effect to the Private Placement on April 15,
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 sale of the Offered Stock at an assumed
price of $5.25 per share and estimated offering expenses, pro forma net tangible
book value would have been $18,590,000 or $2.26 per share. The result will be an
immediate increase in net tangible book value per share of $.78 (53%) to
existing shareholders and an immediate dilution to new investors of $2.99 (57%)
per share. As a result, public investors will bear most of the risk of loss
since their shares are being purchased at a cost substantially above the price
that existing shareholders acquired their shares. The following table
illustrates this dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Public offering price of the Offered Stock ......................... $5.25
Pro forma net tangible book value per share, before the Offering.. $1.48
Increase per share attributable to the sale by the Company of the
Offered Shares ................................................. .78
-----
Pro forma net tangible book value per share, after the Offering..... 2.26
----
Dilution per share to new investors................................. 2.99
----
----
</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 Offered Shares.
<TABLE>
<CAPTION>
Percentage Percent of Average
Shares of Total Aggregate Total Price
Purchased Shares Consideration Invested Per Share
--------- ------ ------------- -------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders......... 6,500,000 79% $19,396,000 68% $2.98
Investors in this Offering.... 1,725,000 21% $ 8,992,000 32% $5.21
--------- --- ----------- --- -----
Total..................... 8,225,000 100% $28,388,000 100% $3.45
--------- --- ----------- --- -----
</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,
including the Placement Agent's Warrants and the Underwriter's Warrants. In the
event of 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 investors in this Offering will increase.
-10 -
<PAGE>
MARKET PRICES OF COMMON STOCK
The Company's Common Stock and Warrants have been quoted in the Nasdaq
Smallcap Market under the symbols ETEL and ETEL W, respectively, since April 8,
1997. The following table sets forth the high and low closing sales price for
the Common Stock as reported by the Nasdaq Smallcap Market for the periods
indicated.
<TABLE>
<CAPTION>
Period Common Stock
------ ------------
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 $ 8.0000 $ 5.0000
</TABLE>
CAPITALIZATION
(Dollars in thousands)
The following table sets forth the capitalization of the Company, as of
December 31, 1997 and as adjusted to reflect the sale of the Offered Stock. No
assurance can be given to the timing of exercise of the Warrants or whether all
or any of the Warrants will be executed. The table should be read in conjunction
with the Financial Statements and the notes thereto.
<TABLE>
<CAPTION>
Historical Pro Forma(1) As Adjusted(2)
December 31, 1997 ------------ --------------
-----------------
<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 6,500,000 shares outstanding reflecting
the issuance of shares after the April 1, 1998
private placement; 8,225,000 shares outstanding,
as adjusted .................................... 57,500 65,000 82,250
Stock Subscriptions Receivable ..................... (46) (46) (46)
Additional paid-in capital ....................... 14,163,090 19,330,590 28,305,340
Retained deficit ................................. (9,797,053) (9,797,053) (9,797,053)
---------- ---------- -----------
Total stockholders' equity ..................... $4,423,491 $9,598,491 $18,590,491
---------- ---------- -----------
Total capitalization ........................... $4,423,491 $9,598,491 $18,590,491
---------- ---------- -----------
</TABLE>
- ----------
(1) The pro forma capitalization illustrates the effect of the sale of 750,000
shares of common stock in the April 1998 Private Placement.
(2) As adjusted to reflect the net proceeds of this Offering. Assumes no
exercise of any options or warrants other than the Warrants, including the
Underwriter's Warrants and the Placement Agent's Warrants;
-11-
<PAGE>
DIVIDEND POLICY
Holders of the Company's Common Stock are entitled to dividends when, as
and if declared by the Board of Directors out of funds legally available
therefor. The Company does not anticipate the declaration or payment of any
dividends in the foreseeable future. The Company intends to retain earnings, if
any, to finance the development and expansion of its business. Future dividend
policy will be subject to the discretion of the Board of Directors and will be
contingent upon future earnings, if any, the Company's financial condition,
capital requirements, general business conditions and other factors. Therefore,
there can be no assurance that any dividends of any kind will ever be paid by
the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 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
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<PAGE>
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.
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.
-13-
<PAGE>
Nine months Ended December 31, 1997 Compared to Nine Months Ended December 31,
1996
Sales for the nine months ended December 31, 1997 were approximately
$378,300, a decrease of 14% from the approximately $438,500 recorded for the
corresponding nine months of 1996. The revenue decline was due primarily to the
completion of several installation and support services contracts in 1996, and
an increased emphasis on development and preparation for the general
availability of the Company's T2000 product line. The services sales for the
nine months ended December 30, 1997, were primarily from one customer.
Gross profits for the nine months ended December 31, 1997 were
approximately $170,100 or 45% of sales, compared to the approximately $135,200
or 31% of sales for the corresponding quarter of 1996. The gross profit
percentage increase was due to the increased emphasis on product sales that have
a higher gross profit contribution than software installation and support
services sales.
Selling, general & administrative expenses for the nine months ended
December 31, 1997, were approximately $1,990,800, an increase of 235% over the
approximately $594,000 recorded for the corresponding nine months of 1996. The
dollar increase in these expenses over the prior year reflected additional
spending for personnel and programs consistent with the Company's emphasis on
its Telecom 2000 products. The increased spending level in the nine months of
1997 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 products.
Research & development expenses for the nine months ended December 31,
1997, were approximately $573,700, a 262% increase over the approximately
$158,700 recorded for the corresponding nine months of 1996. 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 nine months ended December 31,
1997, were approximately $71,900, a decrease from the approximately $(5,712,100)
recorded for the corresponding nine months of 1996. In the nine months ended
December 31, 1996, 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 1996.
To date, inflation and seasonality have not had a material impact on the
Company's results of operations.
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.
For the year ended March 31, 1997, the Company's principal uses of cash
were to fund the losses incurred and support the development of the Company's
products. For the year ended March 31, 1996, net cash was provided to the
Company by operating and financing activities.
For the year ended March 31, 1997, the Company's cash and cash
equivalents, invested cash and marketable securities decreased to approximately
$379,000 from approximately $558,000 as a result of the loss
-14-
<PAGE>
incurred for the year along with the financing of capitalized software and fixed
assets. The Company has no significant capital asset commitments.
For the years ended March 31, 1997 the net cash used in operating
activities was approximately $1,187,000 and for the same period in 1996 the net
cash provided by operating activities was approximately $103,000, the increase
in cash used in operating activities of approximately $1,290,000 was due to net
losses from operations caused by increased research and development and selling,
general and administrative expenses.
For the year ended March 31, 1997 the net cash used in investing
activities was approximately $646,000 as compared to $0 for the same period in
1996. In 1997, investing consisted primarily of increases in capitalized
software development costs and purchases of capital equipment.
For the years ended March 31, 1997 and 1996 the net cash provided by
financing activities was approximately $1,655,000 and approximately $455,000,
respectively. For the year ended March 31, 1997, financing activities consisted
primarily of the issuance of bridge and convertible notes payable of
approximately $1,750,000, which were ultimately converted to common stock. For
the year ended March 31, 1996, financing activity consisted primarily of the
issuance of bridge notes payable of approximately $500,000, which were
ultimately converted to common stock.
In April 1997, the Company received net proceeds of approximately
$5,885,100 from an initial public offering of the Company's common stock and
common stock warrants. The Company also secured a $1,000,000 one year credit
facility in the nine months ended December 31, 1997, which is secured by
investments, receivables and fixed assets. The Company used approximately
$(2,131,200) in cash flows from operating activities, excluding changes in
assets and liabilities, during the nine months ended December 31, 1997, compared
to approximately $(916,400) for the corresponding nine months of 1996. The
increase in cash flows used in operating activities excluding changes in assets
and liabilities was mainly due to the increase in selling, general and
administrative expenses and research and development expenses discussed above.
The total net cash used by operating activities was approximately $(2,440,900)
for the nine months ended December 31, 1997, compared to approximately
$(911,100) for the corresponding nine months of 1996.
Cash used by investing activities totalled approximately $2,924,500 for
the nine months ended December 31, 1997 as compared to approximately $462,200
for the corresponding nine months of 1996. The main component of that investing
activity was the investment in short-term securities of approximately
$2,254,200, as well as continued expenditures for capitalized software
development and property and equipment of approximately $290,400 and $380,000,
respectively. The majority of the expenditures related to continued development
of the Company's Telecom 2000 Products.
Cash provided by financing activities totalled approximately $5,880,600
for the nine months ended December 31, 1997, compared to approximately
$1,484,200 for the corresponding period of 1996. The Company successfully
completed an initial public offering in April 1997, which yielded net proceeds
of approximately $5,885,100. The Company has access to a $1,000,000 credit line
secured by investments, fixed assets and receivables, but did not borrow against
that line of credit during the nine months ended December 31, 1997. This line of
credit expires in May, 1998; while the Company believes that it will be renewed,
no assurance can be given in this regard. In April, 1998, the Company sold
750,000 shares of Common Stock resulting in net proceeds to the Company of
approximately $5,175,000.
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 and subsequent private placement, the line of credit facility, from
internally generated funds and from other potential financing sources under
consideration. The Company presently has a line of
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<PAGE>
credit, investments, and cash and cash equivalents on hand and believes that
these will be adequate to meet the Company's anticipated cash requirements
through March, 1999. However, while operating activities have provided and may
provide cash in certain periods, to the extent the Company has 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
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.
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
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<PAGE>
distance services providers and CLECs, such as ICI and Sprint, are among the
Company's primary target customers for Telecom 2000 Products.
Having completed "beta" testing, in May 1997 the Company announced its IP
version of Telecom 2000. In July 1997, the Company began sales of Telecom 2000
Products with the introduction of the Telecom 2000 Desktop System. In August
1997, the Federal Communications Commission certified the Telecom 2000 Desktop
System for interconnection to public telephone systems, eliminating a regulatory
impediment to sales, and in October 1997 the Company announced that it had hired
its first Vice-President of Sales.
Industry Background
The Internet is a global web of computer networks. Developed over 25 years
ago, this "network of networks" allows any computer attached to the Internet to
talk to any other using the Internet Protocol. The Internet has traditionally
been subsidized by the U.S. federal government, and was historically used by
academic institutions, defense contractors and government agencies primarily for
remote access to host computers and for sending and receiving e-mail. As the
number of commercial entities that rely on the Internet for business
communications and commerce has increased, the level of federal subsidies has
significantly diminished, and funding for Internet infrastructure and backbone
operations has shifted primarily to the private sector.
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.
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Telecom 2000(TM) Products
The Company's Telecom 2000 Products enable telephony through DDNs. Telecom
2000 Products provide high fidelity duplex voice and telefax through DDNs, and
also generally offer traditional telephony features such as call waiting, call
holding, call transfer, conference calling, billing, voice-mail and the like.
The Company views its products as offering several competitive advantages.
First, Telecom 2000 Products facilitate low-cost DDN telephone service with
substantially the same operating features and the voice quality of traditional
telephone service. Next, the use of Telecom 2000 Products can be gradually
implemented so that growth from small installations to large installations can
occur while the user maintains high levels of performance and preserves a
substantial amount of its prior technology investment. Finally, the distributed
architecture of Telecom 2000 Products is designed to avoid problems associated
with centralized systems, such as system-wide telephony loss due to the
malfunction of a single computer or PBX, limitations on system growth and
excessive hardware cost. There are three classes of Telecom 2000 Products, two
of which include products that are available for delivery.
Telecom 2000 Desktop - Small Systems
This product set, with sales commencing in July 1997, consists of e-Net's
award-winning Telecom 2000 Desktop system with two components, the
TS-Workstation card and the CO-Gateway card. This system uses the customer's
existing network computer installed base and its fixed-cost, available-capacity
LAN/WAN, including the Internet, to provide peer-to-peer toll-quality telephony,
with or without the use of a PBX.
The small systems product set also includes the Telecom 2000 Retail
Consumer product, which the Company expects will be announced and available in
May 1998. This product will be a half-card TS circuit set with a dial-up
functionality enabling Internet telephony for the individual consumer and home
use, is expected to be 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.
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Telecom 2000(TM) Carrier-Class Gateway - Large Systems
The large systems product set, Telecom 2000 Carrier-Class Gateways, was
announced in December 1997, is under development and is anticipated to be ready
for delivery by September 1998. Of all Telecom 2000 Products, it will offer the
largest number of ports. It is designed to be scaleable from the equivalent of
four T1s up to 60 T1s, with high fidelity voice quality, and is intended to meet
fully all-existing and evolving standards for the emerging voice-over-IP carrier
market. The Company believes that, at the time of its introduction, this system
will be the only available DDN telephony technology offering over 1000
simultaneous call capacity in a single cost-effective, space-efficient chassis.
Each chassis is capable of being interconnected to obtain single-device
performance and greater port density, with no logical upward limitation on the
total number of ports.
The Telecom 2000 Carrier-Class Gateway is being designed to meet all
interconnection and compression standards, will be certified in most foreign
countries, and is designed to be fully NEBS-compliant for main long distance
carriers, alternate access carrier, local exchange carrier and CLEC customers.
When all products are announced, the price range of the Telecom 2000
Carrier-Class Gateways product set is expected to be between $100,000 and
$500,000.
Other Company Products and Services
e-Net NMS(TM) and IntelliSeries(TM)
The Company sells a proprietary, expert systems-based, user friendly,
object-oriented network and system management product called the e-Net NMS(TM)
network management system. e-Net NMS provides enterprises with a broad range of
capabilities for managing global telephone and data networks. This product
offers automated management of operating problems, system configuration, system
performance, system security, accounting, network traffic optimization and
re-routing, configuration and database management, and system failure detection.
e-Net has developed a set of products called IntelliSeries(TM) to provide
a simple, inexpensive network usage and billing reporting capability.
IntelliSeries uses imaging technology and is a general-purpose search and
retrieval engine that can be used in a wide variety of user applications. One of
e-Net's clients, Sprint, uses IntelliSeries products to provide its clients with
database access to their monthly call detail record data and frame relay
performance data.
The Company believes that Telecom 2000 Products and competitors'
voice-over-data products will gain usage on DDNs, and that this increase in
usage will create greater data volume on DDNs. The Company anticipates that this
volume growth will increase the opportunity for sales of data network management
and network reporting products like e-Net's NMS and IntelliSeries products. The
Company intends to couple sales and marketing of Telecom 2000 Products with
marketing activity for e-Net NMS and IntelliSeries Products.
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Strategic Relationships
e-Net has established, and intends to continue to establish, a variety of
strategic relationships that are intended to result in the embedding of e-Net
telephony-enabling technology in various DDN devices. Strategic partners are
important to the Company because they have developed products or they deliver
services established in the DDN communications market, but have not yet
implemented telephony capability within those products or services.
To date, Sprint has been the Company's largest customer. The IP Dial
Support contract provided a significant increase in revenue to the Company, grew
the Sprint technology relationship, validated the efficacy of the use of the
IntelliSeries products and increased the Company's involvement in the
Internet-related business and technology. Arising out of the growing Sprint
technology relationship under the IP Dial Support contract, Sprint became a
"beta" test site for the Company's Telecom 2000 Product in November 1996.
In June 1997, the Company announced an agreement for cooperative marketing
with Paradyne Corporation. Under the agreement, e-Net's Telecom 2000 is
demonstrated and sold operating in conjunction with Paradyne's DSL technology
product called HotWire(TM). Headquartered in Largo, Florida, Paradyne is a
leading developer and provider of products and technologies that facilitate
high-speed access to networks worldwide for communications, computing and
information. The Company believes that Paradyne's DSL products are among the
best products, in terms of price and performance, in the telecommunications
industry. The Company believes that DSL products have a strong market potential.
DSL technology delivers digital data at high speeds on existing copper telephone
lines, and the Company expects that the Regional Bell Operating Companies
("RBOCs") may, at some point in the future, sell access to copper telephone
lines to digital data service providers at a lower price, "unbundled" from other
RBOC services. If so, digital data service providers and the home consumer will
have the opportunity to provide and acquire more information at a lower cost
with DSL. In particular, the Company's DDN telephony products could be used to
include telephone service in those digital data service packages at a low price.
In August 1997, the Company announced an agreement with Magellan Network
Systems, Inc., ("Magellan") for product development and software integration of
Magellan billing, voice-mail and other software with e-Net's Telecom 2000
Carrier-Class Gateway products. This cooperative development and marketing
arrangement is expected to give e-Net's Telecom 2000 Carrier-Class Gateway
products the carrier-class software applications required to address the needs
of large-call-volume customers. Magellan, a privately held corporation with
headquarters in Sunnyvale, California, is a supplier of the M4000 Enhanced
Services Platform, offering long distance switching, debit card, calling card,
international call-back and voicemail applications to domestic and international
carriers and service providers. All of these applications integrate with
Magellan's system management software, which provides sophisticated system
management and billing capabilities. Magellan Communications, Inc., a related
company, specializes in unified messaging systems and voice processing equipment
for many of the world's leading telephone companies.
In December 1997, the Company announced an agreement with Summa Four, Inc.
to build e-Net's Telecom 2000 Carrier-Class Gateway. This agreement provides a
preferential and discounted arrangement under which the two companies can
purchase and license each other's products in order to deliver, through their
respective sales channels, what the Company believes will be a unique product.
Because of Summa Four's price and performance, management believes that
embedding e-Net technology on Summa Four's existing product is the optimal
approach for designing and building the Telecom 2000 Carrier-Class Gateway.
Summa Four also utilizes the same family of microprocessor that e-Net uses,
which may reduce product development risk and delay. Summa Four is a leading
provider of open, programmable switching platforms that enable
telecommunications providers worldwide to build intelligent, flexible networks
that support the rapid deployment of new wireline and wireless services. An ISO
9001 certified company, Summa Four is
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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.
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. The agreement also permits e-Net's customers
who purchase its Telecom 2000 Retail Consumer product 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 fifty corporate customers who have purchased the Telecom
2000 Starter Kit, an introductory unit of Telecom 2000 Desktop system, they
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
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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 products (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.
Government Regulation
The Company is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses generally,
and there are currently few laws or regulations directly applicable to access to
or commerce on the Internet 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
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the advantages or protection, if any, that may be granted to the Company as a
result of its proprietary technology. See "Risk Factors -- Uncertain Protection
of Patent, Trademark, Copyright and Proprietary Rights." 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. See "Risk Factors - Substantial Competition."
The sets of competitors associated with the three classes of Telecom 2000
Products are:
DDN Telephony Small Systems
A number of companies in this field have developed low-speed, half-duplex
audio/voice communications software programs which use the Internet as a voice
network and deliver voice by means of PC-based software, mostly for home users.
These products compete with the Telecom 2000 Desktop Retail Consumer systems.
Some of these competing products use the telephone handset, while some rely on
PC-based speakers and microphones. Many of these products deliver voice sound
which is delayed or which contains echo and "jitter," producing overall low
quality, but some of these products are sold at a price substantially lower than
the Company's products. Generally designed for the home user market, these
competitor products have gained market share compared to e-Net, and some of the
competitors are large software corporations that specialize in home PC software,
giving them a competitive marketing advantage to e-Net due to their greater
distribution channel capacity and name recognition.
Some of the competitive products in this market provide computer telephony
Graphical User Interfaces ("GUIs") in accordance with the Microsoft Telephony
Applications Programmer Interface ("TAPI") standard, as does e-Net, while some
do not. The level of sophistication of the GUI varies among the competitors.
Some competitors of the Company have developed, produced and marketed products
strictly for Internet telephony, not for other DDNs, while other competitors do
not offer IP telephony but reside only on ATM-type DDNs. e-Net believes that its
products are well-positioned because they offer telephony on all DDNs, including
Ethernet in local area networks, which is relatively uncommon among its
competitors. Within this field of competitors, some companies have developed,
produced and marketed end-user/client application products that extend or
replace PBX devices with computer software technology, like e-Net, delivering
PBX-like features such as call waiting, call holding, call transfer, conference
calling, billing, voice-mail and the like.
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Microsoft Corp., VocalTec Inc., NetSpeak Corp., Altigen Communications,
Inc., Sphere Communications, Inc. and Quicknet Technologies, Inc. are some of
the companies that compete with e-Net in the small systems market.
DDN Telephony Medium Systems
The companies that offer customer-premises-based gateway products
delivering voice over DDNs that compete with Telecom 2000
Customer-Premises-based Gateway systems are, in some cases, larger and have more
significant revenues than e-Net. The greater size and market share of such
companies may offer them greater distribution channel capacity and name
recognition. Most of these companies offer telephony software features residing
in computer file servers, so that all common telephone features such as
dial-tone and off-hook detection are centralized. This approach has allowed
these competitors to complete product development earlier in the technology
cycle than e-Net; however, the Company believes that its products are well
positioned now to gain market share due to the performance and cost advantages
of their distributed architecture.
VocalTec Inc., NetSpeak Corp., Micom Communications Corporation (a
wholly-owned subsidiary of Nortel Corporation), Vienna Systems, Inc., a
Newbridge Networks, Inc. affiliate, Clarent Corporation and Inter-Tel
Communications are some of the companies that compete with e-Net in the medium
systems market.
DDN Telephony Large Systems
To the knowledge of the Company, no competitive product has the intended
and announced features, performance or design of e-Net's Telecom 2000
Carrier-Class Gateway. However, the Company has reviewed a number of
competitors' announcements that make general reference to intentions to launch
or commence IP telephony products to enable voice for Internet service providers
and data communications carriers. Data product companies with announced plans of
this general nature that may compete with the Company in the future include
Cisco Systems, Inc., Lucent Technologies, Inc., 3Com Corporation, Cabletron
Systems, Inc., and Bay Networks, Inc.
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. Finally, the Company is finalizing the market version of its Telecom
2000 Retailer Consumer product. The Company believes that the development
activity associated with the Telecom 2000 Retail Consumer product will be
completed by May 1998 and that the development activity associated with the
Telecom 2000 Desktop product network management software and teleconferencing
bridge will be completed by September 1998.
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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. It expects to release "ADPCM" compression, which is a significantly
greater degree of compression, for Telecom 2000 Customer-Premises-based Gateway
products in March 1998. The Company plans to have available for delivery to
customers an even higher compression scheme by July 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
One of the Company's highest priorities is the Telecom 2000 Carrier-Class
Gateway product, currently under development in conjunction with Summa Four.
This product development also will address compression issues relevant to
Telecom 2000 Customer-Premises-Based Gateway products. Management believes that
standards compliance for compression is important for a product aimed at
telecommunications carriers. e-Net and Summa Four have chosen the compression
standard set under a scheme licensed for elemedia and known as G.723.1. Other
issues for development of this Carrier-Class gateway are maintaining
interoperability with DDN and IP telephony gateways made by other manufacturers
and insuring the efficient physical size and the environmental tolerance of the
product. The Company plans to complete development of the Telecom 2000
Carrier-Class Gateway product in September 1998.
These product developments are currently on schedule, but there can be no
assurance that product development will occur as expected or otherwise on a
timely and cost-effective basis, or, if introduced, that these products will
achieve market acceptance. See "Risk Factors -Technological Change; Market
Acceptance of Evolving Standards."
At December 31, 1997, the Company capitalized approximately $894,000, 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.
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 February 28, 1998, the Company had 30
employees, including 14 in Product Development, 5 in Sales, and 11 in Operations
and Administration.
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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.
MANAGEMENT
The officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<S> <C> <C>
Alonzo E. Short 57 Chairman of the Board
Robert A. Veschi 34 President, Chief Executive
Officer, Director
Christina L. Swisher 32 Vice President, Operations and
Secretary
Donald J. Shoff 43 Vice President of Finance and Chief
Financial Officer
William W. Rogers, Jr. 55 Director
Clive Whittenbury, Ph.D. 61 Director
William L. Hooton 45 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.), 57, has been chairman of the
board of the Company since January 1996. General Short has more than 30 years
experience in executive management, operations and the engineering, design and
development of large-scale telecommunications and data systems. General Short
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retired from the service in 1994 following a career that included serving as
deputy commanding general (1988-1990) and commanding general (1990-1991) of the
U.S. Army Information Systems Command, a major information technology
organization, which was responsible for all telecommunications during the Desert
Shield/Desert Storm operation, among other responsibilities. From 1991 to 1994,
General Short was director of the Defense Information Systems Agency, a major
information technology organization which is responsible for telecommunications
and related services to the President of the United States, Secret Service,
Joint Chiefs of Staff, Secretary of Defense, among other high level federal
entities. From 1994-1997, General Short was president and chief executive
officer of MICAH Systems, Inc., a Washington, D.C. metropolitan area based
information, technologies management and consulting firm. In September 1997,
General Short joined Lockheed Martin , an aerospace, defense, and information
technology company, as a Vice-President. Since January 1996, General Short has
been instrumental in the organization and development of the business of the
Company.
ROBERT A. VESCHI, 34, has been president, chief executive officer, and a
director of the Company since January 1995. Mr. Veschi is the founder of the
Company, which began its operations in June 1995. Mr. Veschi has significant
experience in executive management, operations and the engineering, design and
development of telecommunications and computer products and systems. From 1986
to 1990, Mr. Veschi was manager of systems engineering for International
Telemanagement, Inc., a Washington, D.C. metropolitan area based information,
data and network systems firm. From 1990 to 1994, Mr. Veschi was a group
president of I-Net, Inc., a Washington, D.C. metropolitan area based
information, data and network systems firm. From December 1994 to May 1995, for
approximately six months, Mr. Veschi was president and chief executive officer
of Octacom, Inc., a Washington, D.C. metropolitan area based information, data
and network systems firm, and a wholly-owned subsidiary of Octagon, Inc., an
Orlando, Florida metropolitan area based publicly held technical services firm.
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, 32, 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.
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Since June 1995, Ms. Swisher has been instrumental in the organization and
development of the business of the company.
WILLIAM W. ROGERS, JR., 55, has been a director of the Company since
January 1997. Mr. Rogers has substantial senior management, operations and
technical and engineering services experience. From 1972 to 1987, Mr. Rogers was
a general manager engaged in operations, technical and engineering services for
Boeing Computer Services, Inc. From 1987 to 1989, Mr. Rogers was president and
chief executive officer of International Telemanagement , Inc., a McLean,
Virginia based telecommunications and systems engineering and services company.
From 1989 to 1991, Mr. Rogers was a vice president of Fluor-Daniel, where he was
responsible for telecommunications and systems integration services. Since 1991,
Mr. Rogers has been a vice president with Computer Sciences Corporation, a
McLean, Virginia based technology products, systems and services company, where
he is responsible for systems integration and related technical services. Since
January 1997, Mr. Rogers has been instrumental in the organization and
development of the Company. Mr. Rogers holds a B.A. degree from West Virginia
University.
WILLIAM L. HOOTON, 45, has been a director of the Company since January
1996. Mr. Hooton has substantial experience in the management, design,
operation, marketing and sales of image conversion systems, electronic imaging
system integration, data automation and high performance data storage
subsystems. From 1990 to 1993, Mr. Hooton was vice president of operations and
technical and business development of the Electronic Information Systems Group
of I-Net, Inc., a Washington, D.C. metropolitan area based information, data and
network systems firm. Since 1993, Mr. Hooton has been president and chief
executive officer of Q Corp., a Washington, D.C. metropolitan area high
technology consulting firm specializing in digital imaging systems and other
complex imagery in media. Since January 1996, Mr. Hooton has been a director of
the Company and has been instrumental in the organization and development of the
Company. Mr. Hooton holds a B.B.A. degree from the University of Texas.
CLIVE G. WHITTENBURY, PH.D., 61, has been a director of the Company since
June 1996. Dr. Whittenbury has substantial senior management, operations and
technical advisory experience. From 1972 to 1979, Dr. Whittenbury was a senior
vice president and, from 1976 to 1986, a director of Science Applications
International Corporation ("SAIC"), a La Jolla, California based major
international systems engineering firm with current annual revenues of
approximately $2 billion. Since 1979, Dr. Whittenbury has been executive vice
president and a director of the Erickson Group, Inc., a major international
diversified products firm. Since 1994, Dr. Whittenbury has been a director of
MVSI, Inc., a publicly held (NASDAQ: "MVSI") McLean, Virginia based 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:
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The following table sets forth certain compensation information for the
fiscal years ended March 31, 1996, 1997 and 1998 with regard to the Company's
chief executive officer and one other executive officer whose combined salary
and bonus was $100,000 or more in fiscal year 1998 (the "Named Officers"):
Summary Compensation Table
<TABLE>
<CAPTION>
Other
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
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club dues and other fringe benefits commensurate with his duties and
responsibilities. The Agreement also provides for benefits in the event of
disability. The Agreement also contains non-compete provisions which are limited
in geographical scope to the Washington, D.C. metropolitan area.
Pursuant to the Agreement, Mr. Veschi's employment may be terminated by
the Company with cause or by Mr. Veschi with or without good reason. Termination
by the Company without cause, or by Mr. Veschi for good reason, would subject
the Company to liability for liquidated damages in an amount equal to Mr.
Veschi's current salary and a pro rata portion of his bonus for the remaining
term of the Agreement, payable in a lump sum cash payment, without any set-off
for compensation received from any new employment. In addition, Mr. Veschi would
be entitled to continue to participate in and accrue benefits under all employee
benefit plans and to receive supplemental retirement benefits to replace
benefits under any qualified plan for the remaining term of the Agreement to the
extent permitted by law.
Limitation on Liability of Directors
As permitted by Delaware law, the Company's Certificate of Incorporation
includes a provision that provides that the Company will, to the fullest extent
permitted by Section 145 of the Delaware General Corporation Law, as amended
from time to time ("DGCL"), indemnify all persons whom it may indemnify pursuant
thereto. To the fullest extent permitted by the DGCL, a director of the Company
shall not be personally liable to the Company or its stockholders for monetary
damages for a breach of fiduciary duty as a director. The provisions are
intended to afford directors protection against, and to limit their potential
liability for, monetary damages resulting from suits alleging a breach of the
duty of care by a director; they also diminish the potential rights of action
which might otherwise be available to shareholders by limiting the liability of
officers and directors to the maximum extent allowable under Delaware law and by
affording indemnification against most damages and settlement amounts paid by a
director of the Company in connection with any shareholders derivative action.
As a consequence of these provisions, stockholders of the Company will be unable
to recover monetary damages against directors for action taken by them that may
constitute negligence or gross negligence in performance of their duties unless
such conduct falls within an exception under DGCL or under Delaware case law.
The provision, however, does not alter the applicable standards governing a
director's fiduciary duty and does not eliminate or limit the right of the
Company or any stockholder to obtain an injunction or any other type of
equitable relief in the event of a breach of fiduciary duty. Management of the
Company believes these provisions will assist the Company in securing and
retaining qualified persons to serve as directors. The Company is unaware of any
pending or threatened litigation against the Company or its directors that would
result in any liability for which such director would seek indemnification or
similar protection.
The Company believes that the substantial increase in the number of
lawsuits being threatened or filed against corporations and their directors has
resulted in a growing reluctance on the part of capable persons to serve as
members of boards of directors of public companies. The Company also believes
that the increased risk of personal liability without adequate insurance or
other indemnity protection for its directors could result in overcautious and
less effective direction and management of the Company. The limitation on
liability and indemnification provisions are intended to increase the protection
provided directors and, thus, increase the Company's ability to attract and
retain qualified persons to serve as directors. Additionally, the Company has
procured directors liability insurance coverage, but there is no assurance that
it will provide coverage to the extent of the director's claims for
indemnification. In such event, the Company may be forced to bear a portion or
all of the cost of the director's claims for indemnification and, the value of
the Company stock may be adversely affected as a result. There is also no
assurance that the Company will be able to continue to procure directors
liability insurance. It is uncertain whether the Company's directors would
continue to serve in such capacities if improved protection from liability were
not provided.
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Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the Company's
Common Stock owned as of April 23, 1998 and, as adjusted, to reflect the sale of
the Offered Stock, 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 Before After
Name and Address Position with Company of Shares Offering Offering(1)
- ---------------- --------------------- --------- -------- -----------
<S> <C> <C> <C> <C>
Alonzo E. Short, Jr., Chairman of the
Lt. Gen., USA (ret.)(2) Board 90,000 1.38 1.09
Robert A. Veschi(3) President, Chief
Executive
Officer, Director 1,375,000 21.15 16.72
Christina Swisher(3) Vice President,
Secretary 120,000 1.85 1.46
Donald J. Shoff(3) Vice President,
Chief Financial
Officer 50,000 .77 .61
William L. Hooton(4) Director 50,000 .77 .61
Clive W. Whittenbury, Director 50,000 .77 .61
Ph.D.(5)
William W. Rogers, Jr.(6) Director 5,000 .08 .06
Edward Ratkovitch, Maj. Stockholder 500,000 7.69 6.08
Gen. USA (ret.)(7)
Arthur Henley(8) Stockholder 487,500 7.50 5.93
Thomas T. Prousalis(9) Stockholder 450,000 6.92 5.47
All Officers and
Directors as a
Group (7 persons) 1,740,000 26.77 21.16
</TABLE>
- ----------
(1) Does not include the exercise of options or warrants other than the
Warrants, including the Placement Agent's Warrant and the Underwriter's
Warrant.
(2) c/o Lockheed Martin, 5203 Leesburg Pike, Suite 1501, Falls Church,
Virginia 22041.
(3) c/o e-Net, Inc., 12800 Middlebrook Road, Suite 200, Germantown, Maryland
20874.c/o e-Net, Inc., 12800 Middlebrook Road, Suite 200, Germantown,
Maryland 20874.
(4) 13333 Glen Taylor Lane, Herndon, Virginia 22071.
(5) 511 Trinity Avenue, Yuba City, California 95991. Does not include 250,000
shares owned by MVSI, Inc., of which Dr. Whittenbury is, to the Company's
knowledge, a director.
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<PAGE>
(6) c/o CASI, 14200 Park Meadow Drive, Suite 200, Chantilly, Virginia 20151.
(7) 1030 Delf Drive, McLean, Virginia 22101. Does not include 250,000 owned by
MVSI, Inc., of which Gen. Ratkovitch is, to the Company's knowledge, a
significant shareholder, chairman and chief executive officer.
(8) 10705 Bay Laurel Trail, Austin, Texas 78750.
(9) 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.
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. Hooten, 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 Ratkovitch,
$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. Ratkovitch, 250,000 to Mr. Foise, 200,000 to Armstrong Industries
and 50,000 to Mr. Sumichrast. Each bridge unit contained one share of Common
Stock, one Class A Warrant and one Class B Warrant. In June 1996, the loan
principal was converted into paid-in capital and accounted for as consideration
for the bridge units. The Class A Warrants and Class B Warrants were canceled in
March 1997 in exchange for each such shareholder receiving additional shares of
Common Stock such that, even taking the Reverse Split into account, each such
shareholder had 500,000, 250,000, 200,000 and 50,000 shares of today's Common
Stock.
In August 1996, the Company entered into a letter of intent with MVSI,
Inc. ("MVSI"), a Washington, D.C. area based NASDAQ-listed technology products
and services company, in which the Company agreed to be acquired and become a
wholly-owned subsidiary of MVSI in an exchange of securities. To the Company's
knowledge, Edward Ratkovitch 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 Whittenberry 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.
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<PAGE>
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 year ended March 31, 1997, the Company paid $27,796 for the rental of the
aircraft.
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. No amounts were paid to the stockholder during 1997.
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 6,500,000 issued and
outstanding shares of Common Stock. Holders of the Common Stock do not have
preemptive rights to purchase additional shares of Common Stock or other
subscription rights. The Common Stock carries no conversion rights and is not
subject to redemption or to any sinking fund provisions. All shares of Common
Stock are entitled to share equally in dividends from sources legally available
therefor when, as and if declared by the Board of Directors and, upon
liquidation or dissolution of the Company, whether voluntary or involuntary, to
share equally in the assets of the Company available for distribution to
stockholders. All outstanding shares of Common Stock are validly authorized and
issued, fully paid and nonassessable, and all shares to be sold and issued as
contemplated hereby, will be validly authorized and issued, fully paid and
nonassessable. The Board of Directors is authorized to issue additional shares
of Common Stock, not to exceed the amount authorized by the Company's
Certificate of Incorporation, and to issue options and warrants for the purchase
of such shares, on such terms and conditions and for such consideration as the
Board may deem appropriate without further stockholder action. The above
description concerning the Common Stock of the Company does not purport to be
complete. Reference is made to the Company's Certificate of Incorporation and
By-laws which are available for inspection upon proper notice at the Company's
offices, as well as to the applicable statutes of the State of Delaware for a
more complete description concerning the rights and liabilities of stockholders.
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
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<PAGE>
Each of the Warrants entitles the registered holder to purchase one share
of Common Stock. The Warrants are exercisable at a price of $5.25 (which
exercise price was arbitrarily determined) subject to certain adjustments. The
Warrants are entitled to the benefit of adjustments in their exercise prices and
in the number of shares of Common Stock or other securities deliverable upon the
exercise thereof in the event of a stock dividend, stock split,
reclassification, reorganization, consolidation or merger.
The Warrants may be exercised at any time and continuing thereafter until
April 7, 2002 unless such date extended by the Company. After the expiration
date, Warrant holders shall have no further rights. Warrants may be exercised by
surrendering the certificate evidencing such Warrant, with the form of election
to purchase on the reverse side of such certificate properly completed and
executed, together with payment of the exercise price and any transfer tax, to
the Warrant Agent. If less than all of the Warrants evidenced by a warrant
certificate are exercised, a new certificate will be issued for the remaining
number of Warrants. Payment of the exercise price may be made by cash, bank
draft or official bank or certified check equal to the exercise price.
Warrant holders do not have any voting or any other rights as shareholders
of the Company. The Company has the right at any time to redeem the Warrants, at
a price of $.05 per Warrant, by written notice to the registered holders
thereof, mailed not less than thirty (30) nor more than sixty (60) days prior to
the date of redemption. The Company may exercise this right only if the closing
bid price for the Common Stock equals or exceeds $10 per share during a thirty
(30) consecutive trading day period ending no more than fifteen (15) days prior
to the date that the notice of redemption is mailed, provided there is then a
current registration statement under the Securities Act of 1933, as amended (the
"Act") with respect to the issuance and sale of Common Stock upon the exercise
of the Warrants. If the Company exercises its right to call Warrants for
redemption, such Warrants may still be exercised until the close of business on
the day immediately preceding the date of redemption. If any Warrant called for
redemption is not exercised by such time, it will cease to be exercisable, and
the holder thereof will be entitled only to the repurchase price. Notice of
redemption will be mailed to all holders of Warrants or record at least thirty
(30) days, but not more than sixty (60) days, before the date of redemption. The
foregoing notwithstanding, the Company may not call the Warrants at any time
that a current registration statement under the Act is not then in effect.
The Warrants were issued in registered form pursuant to an agreement dated
April 8, 1997 (the "Warrant Agreement"), between the Company and American Stock
& Transfer Trust Company, New York, New York, as warrant agent (the "Warrant
Agent"). The Warrant Agreement permits the Company and the Warrant Agent,
without the consent of Warrant holders, to supplement or amend the Warrant
Agreement in order to cure any ambiguity, manifest error or other mistake, or to
address other matters or questions arising thereafter that the Company and the
Warrant Agent deem necessary or desirable and that do not adversely affect the
interest of any Warrant holder. The Company and the Warrant Agent may also
supplement or amend the Warrant Agreement in any other respect with the written
consent of holders of not less than a majority in the number of Warrants then
outstanding; however, no such supplement or amendment may (i) make any
modification of the terms upon which the Warrants are exercisable or may be
redeemed; or (ii) reduce the percentage interest of the holders of the Warrants
without the consent of each Warrant holder affected thereby.
In order for the holder to exercise a Warrant, there must be an effective
registration statement, with a current prospectus on file with the Commission
covering the shares of Common Stock underlying the Warrants, and the issuance of
such shares to the holder must be registered, qualified or exempt under the laws
of the state in which the holder resides. See "Risk Factors - Continuing
Registration Required to Exercise Warrants."
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<PAGE>
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.
PLAN OF DISTRIBUTION
The Company shall issue the Offered Stock upon the exercise of the
Warrants by the holders thereof. Warrants may be exercised by surrendering the
certificate evidencing such Warrant, with the form of election to purchase on
the reverse side of such certificate properly completed and executed, together
with payment of the exercise price and any transfer tax, to the Warrant Agent.
If less than all of the Warrants evidenced by a warrant certificate are
exercised, a new certificate will be issued for the remaining number of
Warrants. Payment of the exercise price may be made by cash, bank draft or
official bank or certified check equal to the exercise price. The Company will
be prevented, however, from issuing Common Stock upon exercise of the Warrants
in certain circumstances. See "Risk Factors - Continuing Registration Required
to Exercise Warrants."
LEGAL PROCEEDINGS
e-Net, Inc. is not a party to any legal proceedings and, to the best of
its information, knowledge and belief, none is contemplated or has been
threatened.
LEGAL MATTERS
The validity of the Securities being offered hereby has been passed on for
the Company by Thomas T. Prousalis, Jr., Esq., Washington, D.C.
EXPERTS
The financial statements of e-Net, Inc. as of March 31, 1997 and 1996 and
for the year ended March 31, 1997 and for the period from beginning of
operations (June 8, 1995) to March 31, 1996 included in the Registration
Statement and this Prospectus have been included herein in reliance on the
reports dated May 2, 1997, of Grant Thornton LLP, Independent Certified Public
Accountants, and upon the authority of said firm as experts in accounting and
auditing.
With respect to the unaudited interim financial information included in
the Company's Quarterly Report on Form 10-QSB for the quarter ended December 31,
1997 included herein, Grant Thornton LLP has applied limited procedures in
accordance with professional standards for a review of such information.
However, as stated in their report dated January 19, 1998 included in the
Company's Quarterly Report on Form 10-QSB for the quarter ended December 31,
1997, they did not audit and they do not express an opinion on that interim
financial information. Accordingly, the degree of reliance on their reports on
such information should be restricted in light of the limited nature of the
review procedures applied. Grant Thornton LLP is not subject to the liability
provisions of Section 11 of the Securities Act of 1933 for their reports on the
unaudited interim financial information because those reports are not "reports"
or a "part" of the registration statement prepared or certified by an accountant
within the meaning of Sections 7 and 11 of the Securities Act.
-35-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants.......................... F-2
AuditedFinancial Statements
Balance Sheets as of March 31, 1997 and 1996.............................. F-3
Statements of Operations for the year ended March 31, 1997 and for the
Period from beginning of operations (June 8, 1995) to March 31, 1996.... F-4
Statements of Cash Flows for the year ended March 31, 1997 and for the
Period from beginning of operations (June 8, 1995) to March 31, 1996.... F-5
Statements of Stockholders' Equity as of March 31, 1997................... F-6
Notes to Financial Statements............................................. F-7
Page
----
Report of Independent Certified Public Accountants..........................F-10
Audited Financial Statements
Balance Sheets as of December 31 and March 31, 1997.......................F-17
Statements of Operations for the three months ended December 31, 1997
and 1996................................................................F-18
Statements of Operations for the nine months ended December 31, 1997
and 1996................................................................F-19
Statements of Cash Flows for the nine months ended December 31, 1997
and 1996................................................................F-20
Statements of Stockholders' Equity as of December 31, 1997................F-21
Notes to Financial Statements.............................................F-22
</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, 1997 and 1996, and the related statements of
operations, cash flows and stockholders' equity for the year ended March 31,
1997, and the period from the beginning of operations (June 8, 1995) to March
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of e-Net, Inc.,
as of March 31, 1997 and 1996, and the results of its operations and its cash
flows for the year ended March 31, 1997, and the period from the beginning of
operations (June 8, 1995) to March 31, 1996, in conformity with generally
accepted accounting principles.
Grant Thornton, LLP
Vienna, Virginia
May 2, 1997
F-2
<PAGE>
e-NET, INC.
BALANCE SHEETS
ASSETS
March 31,
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 379,441 $ 557,960
Accounts receivable 113,181 53,677
Prepaid expenses 14,800 --
----------- -----------
Total Current Assets 507,422 611,637
Deposits 7,530 --
Property, Plant and Equipment, Net 203,125 134,285
Deferred Initial Public Offering Costs 964,706 --
Software Development Costs 520,853 --
----------- -----------
$ 2,203,636 $ 745,922
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Stockholder/Officer notes payable $ -- $ 45,000
Accounts payable--trade 105,301 5,326
Accrued liabilities 330,580 22,787
Deferred revenue -- 20,000
Capital lease obligation 4,480 --
----------- -----------
Total Current Liabilities 440,361 93,113
Accrued Initial Public Offering Costs 887,843 --
Long-Term Debt -- 500,000
----------- -----------
Total Liabilities 1,328,204 593,113
Stockholders' Equity
Common stock, $.01 par value, 50,000,000
shares authorized, 4,250,000 and 3,750,000
shares outstanding at March 31, 1997
and 1996, respectively 42,500 37,500
Stock subscriptions and notes receivable (46) (125,100)
Unamortized cost of bridge financing -- (2,885,135)
Additional paid-in capital 8,307,627 3,662,600
Retained deficit (7,474,649) (537,056)
----------- -----------
Total Stockholders' Equity 875,432 152,809
----------- -----------
$ 2,203,636 $ 745,922
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
e-NET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
beginning of
operations
Year ended (June 8, 1995) to
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Sales $ 549,037 $ 293,876
Operating Expenses
Cost of product sales and service 410,027 88,360
Selling, general and administrative 1,171,212 115,171
Research and development 236,846 --
----------- -----------
(Loss) Income from Operations (1,269,048) 90,345
Interest and Financing Charges
Interest expense--bridge financing (5,385,135) (614,865)
Cost of abandoned stock registration (284,575) --
Interest expense (19,356) (6,884)
Other expenses (442) (6,143)
Interest income 20,963 491
----------- -----------
Loss Before Income Taxes (6,937,593) (537,056)
Income Tax Provision -- --
----------- -----------
Net Loss $(6,937,593) $ (537,056)
----------- -----------
----------- -----------
Pro forma adjustment to reflect
additional compensation expense $ -- $ (237,500)
----------- -----------
Pro forma Net Loss $(6,937,593) $ (774,556)
----------- -----------
----------- -----------
Pro forma Loss per Share $ (1.72) $ (.26)
----------- -----------
----------- -----------
Weighted Average Shares Outstanding 4,034,247 3,017,808
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
e-NET, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
beginning of
operations
(June 8,
Year ended 1995) to
March 31, 1997 March 31, 1996
-------------- --------------
<S> <C> <C>
Increase (Decrease) in Cash and
Cash Equivalents
Cash Flows from Operating Activities
Net loss $(6,937,593) $ (537,056)
Adjustments to reconcile net loss to
net cash from operating activities
Interest expense--private placement 5,385,135 614,865
Depreciation and amortization 34,402 30,715
Changes in operating assets and liabilities
(Increase) in accounts receivable (59,504) (53,677)
Increase in prepaid expenses and deposits (22,330) --
Increase in accounts payable and accrued
liabilities 432,849 28,113
(Decrease) increase in deferred revenue (20,000) 20,000
----------- -----------
Net Cash (Used in) Provided by Operating
Activities (1,187,041) 102,960
----------- -----------
Cash Flows from Investing Activities
Capital expenditures (125,502) --
Capitalized software development costs (520,853) --
----------- -----------
Net Cash Used in Investing Activities (646,355) --
----------- -----------
Cash Flows from Financing Activities
Proceeds from shareholder/officer loans -- 30,000
Payment of shareholder/officer loans (12,050) (25,000)
Payment of notes payable arising from
asset acquisition -- (50,000)
Proceeds from issuance of bridge notes payable 500,000 500,000
Proceeds from issuance of debt instrument
converted to equity 1,250,000 --
Payments on capital leases (6,210) --
Payment of public offering costs (76,863) --
----------- -----------
Net Cash Provided by Financing Activities 1,654,877 455,000
----------- -----------
Net (Decrease) Increase in Cash and
Cash Equivalents (178,519) 557,960
Cash and Cash Equivalents at Beginning
of Period 557,960 --
----------- -----------
Cash and Cash Equivalents at End of Period $ 379,441 $ 557,960
----------- -----------
----------- -----------
Supplemental Disclosures:
Income Taxes Paid $ -- $ --
----------- -----------
----------- -----------
Interest Paid $ 6,284 $ 688
----------- -----------
----------- -----------
</TABLE>
Noncash investing and financing activities
The Company issued 3,250,000 shares of common stock for notes receivable of
$155,000 during the period ended March 31, 1996. In June 1996, notes receivable
of $125,000 were canceled upon the return of 250,000 shares of common stock.
The Company issued 250,000 shares of common stock upon conversion of a
convertible debenture of $1,250,000, plus accrued interest of $25,081.
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
e-NET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Stock Unamortized
------------ Subscriptions Cost of Additional Total
No. of and Notes Bridge Paid-in Retained Stockholders'
Shares Amount Receivable Financing Capital Deficit Equity
------ ------ ---------- --------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, inception
Initial capitalization 3,000,000 $ 30,000 $ (100) $ -- $ (29,900) $ -- $ --
Contribution of assets
from stockholder/officer -- -- -- -- 75,000 -- 75,000
Sale of common stock for
note 250,000 2,500 (125,000) -- 122,500 -- --
Issuance of common stock
and additional capital
associated with the
financing cost from the
issuance of bridge units 500,000 5,000 -- (2,885,135) 3,495,000 -- 614,865
Net loss -- -- -- -- -- (537,056) (537,056)
--------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 1996 3,750,000 37,500 (125,100) (2,885,135) 3,662,600 (537,056) 152,809
Bridge loan converted to
capital -- -- -- 500,000 -- -- 500,000
Issuance of capital
common stock and
additional associated
with the financing costs
from the issuance
of bridge units 500,000 5,000 -- (3,000,000) 3,495,000 -- 500,000
Cancellation of note
receivables in exchange
for common stock (250,000) (2,500) 125,000 -- (122,500) -- --
Amortization of the
costs of bridge
financing -- -- -- 5,385,135 -- -- 5,385,135
Conversion of debt to equity 250,000 2,500 -- -- 1,272,581 -- 1,275,081
Reclassification
adjustment -- -- 54 -- (54) -- --
Net loss -- -- -- -- -- (6,937,593) (6,937,593)
---------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 1997 4,250,000 $ 42,500 $ (46) $ -- $ 8,307,627 $(7,474,649) $ 875,432
========== =========== =========== =========== =========== =========== ===========
</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. The Company, with principal executive
offices in Germantown, Maryland, develops, markets, and supports open client,
server and integrated applications software that enables local, national and
international telephone communications, information exchange and commerce over
the Internet and private networks, principally located in the United States. The
Company also sells other products used in the management and billing of computer
network, telephone and computer usage.
The significant accounting policies used in the preparation of the
accompanying financial statements are as follows:
Revenue Recognition
Revenue is recognized on the sale of software products upon shipment
unless future obligations exist wherein a portion of the revenue is deferred
until the obligation is satisfied. Revenue from services rendered is recognized
either as the services are rendered based upon fixed hourly rates or at
contractually determined fixed monthly fees.
For the year ended March 31, 1997, the Company derived 78% and 21% of its
sales from two customers, respectively.
For the period ended March 31, 1996, the Company derived 32%, 29%, 16% and
13% of its sales from four customers, respectively.
Accounts Receivable
Accounts receivable are stated at the unpaid balances, less allowance on
uncollectible accounts, if any. Management periodically reviews its outstanding
accounts receivable to assess collectibility of balances based on past
experience and evaluation of current adverse situations which may affect
collectibility of receivables. At March 31, 1997 and 1996, management deemed all
balances fully collectible and did not establish an allowance for uncollectible
accounts.
Use of Estimates in the Preparation of Financial Statements
Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of 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 declining-balance method over a five-year period.
F-7
<PAGE>
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Share
Earnings per share for the periods from the beginning of operations to
March 31, 1996, are based upon weighted-average shares outstanding during the
period from June 1995, the date operations commenced, through March 31, 1996,
adjusted retroactively, where applicable, for the effect of a 600:1 stock split
effective as of March 1996 and a 2:1 reverse stock split effective as of March
1997. The weighted average shares outstanding also include the weighted-average
effect (17,808 shares) of 500,000 shares of common stock issued in March 1996,
pursuant to the issuance of the bridge units. The weighted-average effect of
bridge units issued in April 1996 has been accounted for in computing earnings
per share for the period ended March 31, 1996, and is not reflected in prior
period calculations inasmuch as the issuance of the securities was accounted for
at fair value as described in Note C. The effect of the issuance of 250,000
shares of Common Stock in March 1996 for a $125,000 promissory note has not been
reflected in weighted average shares outstanding because the note was canceled
in June 1996 in exchange for the return of all such shares.
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 will be
amortized over the estimated useful life of the software once the product is
available for general release to customers which release management estimates
will occur by October 1997. At March 31, 1997, the Company has capitalized
$520,853.
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 maturities of three months or
less to be cash equivalents. The carrying amount approximates fair value because
of the short-term maturity of the instruments.
NOTE B--INITIAL PUBLIC OFFERING
In February 1997, the Company entered into a letter of intent with an
underwriter for a firm commitment initial public offering of securities
consisting of 1,500,000 shares of common stock and 1,500,000 warrants. In
connection with the offering, a 2:1 reverse stock split was approved by the
Company. In addition, in connection with the offering, the $1,275,081
convertible debenture described in Note C was converted to 250,000 shares of
common stock, and the outstanding Class A and Class B warrants were canceled,
resulting in 4,250,000 shares of common stock issued and outstanding prior to
the offering. On April 11, 1997, the shares were registered and the offering
closed with net proceeds to the Company of approximately $5,722,000. The Company
deferred costs incurred in connection with the offering of $964,706 at March 31,
1997, representing legal, accounting, underwriter fees, and printing costs
pending completion of the offering, at which time the costs will be charged to
paid-in capital. Such costs included legal fees of approximately $380,000 paid
to an attorney who is a stockholder of the Company. The liability associated
with the accrual of the costs has been classified as a noncurrent liability
because proceeds from the equity offering were used to retire the payable. Pro
forma data are represented below to reflect the balance sheet at March 31, 1997,
as if the offering had closed at year-end.
F-8
<PAGE>
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE B--INITIAL PUBLIC OFFERING--Continued
<TABLE>
<CAPTION>
Pro forma Pro forma
Historical Adjustment Balance Sheet
---------- ---------- -------------
Assets
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 379,441 $ 5,722,282 $ 6,101,723
Deferred initial public offering costs 964,706 (964,706) --
Software development 520,853 -- 520,853
Other assets 338,636 -- 338,636
------------ ------------ ------------
Total Assets $ 2,203,636 $ 4,757,576 $ 6,961,212
------------ ------------ ------------
------------ ------------ ------------
Liabilities and Stockholders' Equity
Liabilities
Accrued liabilities $ 330,580 $ -- $ 330,580
Accrued initial public offering costs 887,843 (887,843) --
Other liabilities 109,781 -- 109,781
------------ ------------ ------------
Total Liabilities 1,328,204 (887,843) 440,361
Stockholders' Equity
Common stock 42,500 15,000 57,500
Additional paid-in capital, stock
subscriptions and notes receivable 8,307,581 5,630,419 13,938,000
Retained deficit (7,474,649) -- (7,474,649)
------------ ------------ ------------
Total Stockholders' Equity 875,432 5,645,419 6,520,851
------------ ------------ ------------
Total Liabilities and Stockholders' Equity $ 2,203,636 $ 4,757,576 $ 6,961,212
------------ ------------ ------------
------------ ------------ ------------
</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 $ (1.25)
------------
------------
Pro forma weighted average shares outstanding 5,534,247
------------
------------
</TABLE>
In March 1996, the Company entered into a letter of intent with an
underwriter for a firm commitment initial public offering of securities. The
offering was abandoned in September 1996. The Company paid $100,000 to an
attorney who is also a stockholder of the Company in return for services
rendered in connection with the offering. In addition, the Company has expensed
$284,575 of costs incurred in connection with the offering, which costs do not
benefit the 1997 offering described above.
F-9
<PAGE>
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE C--SIGNIFICANT TRANSACTIONS
Convertible Debenture
In August 1996, the Company entered into a letter of intent with MVSI,
Inc. ("MVSI"), a Washington, D.C., area based Nasdaq-listed technology products
and services company, whereby the Company agreed to be acquired and become a
wholly owned subsidiary of MVSI in an exchange of securities. Pursuant to the
terms of the letter of intent, an initial amount of $500,000 was loaned by MVSI
to the Company for working capital. In October 1996, the Company entered into an
agreement to be acquired by MVSI, which was subject to stockholder approval. An
additional $500,000 was loaned to the Company in November 1996. However, in
January 1997, the parties mutually agreed to terminate the acquisition,
principally due to market conditions, and, as part of a mutual cooperation
agreement, MVSI loaned the Company an additional $250,000 pursuant to the terms
of a convertible debenture.
The terms of the convertible debenture for the principal sum of
$1,275,081, reflecting the total amount of the loan advances made to the Company
by MVSI, provided that the outstanding principal balance bear interest at 9% per
annum. In March 1997, at MVSI's option, the principal was converted into 250,000
shares of common stock of the Company upon completion of an initial public
offering of the Company's securities, with the number of shares calculated using
the initial price per share of the offering, resulting in a total of 4,250,000
shares of Common Stock issued and outstanding prior to the date of the
prospectus. The 250,000 shares of Common Stock owned by MVSI were registered as
part of the offering and are restricted from sale for a period of 12 months from
the date of this offering, but may be released for sale during this period with
the consent of the Representative. Three principal stockholders of the Company
are stockholders of MVSI. A director of the Company is a director of MVSI.
Private Placement Transactions
In March 1996, the Company issued 250,000 shares of Common Stock to a
nonaffiliated investment banking firm in a private placement transaction for
aggregate consideration of $125,000, represented by a full recourse promissory
note for the entire purchase price. In June 1996, this promissory note was
canceled in exchange for the return of the 250,000 shares of Common Stock.
In March 1996, the Company was loaned $500,000 by a nonaffiliated person.
Principal and interest computed at the rate of eight percent per annum become
due at the earlier of June 1, 1997, or the closing date of the proposed initial
public offering of securities of the Company which was expected to occur in June
1996. As additional consideration for making such loan, the Company issued
500,000 bridge units each containing one share of Common Stock, one Class A
Warrant and one Class B Warrant to the lender. In June 1996, the loan principal
was converted to paid-in capital and accounted for as consideration for the
500,000 bridge units received in connection with the loan. Inasmuch as these
bridge units were issued in contemplation of a proposed offering, financing
expense related to the issuance of these securities of $3,000,000 was recorded
between the date of issuance and the anticipated offering date, with a
corresponding credit to paid-in capital. The value of $3,000,000 attributed to
issuance of the bridge units was computed using the offering price of the units
offered in the Company's proposed 1996 public offering less the amount of debt
converted to paid-in capital in June 1996. As of March 31, 1996, the Company had
accrued $614,865 of this financing expense. The Company recorded the loan of
$500,000 as a noncurrent liability at March 31, 1996. It is not practicable to
estimate the fair value of this debt, as there are no quoted market prices for
debt with similar terms. In June 1996, the bridge loans outstanding as of March
31, 1996, were converted and the unamortized financing expense was charged to
income at that time. The Class A Warrants and Class B Warrants were canceled in
March 1997 in exchange for such unaffiliated person receiving additional shares
of Common Stock such that, even after the 2:1 reverse stock split, he had
500,000 shares of Common Stock.
F-10
<PAGE>
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE C--SIGNIFICANT TRANSACTIONS (Continued)
In April 1996, the Company was loaned $500,000 by three nonaffiliated
persons. Principal and interest computed at the rate of eight percent per annum
become due at the earlier of June 1, 1997, or the closing date of an initial
public offering of securities of the Company which was expected to occur in June
1996. As additional consideration for making such loan, the Company issued
500,000 bridge units identical to those issued in March 1996 as described above.
In June 1996, the loan principal was converted to paid-in capital and accounted
for as consideration for the 500,000 bridge units received in connection with
the loan. Inasmuch as these bridge units were issued in contemplation of the
proposed offering, financing expense related to the issuance of these securities
of $3,000,000 was recorded between the date of issuance and the date the loan
was converted to capital, with a corresponding credit to paid-in capital. The
value of $3,000,000 attributed to issuance of the bridge units was computed
using the offering price of the units in the Company's proposed 1996 public
offering less the amount of debt converted to paid-in capital in June 1996. The
Class A Warrants and Class B Warrants were canceled in March 1997 in exchange
for such unaffiliated persons receiving additional shares of Common Stock such
that, even after the 2:1 reverse stock split, they had 500,000 shares of Common
Stock.
Acquisitions
In June 1995, the Company acquired the rights and title to certain
tangible assets consisting primarily of computer equipment and peripherals,
certain products and intangible assets related thereto, and contract rights in
return for a promissory note of $50,000 and the release of the seller's
obligation valued at $75,000 for compensation formerly due to the president of
the Company. The Company allocated the entire purchase price of $125,000 to the
tangible assets acquired based upon their fair value. The portion of the
purchase price attributable to the release of the compensation obligation due to
the stockholder/officer was credited to additional paid-in capital. The entire
principal balance due under the promissory note and interest thereon was repaid
by the Company in March 1996.
In January 1996, the Company signed a letter of intent to purchase certain
assets from an entity of which two of the three owners are also stockholders of
the Company. These assets are prototype boards, proprietary software code and
existing research and development relating to specific computer software
products. In May 1996, the Company completed the purchase for cash of $50,000.
Management allocated the entire purchase price of $50,000 to research and
development expense and therefore, recorded a charge to operations in fiscal
year 1997 for that amount. The entity from which the assets were acquired was
dormant and contained no assets other than the intangible assets described
below. As a result, condensed financial statements of this entity have not been
presented.
In March 1996, the Company acquired the right, title and interest to
certain inventions and related patents ("Technology") from two individuals who
are also stockholders of the Company in an assignment of patent rights in return
for future royalties computed quarterly equal to 5% of gross profit from
products sold related to the acquired Technology. Royalties will be expensed in
the period in which related sales are recognized. The assignment agreement
provides for the right of the individuals to repurchase the Technology if the
Company fails to make reasonable efforts to develop and exploit the market
opportunities made available by the Technology. The agreement provides that the
Company allocate $1,000,000 of paid-in capital to develop and exploit the market
opportunities of the Technology by December 31, 1996, or the Technology will be
subject to repurchase by the inventors of the Technology. The Company satisfied
its commitment to allocate $1,000,000 towards the Technology as of March 31,
1997.
F-11
<PAGE>
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE D--COMPOSITION OF CERTAIN BALANCE SHEET CAPTIONS
Property and Equipment
Property and equipment consist of the following at March 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Furniture and office equipment $ 258,590 $ 125,000
Airplane -- 40,000
Leasehold improvements 2,602 --
--------- ---------
261,192 165,000
Less accumulated depreciation (58,067) (30,715)
--------- ---------
Property and equipment--net $ 203,125 $ 134,285
--------- ---------
--------- ---------
</TABLE>
Accrued Liabilities
Accrued liabilities consist of the following at March 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Accrued salaries $ 43,042 $ 3,577
Accrued vacation 32,819 821
Accrued profit-sharing plan 32,216 4,063
Accrued bonuses 202,250 --
Accrued deferred rent 16,773 --
Accrued taxes and payroll liabilities 3,480 8,407
Interest payable -- 5,919
--------- ---------
$ 330,580 $ 22,787
--------- ---------
--------- ---------
</TABLE>
Stockholder/Officer Notes Payable
Stockholder notes payable consist of the following at March 31:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Loan from an officer of the Company,
bearing interest at 8% per annum
with principal and interest due
June 3, 1996. The note is
collateralized by an airplane $ -- $ 40,000
Loan from an officer of the Company,
bearing interest at 10% per annum
with payment of principal and
interest due June 15, 1996 -- 5,000
--------- ---------
$ -- $ 45,000
--------- ---------
--------- ---------
</TABLE>
Management's estimate of the fair value of these liabilities is the
carrying value.
F-12
<PAGE>
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE E--INCOME TAXES
For the period ended March 31, 1997, no provision for income taxes has
been reflected due to uncertainty as to the realizability of tax benefits
associated with net operating losses to date. Financing expense associated with
the issuance of bridge units is non-deductible and is being treated as a capital
transaction for income tax reporting purposes.
The income tax provision consists of the following for the period ended
March 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Deferred
Federal $ 465,927
State 87,470
Valuation allowance (553,397)
---------
Net provision $ --
---------
---------
</TABLE>
The effective tax rate for the period ended March 31, 1997, 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 $(2,358,782)
Increase (decrease) resulting from:
State tax (benefit) (274,729)
Permanent difference--financing expense private placement 2,081,437
Other permanent differences (4,016)
Valuation allowance 556,090
-----------
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, 1997:
<TABLE>
<CAPTION>
<S> <C>
Net loss for January 1 through March 31, 1997 $ 231,050
Accounts receivable (49,416)
Capitalized software (139,687)
Other assets (6,840)
Accounts payable and accrued expenses 44,592
Depreciation expense (7,193)
Net operating loss 483,584
Valuation allowance (556,090)
---------
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-13
<PAGE>
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE F--COMMITMENTS AND CONTINGENT LIABILITIES
Lease Commitment
As of March 31, 1996, the Company leased office space under a
month-to-month operating lease which provides for monthly rent payments of
$1,900.
In May and September 1996, the Company entered into two leases for office
space which provide for aggregate monthly rent payments of $7,530. At March 31,
1997, approximate future rental commitments are as follows:
<TABLE>
<CAPTION>
Year ending March 31,
---------------------
<S> <C>
1998 $107,124
1999 109,458
2000 100,306
2001 100,446
Thereafter 50,844
--------
$468,178
--------
--------
</TABLE>
Rent expense for the year ended March 31, 1997, and the period ended March
31, 1996, totaled $78,996 and $6,341, respectively.
Employment Agreement
The Company entered into an employment agreement effective April 1, 1996,
with an officer. Minimum future annual salary commitments of the Company under
the agreements are as follows:
<TABLE>
<CAPTION>
Year ending March 31, Salary Bonus Total
--------------------- ------ ----- -----
<S> <C> <C> <C>
1998 $ 175,000 $ 87,500 $ 262,500
1999 175,000 87,500 262,500
2000 175,000 87,500 262,500
2001 175,000 87,500 262,500
---------- ---------- ----------
$ 700,000 $ 350,000 $1,050,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The agreement also provides for bonuses upon certain performance criteria
of the Company and the determination of the Board of Directors. Pursuant to the
agreement, employment may be terminated by the Company with cause or by the
executive with or without good reason. Termination by the Company without cause,
or by the executive for good reason, would subject the Company to liability for
an amount equal to six months of the terminated executive's salary at the date
of termination plus comparable insurance benefits being received prior to
termination.
The accompanying financial statements reflect compensation paid and
accrued for services rendered, if any, by the officer at the salary level which
the Company believes is reasonable under the circumstances. Pro forma data
presented in the accompanying fiscal year 1996 statement of operations reflect
the result of operations on a pro forma basis had the officer been employed by
the Company for the entire period at a compensation level equal to that
contained in the above agreement.
F-14
<PAGE>
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE G--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 year ended March 31, 1997, the Company paid
$27,796 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. No amounts were
paid to the stockholder during 1997.
NOTE H--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 year ended March 31, 1997, and for the period ended March
31, 1996, were $32,216 and $3,750, respectively.
F-15
<PAGE>
Board of Directors
e-Net, Inc.
We have reviewed the accompanying balance sheet of e-Net, Inc. (a Delaware
Corporation), as of December 31, 1997, and the related statements of operations,
stockholders' equity and cash flows for nine month periods ended December 31,
1997 and 1996, and the statements of operations for the three month periods
ended December 31, 1997 and 1996. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet as of March 31, 1997, and the related statements of
operations, stockholders' equity and cash flows for the year then ended (not
presented herein), and in our report dated May 2, 1997, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed balance sheet as of March
31, 1997, is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
Grant Thornton LLP
Vienna, Virginia
January 19, 1998
F-16
<PAGE>
e-NET, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1997
----------------- --------------
(Unaudited) (Audited)
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 894,650 $ 379,441
Short-term investments 2,254,180 --
Accounts receivable 95,729 113,181
Inventory 233,144 --
Prepaid expenses 86,318 14,800
------------ ------------
Total Current Assets 3,564,021 507,422
Deposits and other assets -- 7,530
Property, Plant and Equipment, Net 371,152 203,125
Deferred Initial Public Offering Costs -- 964,706
Other Assets 54,000 --
Software Development Costs 894,172 520,853
------------ ------------
$ 4,883,345 $ 2,203,636
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable--trade 69,722 105,301
Accrued liabilities 390,132 330,580
Capital lease obligation -- 4,480
------------ ------------
Total Current Liabilities 459,854 440,361
Accrued Initial Public Offering Costs -- 887,843
------------ ------------
Total Liabilities 459,854 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 September 30, and
March 31, 1997, respectively 57,500 42,500
Stock subscriptions (46) (46)
Additional paid-in capital 14,163,090 8,307,627
Retained deficit (9,797,053) (7,474,649)
------------ ------------
Total Stockholders' Equity 4,423,491 875,432
------------ ------------
$ 4,883,345 $ 2,203,636
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-17
<PAGE>
e-NET, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended December 31,
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Sales
Products $ 99,235 $ --
Services 65,505 114,389
----------- -----------
Total sales 164,740 114,389
Cost of product sold and service provided
Products 32,412 --
Services 65,003 117,739
----------- -----------
Total cost of product sold and service provided 97,415 117,739
Gross profit 67,325 (3,350)
Operating Expenses
Selling, general and administrative 818,544 157,644
Research and development 310,470 54,342
----------- -----------
Loss from Operations (1,061,689) (215,336)
Other Income (Expense)
Interest and financing expense -- 7,219
Other expenses (20,404) (20,250)
Interest income 48,128 4,773
----------- -----------
Loss Before Income Taxes (1,033,965) (223,594)
Income Tax Provision -- --
----------- -----------
Net Loss $(1,033,965) $ (223,594)
----------- -----------
----------- -----------
Loss per Share $ (.18) $ (.06)
----------- -----------
----------- -----------
Weighted Average Shares Outstanding 5,750,000 4,000,000
</TABLE>
The accompanying notes are an integral part of these statements.
F-18
<PAGE>
e-NET, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended December 31,
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Sales
Products $ 128,176 $ 24,000
Services 250,079 414,517
----------- -----------
Total sales 378,255 438,517
Cost of product sold and service provided
Products 48,017 12,822
Services 160,045 290,487
----------- -----------
Total cost of product sold and service provided 208,062 303,309
Gross profit 170,193 135,208
Operating Expenses
Selling, general and administrative 1,990,798 593,971
Research and development 573,651 158,684
----------- -----------
Loss from Operations (2,394,256) (617,447)
Other Income (Expense)
Interest expense--bridge financing -- (5,385,135)
Cost of abandoned stock registration -- (284,575)
Interest and financing expense (5,158) (15,581)
Other expenses (101,082) (41,849)
Interest income 178,092 15,019
----------- -----------
Loss Before Income Taxes (2,322,404) (6,329,568)
Income Tax Provision -- --
----------- -----------
Net Loss $(2,322,404) $(6,329,568)
----------- -----------
----------- -----------
Loss per Share $ (.41) $ (1.59)
----------- -----------
----------- -----------
Weighted Average Shares Outstanding 5,695,455 3,972,727
</TABLE>
The accompanying notes are an integral part of these statements.
F-19
<PAGE>
e-NET, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended December 31,
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and
Cash Equivalents
Cash Flows from Operating Activities
Net loss $(2,322,404) $(6,329,568)
Adjustments to reconcile net loss to net
cash from operating activities
Interest expense--bridge financing -- 5,385,135
Depreciation and amortization 128,976 28,011
Stock-Based Compensation 62,244 --
Changes in operating assets and liabilities
(Increase) Decrease in accounts receivable 17,452 (76,364)
(Increase) in inventory (233,144) --
(Increase) in prepaid expenses,
deposits and other assets (117,987) (25,530)
Increase in accounts payable
and accrued liabilities 23,972 127,183
(Decease) in deferred revenue -- (20,000)
----------- -----------
Net Cash Used in Operating Activities (2,440,891) (911,133)
----------- -----------
Cash Flows from Investing Activities
Capital expenditures (290,353) (94,580)
Capitalized software development costs (379,969) (367,598)
Investment in short term securities (2,254,180) --
----------- -----------
Net Cash Used in Investing Activities (2,924,502) (462,178)
----------- -----------
Cash Flows from Financing Activities
Net proceeds from initial public offering
of common stock 5,870,082 --
Issuance of common stock 15,000 --
Payment of shareholder/officer loans -- (12,050)
Proceeds from issuance of bridge notes payable -- 500,000
Proceeds from issuance of long-term debt -- 1,000,000
Payments on capital leases (4,480) (3,719)
----------- -----------
Net Cash Provided by Financing Activities 5,880,602 1,484,231
----------- -----------
Net Increase in Cash and Cash Equivalents 515,209 110,920
Cash and Cash Equivalents at Beginning of Period 379,441 557,960
----------- -----------
Cash and Cash Equivalents at End of Period $ 894,650 $ 668,880
----------- -----------
----------- -----------
Supplemental Disclosures:
Income Taxes Paid $ -- $ --
----------- -----------
----------- -----------
Interest Paid $ 158 $ 6,284
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE>
e-NET, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Stock
------------------------ Subscriptions Additional Total
No. of and Notes Paid-in Retained Stockholders'
Shares Amount Receivable Capital Deficit Equity
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, April 1, 1997 4,250,000 $ 42,500 $ (46) $ 8,307,627 $(7,474,649) $ 875,432
Sale of common stock
in initial public offering 1,500,000 15,000 -- 5,793,219 -- 5,808,219
Stock-based compensation -- -- -- 62,244 -- 62,244
Net loss -- -- -- -- (2,322,404) (2,322,404)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 5,750,000 $ 57,500 $ (46) $14,163,090 $(9,797,053) $ 4,423,491
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE>
e-NET, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A--BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited financial statements include the accounts of
e-Net, Inc. (the "Company"). Such statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and pursuant to the regulations of the Securities and Exchange Commission;
accordingly, they do not include all of the information and notes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments considered necessary for a fair
presentation (consisting of normal recurring accruals) have been included. The
results of operations for the quarter and nine months ended December 31, 1997
are not necessarily indicative of the results for the fiscal year ending March
31, 1998. The accompanying unaudited financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997.
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.
Software development costs - The Company has capitalized certain software
development costs incurred after establishing technological feasibility.
Software costs are amortized over the estimated useful life of the software once
the product is available for general release to customers. At December 31, 1997,
the Company has capitalized $900,822, net of accumulated amortization of $
6,650. Should sufficient product sales fail to materialize, the carrying amount
of capitalized software costs may be reduced accordingly in the future. The
costs associated with development of a software product prior to reaching the
point of technological feasibility and with a product's post-general
availability support are charged to research and development expense in the
period incurred.
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. The Company has recorded, as an
element of cost of product sales, an estimated accrual for product warranty
costs.
NOTE B--INITIAL PUBLIC OFFERING
In April 1997, the Company completed an initial public offering of
securities consisting of 1,500,000 shares of common stock and 1,725,000 common
stock warrants. In connection with the offering, the Company received proceeds
of $5,808,219 net of all expenses associated with the offering.
NOTE C--LINE OF CREDIT FACILITY
On May 31, 1997, the Company signed a one (1) year promissory note for a
$1,000,000 line of credit facility that is collateralized by investments,
receivables and fixed assets of the Company. To date, the Company has not
borrowed on this facility.
NOTE D--NON-QUALIFIED STOCK OPTION PLAN
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 in the nine months ended December 31, 1997 were
recorded as compensation expense of $62,244. Since the plan's inception, the
Company has granted 255,323 options, of which 115,990 are exercisable at
December 31, 1997.
NOTE E--INCOME TAXES
The Company has generated net operating losses since its inception. At
December 31, 1997, the Company recorded a valuation allowance in an amount equal
to the deferred tax asset due to the uncertainty of generating future taxable
income.
NOTE F--CONCENTRATION
Approximately 56% of the Company's accounts receivable balance at December
31, 1997, and approximately 75% of the Company's sales for the nine months ended
December 31, 1997, are from one customer.
F-22
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 1
Risk Factors.............................................................. 5
Use of Proceeds........................................................... 9
Dilution.................................................................. 10
Market Prices of Common Stock............................................. 11
Capitalization............................................................ 11
Dividend Policy........................................................... 12
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 12
Business.................................................................. 16
Management................................................................ 26
Principal Stockholders.................................................... 31
Certain Transactions...................................................... 32
Description of Securities................................................. 33
Plan of Distribution...................................................... 35
Legal Proceedings......................................................... 35
Legal Matters............................................................. 35
Experts................................................................... 35
Index to Financial Statements............................................. F-1
Report of Independent Certified Public Accountants........................ F-2
</TABLE>
e-Net, Inc.
1,725,000 Shares of Common Stock
Underlying 1,725,000 Redeemable
Common Stock Purchase Warrants
-----------
PROSPECTUS
-----------
April 30, 1998
<PAGE>
PART TWO
INFORMATION NOT REQUIRED IN PROSPECTUS
Limitation on Liability of Directors
As permitted by Delaware law, the Company's Certificate of Incorporation
includes a provision that provides that the Company will, to the fullest extent
permitted by Section 145 of the Delaware General Corporation Law, as amended
from time to time ("DGCL"), indemnify all persons whom it may indemnify pursuant
thereto. To the fullest extent permitted by the DGCL, a director of the Company
shall not be personally liable to the Company or its stockholders for monetary
damages for a breach of fiduciary duty as a director. The provisions are
intended to afford directors protection against, and to limit their potential
liability for, monetary damages resulting from suits alleging a breach of the
duty of care by a director; they also diminish the potential rights of action
which might otherwise be available to shareholders by limiting the liability of
officers and directors to the maximum extent allowable under Delaware law and by
affording indemnification against most damages and settlement amounts paid by a
director of the Company in connection with any shareholders derivative action.
As a consequence of these provisions, stockholders of the Company will be unable
to recover monetary damages against directors for action taken by them that may
constitute negligence or gross negligence in performance of their duties unless
such conduct falls within an exception under DGCL or under Delaware case law.
The provision, however, does not alter the applicable standards governing a
director's fiduciary duty and does not eliminate or limit the right of the
Company or any stockholder to obtain an injunction or any other type of
equitable relief in the event of a breach of fiduciary duty. Management of the
Company believes these provisions will assist the Company in securing and
retaining qualified persons to serve as directors. The Company is unaware of any
pending or threatened litigation against the Company or its directors that would
result in any liability for which such director would seek indemnification or
similar protection.
The Company believes that the substantial increase in the number of
lawsuits being threatened or filed against corporations and their directors has
resulted in a growing reluctance on the part of capable persons to serve as
members of boards of directors of public companies. The Company also believes
that the increased risk of personal liability without adequate insurance or
other indemnity protection for its directors could result in overcautious and
less effective direction and management of the Company. The limitation on
liability and indemnification provisions are intended to increase the protection
provided directors and, thus, increase the Company's ability to attract and
retain qualified persons to serve as directors. Additionally, the Company has
procured directors liability insurance coverage, but there is no assurance that
it will provide coverage to the extent of the director's claims for
indemnification. In such event, the Company may be forced to bear a portion or
all of the cost of the director's claims for indemnification and, the value of
the Company stock may be adversely affected as a result. There is also no
assurance that the Company will be able to continue to procure directors
liability insurance. It is uncertain whether the Company's directors would
continue to serve in such capacities if improved protection from liability were
not provided.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
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(1)............................ $-0-
NASD Registration and Filing Fee(1)........................... $-0-
Nasdaq Registration and Filing Fee(1)......................... $-0-
Financial Printing............................................ $5,000
Transfer Agent Fees........................................... $-0-
Accounting Fees and Expenses.................................. $10,000
Legal Fees and Expenses....................................... $25,000
Blue Sky Fees and Expenses.................................... $10,000
Miscellaneous................................................. $15,000
--------
Total..................................................... $65,000
</TABLE>
- -----------
(1) Paid upon filing of the Registration Statement in connection with the
Initial Public Offering.
Item 26. Recent Sales of Unregistered Securities.
The following information sets forth 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 Ratkovitch,
$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. Ratkovitch, 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 received 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 Ratkovitch 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 Whittenberry 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
<TABLE>
<CAPTION>
<S> <C>
1.0 Underwriting Agreement.*
1.1 Agreement Among Underwriters.*
1.2 Selected Dealers Agreement.*
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.*
5.0 Opinion of Thomas J. Prousalis, Jr., Esq. *
10.0 Employment Agreement, Robert A. Veschi, dated April 1, 1996.*
10.1 United States Patent, Notice of Allowance, dated January 23, 1996.*
10.2 Assignment of Patent Rights, dated March 22, 1996.*
10.3 Sprint Agreement, dated March 1, 1996.*
10.4 Financial Advisory Agreement.*
10.5 Merger and Acquisition Agreement.*
10.6 Mutual Cooperation Agreement, dated January 14, 1997.*
10.7 Lockheed Martin Agreement, dated January 3, 1997.*
10.8 Product Sales Agreement with Diamond Telecom.
10.9 Software Development Agreement with Com21.
10.10 Distributor Agreement with Comtel Electronic System GMBH.
10.11 Joint Market Agreement with Paradyne Corporation.
10.12 Product Sales Agreement with Paradyne Corporation
10.13 1997 Nonqualified Stock Option Plan.
10.14 Government Reseller Agreement dated August 27, 1997.
10.15 Memorandum of Understanding with Summa Four, Inc.
10.16 Net2Phone Bundling Agreement with IDT Corporation.
11.0 Computation of Per Share Loss.*
23.0 Consent of Thomas J. Prousalis *
24.0 Consent of Grant Thornton LLP.
25.0 Power of Attorney (contained on page II-6).
</TABLE>
- ----------
*Previously filed.
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
Post-Effective Amendment to the Registration Statement on Form SB-2 to be signed
on its behalf by the undersigned, in the County of Montgomery, State of
Maryland, on April 30, 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 Post-Effective Amendment to the 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.
Name Title Date
- ---- ----- ----
/s/Alonzo E. Short, Jr.
- ----------------------------------------- Chairman of April 30, 1998
Alonzo E. Short, Jr., Lt. Gen., USA (ret.) the Board
/s/Robert A. Veschi President, Chief April 30, 1998
- ----------------------------------------- Executive Officer,
Robert A. Veschi Director
/s/Donald J. Shoff Chief Financial April 30, 1998
- ----------------------------------------- Officer (Chief
Donald J. Shoff Accounting Officer)
/s/William L. Hooton
- ----------------------------------------- Director April 30, 1998
William L. Hooton
- ----------------------------------------- Director April 30, 1998
Clive Whittenbury, Ph.D.
- ----------------------------------------- Director April 30, 1998
William W. Rogers, Jr.
II-6
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
to
Post-Effective Amendment No. 1
to
FORM SB-2
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
-----------
e-NET, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Document
- ------- --------
<S> <C>
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
10.8 Product Sales Agreement with Diamond Telecom.
10.9 Software Development Agreement with Com21.
10.10 Distributor Agreement with Comtel Electronic System GMBH.
10.11 Joint Market Agreement with Paradyne Corporation.
10.12 Product Sales Agreement with Paradyne Corporation
10.13 1997 Nonqualified Stock Option Plan.
10.14 Government Reseller Agreement dated August 27, 1997.
10.15 Memorandum of Understanding with Summa Four, Inc.
10.16 Net2Phone Bundling Agreement with IDT Corporation.
24.0 Consent of Grant Thornton LLP.
25.0 Power of Attorney (contained on page II-6).
</TABLE>
<PAGE>
Exhibit 3.1
CERTIFICATE OF CORRECTION
TO THE
CERTIFICATE OF INCORPORATION OF
e-NET, INC.
e-Net, Inc., a corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
1. The name of the corporation is e-Net, Inc. (formerly Nightware
Technologies, Inc.).
2. A Certificate of Amendment to the Certificate of Incorporation of the
corporation (the "Amendment") was filed on January 22, 1996. Said Amendment
requires correction as permitted by subsection (f) of Section 103 of The General
Corporation Law of the State of Delaware.
3. The inaccuracies or defects of said Amendment to be corrected are as
follows: (i) changing the effective date of the Amendment from the filing date
of January 22, 1996, to March 15, 1996; (ii) correcting the spelling of the word
"Forth" to "Fourth" as it appears in the Amendment; and (iii) including language
in Article SECOND of the Amendment authorizing a 600-for-1 stock split of the
corporation's outstanding common stock, which language was inadvertently omitted
from the Amendment.
4. Article SECOND of the Amendment is corrected to read as follows:
"SECOND: Effective as of March 15, 1996, the Certificate of
Incorporation is hereby amended by striking out paragraph 1(a) of Article
FOURTH in its entirety and substituting the following provisions, to wit:
"FOURTH: 1)(a) The total number of shares of common stock which this
corporation is authorized to issue is fifty million (50,000,000) shares,
$.01 par value.
(b) Effective as of the close of business on
March 15, 1996, each issued and outstanding share of common stock with a
par value of $.01 per share is subdivided and reclassified into 600 shares
of common stock with a par value of $.01 per share."
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by ________________, its authorized officer, on this ____ day of April,
1998.
e-NET, INC.
By: ______________________________
Name:
Title:
-2-
<PAGE>
Exhibit 3.2
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
e-NET, INC.
e-Net, Inc., a corporation duly organized and existing under the General
Corporation Law of the State of Delaware (the "Corporation"),
DOES HEREBY CERTIFY:
FIRST: The amendment of the Certificate of Incorporation herein certified
has been duly adopted in accordance with the provisions of Section 242 of the
General Corporation Law of the State of Delaware.
SECOND:Paragraph 1 of Article FOURTH of the Certificate of Incorporation
of the Corporation is amended by adding after subparagraph 1(b) the following
subparagraph:
"(c) Effective as of March 18, 1997, each issued and
outstanding share of common stock with a par value of $.01 is combined and
reclassified, on a one-for-two basis, into one-half of one share of common stock
with a par value of $.01 per share. This Certificate of Amendment shall affect,
as of March 18, 1997, only the shares of common stock issued and outstanding as
of such date, and, except with respect to those shares affected as of such date,
shall have no effect as of the date hereof on shares of common stock issued and
outstanding as of the date hereof.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by ____________________, its authorized officer, on this __ day of April,
1998.
e-NET, INC.
By:_____________________________
Name:
Title:
<PAGE>
EXHIBIT 10.8
PRODUCT SALES AGREEMENT
Between Seller, Inc., a Delaware corporation with principal offices at
12800 Middlebrook Rd., Germantown, MD 20874-5204 ("Seller") , and Diamond
Telecom ("Reseller"), a Brazilian corporation with a principal place of business
at Rua Jangadeiros 6/502, Rio de Janeiro, RJ, Brazil,
WHEREAS, Seller is the manufacturer of a product called Telecom
2000(TM), and
WHEREAS, Reseller wishes to make purchases of Telecom 2000(TM) for
resale, and
WHEREAS, the parties believe that it would be mutually beneficial for
them to cooperate in order for Reseller to resell Telecom 2000(TM),
NOW, THEREFORE, in order to establish the terms and conditions under
which the parties' respective goals may be accomplished, in exchange of the
mutual covenants and premises here in below, the parties agree as follows:
1.0 DEFINITIONS
Seller Product shall mean those products listed in Attachment A hereto.
Telecom 2000(TM) shall mean the intellectual property underlying Seller
Product related to or derived from Telecom 2000(TM) and / or related to or
derived from US Patent No. 5, 526, 353 including specifically, for purposes of
clarification and not limitation, algorithms, electronic computer protocols,
routines, subroutines or programs developed by or on behalf of Seller or
otherwise owned by or in the custody of Seller.
2.0 LICENSE AND SCOPE OF AGREEMENT
2.1 License Rights and Scope. Subject to the terms and conditions set
forth herein, Seller hereby grants to Reseller, and Reseller accepts, a
non-transferable and non-exclusive license to resell or sublicense Seller
Product, subject to and controlled by Attachment A, Special Terms and Conditions
Number 3.
2.2 Restrictions on Use. All purchase, use, and resale by Reseller of
Seller Product is restricted as follows:
(a) Reseller is strictly prohibited from reverse engineering, reverse
compilation, or reverse assembly of Seller Product;
(b) Reseller is strictly prohibited from making a copy or copies of
Seller Product;
(c) Reseller shall not misuse the trademarks or trade names of Seller,
but Reseller may use the trademarks or trade names of Seller in advertising
Seller Products;
(d) Reseller shall not make any foreign sales without full compliance
with United States import/export laws and restrictions, and shall be responsible
to Seller and indemnify Seller for any failure to abide with this clause; and
(e) Reseller shall not make any government contract sales that impair
the rights of Seller hereunder, and must take all necessary steps to insure
compliance with the intellectual property ownership rights of Seller hereunder,
and shall be responsible to Seller and indemnify Seller for any failure to abide
with this clause. The foregoing is subject to and controlled by Attachment A,
Special Terms and Conditions Number 8.
<PAGE>
2.3 Term. This Agreement shall be for a term of one year, subject to
termination by either party at any time in accordance with the terms hereof.
2.4 Termination. Subject to Section 4.6 hereof, the Agreement may be
terminated by Seller if Reseller does not pay Seller any amount due hereunder or
otherwise materially breaches this Agreement, or if Reseller violates any
material term hereof, including specifically but not as a limitation its
restrictions under 2.0 and its duties under Section 3.0. Reseller shall have the
right to terminate this Agreement if Seller fails to provide support as
described in Attachment B, or if Seller otherwise materially breaches this
Agreement. Either party may terminate this Agreement if a force majeure event
continues for more than ninety (90) days or if the other party becomes insolvent
or bankrupt or makes an assignment for the benefit of creditors.
2.5 Duties Upon Termination. Upon the termination or expiration of this
Agreement for any cause, the parties agree to continue their cooperation in
order to effect an orderly termination of their relationship. Reseller shall
immediately cease representing itself as a reseller of Seller Product, and shall
accept no new orders for Seller Product except pursuant to firm, outstanding
bids or quotations.
2.6 Survival. Upon the termination or expiration of this Agreement for
any cause, the paragraphs which by their plain meaning, including specifically
but not as a limitation provisions which protect the intellectual property
rights of Seller shall survive.
2.7 Breach or Default. Neither party may terminate this Agreement for
breach or default of the other party unless and until the party seeking to
terminate has specified the breach or default in writing and such breach or
default has not been cured by the receiving party within thirty (30) days after
receipt of written notice.
3.0 OBLIGATIONS OF RESELLER
3.1 Reasonable Best Efforts Services and Minimum Commitment. In
consideration of the license granted above and discounting schedules extended in
Attachment A, Reseller agrees to exert its reasonable best efforts to resell
Seller Product, to meet agreed-upon sales goals, and to purchase the Minimum
Commitment of Seller Product outlined in Attachment A. In consideration of the
Reseller efforts, the Seller agrees to exert its reasonable best efforts to a
deliver high quality product in conformance with its published specifications,
within a reasonable period of time related to agreed upon delivery dates, in
order for the Reseller to meet and/or exceed sales goals.
3.2 Sales Capability. Reseller shall maintain offices as sales
locations, which offices shall be staffed by a sufficient trained capable sales
and technical staff, adequate to provide Reseller's customers with assistance
and instructions on setup, installlation, and use of Seller Product.
3.3 Sales Reports, Sales Estimates, and Product Performance Data.
Periodically, as agreed, Reseller will forecast expected sales to be made in the
upcoming three month period on a "rolling" basis.The Reseller is required to
forward to Seller any reports from users of the Seller Product regarding either
(i.) any outages or failures experienced by users of the Seller Product which
become known to Reseller, or (ii) any complaints of users of the Seller Product
regarding the quality, functionality or performance of Seller Product which
become knownto Reseller.
3.4 Insurance Coverages. Based upon Seller's determination, Reseller
shall acquire reasonable insurance coverages related hereto of the kinds and in
the amounts specified by Seller, at Reseller's expense, with loss payees and
subrogation as specified by Seller.
4.0 ORDERING, DELIVERY, ACCEPTANCE, FEES, PAYMENT, AND SUPPORT
4.1 Ordering and Delivery. Individual firm funded purchase orders of
Reseller issued to Seller shall be effective upon acceptance and order receipt
verification in writing by Seller at its headquarters at Germantown, Maryland,
USA. All Seller Products are listed in the initial form of Attachment A with
prices and the purchase
<PAGE>
orders of Reseller must reflect the description, prices, and model numbers
contained therein. The terms and conditions of this Agreement override those of
the purchase orders, with the exception of Reseller's rights to return ordered
product (if any) after acceptance has occurred under the provisions of 4.2
below. All Seller Products shall be delivered on or about the delivery date set
forth in the order receipt verification in writing by Seller. Shipment will be
at the risk of Reseller. Reseller shall have 15 business days to verify that all
deliveries have been received. Delivery of the Seller Products shall be
conclusively deemed to be completed at the end of the 15 business days
verification period or at such time as missing deliverables identified by
Reseller in writing during the 15 business days verification period have been
replaced by Seller.
4.2 Acceptance. The Seller Product shall be accepted by Reseller if the
Seller Products perform substantially as described in their current
documentation. Failure of Reseller to inform Seller of acceptance or
non-acceptance within thirty (30) days following completed delivery or
commercial use of the deliverables by Reseller shall constitute acceptance.
Purchase prices and license fees shown in the initial form of Attachment A are
due and payable upon acceptance. Until full payment is received, Seller retains
a purchase money security interest in and to Seller products. After full payment
is received, title is transferred to Reseller.
4.3 After-Sale Support of Products. Following delivery of the
Deliverables, Reseller shall be exclusively responsible for the installation,
testing, modification, management, and control of its resales of Seller Product,
except for Seller's Warranty responsibility in clause 5.3 below and After-Sale
Support of Products responsibility defined in Attachment B hereto.
4.4 Prices and Price Changes. Reseller agrees to pay Seller the amounts
shown on Attachment A for Seller Product. Seller will have the right through its
independent auditors to inspect Reseller 's facilities and records to verify the
amounts and fees charged to Reseller's customers hereunder. Reseller shall keep
records regarding its resales and sublicenses to Reseller's customers hereunder
in detail to permit Seller to make such a verification. Seller may change the
price of any Seller Product subsequent to the date of this agreement. If prices
are increased, Seller will give Reseller a written notice thereof effective
immediately upon increase.Firm funded purchase orders accepted by Seller before
the written notice of price increase is issued shall be honored at the old
(lower) price so long as the scheduled shipment date therefore is not later than
thirty (30) days after the date of the written notice of price increase. If
prices are decreased, Seller will give Reseller a written notice thereof
effective immediately, and the decrease shall apply to all unused unopened
inventory purchased by Reseller during the previous thirty (30) days, as well as
to orders-in-process.
4.5 Training, Updates, Maintenance & Support Fees. Except as expressly
provided in this Agreement, including the Attachments, all training and support
services provided by Seller shall be at an additional fee in accordance with
Seller 's then current standard rates. Unless otherwise stated, Reseller shall
reimburse Seller for all reasonable travel and other out-of-pocket expenses
incurred by Seller in connection with the assistance furnished hereunder,
provided same have been approved and pre-authorized by Reseller.
4.6 Payment. All checks will be in U.S. currency unless otherwise
agreed and shall be drawn on U.S. banks. Except as otherwise stated herein,
based upon credit approval in the sole discretion of Seller, all payments
including license fees shall be due and payable within thirty (30) calendar day
after the receipt by Reseller from Seller of an invoice. If Reseller fails to
pay any amount due by the due date, Reseller shall pay late charges of 1.5% per
month, but not more than the highest rate permitted by law, together with all
Seller 's expenses and collection charges
4.7 Taxes. In addition to Seller 's fees hereunder, Reseller is
obligated to pay any federal, state, provincial, county, local or governmental
taxes, (including but not limited to sales tax and value added taxes), duties
fees and amounts in lieu thereof, now or hereafter applied on the licenses
granted or products sold herein or Reseller 's production, storage,
transportation, import, export, licensing or use of Seller Product. Any such
taxes, duties, fees and amounts payable in lieu thereof, including interest and
penalties thereon ,paid or payable at any time by Seller, exclusive of taxes
based solely on Seller 's net income, shall be reimbursed by Reseller.
<PAGE>
5.0 OWNERSHIP AND PROPRIETARY RIGHTS
5.1 Ownership. All rights, title and interest to Telecom 2000(TM) shall
at all times remain the exclusive property of Seller, except for Seller Product
fully paid for by Reseller. All applicable copyrights, trade secrets, patents
and other intellectual property rights in Seller Product and Telecom 2000(TM)
shall remain the exclusive property of Seller. No title to Telecom 2000(TM) is
transferred to Reseller. Reseller shall not remove the copyright, trademark and
proprietary rights notices of Seller, and shall prohibit any such removal by its
officers, agents, employees, and contractors.
5.2 Proprietary Rights. Reseller acknowledges that Telecom 2000(TM) is
proprietary and confidential and constitutes valuable trade secrets of Seller.
Reseller agrees to safeguard Telecom 2000(TM) with not less than the same degree
of care as is exercised in connection with Reseller's own most proprietary and
confidential materials.
All aspects of Telecom 2000(TM), including without limitation,
programs, methods of processing, specific design and structure of individual
programs and their interaction and unique programming techniques employed
therein, if any, shall remain the sole and exclusive property of Seller, and
shall not be used, sold, revealed, disclosed or otherwise communicated, directly
or indirectly, by Reseller to any person, company, or institution other than as
set forth herein, excepting such technical and business development
communications, products demonstrations, and detailed technical discussions as
Reseller reasonably may deem necessary to perform the reselling duties described
herein.
5.3 Warranty and Disclaimer of Warranty. Seller Product Hardware is
warranted as free from defects in materials and workmanship for a period of one
year after shipment. In the event of warranty claims hereunder, Reseller shall
return ship to seller, prepaid, with a written description of the basis for
warranty claim for a final determination by Seller. Warranty-covered items shall
be repaired or replaced by Seller and shipped to Reseller, at Seller's expense.
All Seller Product Software is delivered "AS IS". SELLER MAKES NO EXPRESSED OR
IMPLIED WARRANTIES WHATSOEVER WITH RESPECT TO SELLER PRODUCT. IN PARTICULAR, AND
WITHOUT LIMITING THE FOREGOING, THE PARTIES AGREE THAT THERE IS NO EXPRESSED OR
IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE OR OF MERCHANTABILITY.
SELLER SHALL NOT BE FOUND LIABLE FOR ANY MONETARY DAMAGES OF ANY KIND
WHATESOEVER RELATED TO THE USE OF SELLER PRODUCTS, AND ANY AND ALL RISK OF SUCH
USE IS HEREBY SPECIFICALLY ASSUMED BY RESELLER.
6.0 INDEMNIFICATION
6.1 Limitation of Liability. IN NO EVENT WILL EITHER PARTY BE LIABLE TO
THE OTHER OR TO ANY OTHER THIRD PARTY BASED ON CONTRACT, TORT OR OTHERWISE FOR
LOSS OF REVENUES, LOST PROFITS, LOST SAVINGS, OR INDIRECT, CONSEQUENTIAL,
INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES ARISING OUT OF OR RELATING IN ANY WAY TO
THIS AGREEMENT, EXCEPT THAT RESELLER MAY BE FOUND SO LIABLE TO SELLER FOR ANY
DAMAGES ARISING OUT OF OR RELATING TO RESELLER'S INTENTIONAL OR GROSSLY
NEGLIGENT VIOLATION OF CLAUSES 2.2.
6.2 Indemnification by Seller . Seller shall indemnify, defend and hold
Reseller harmless from any claims, damages or judgments, including all
reasonable attorney's fees, directly or indirectly resulting from any claimed
infringement or violation of any US copyright, US patent or other US
intellectual property right with respect to Seller Product. Seller shall have no
liability for any such claims or liabilities based on use of: (i) any version,
modification or adaptation of Seller Product, if such infringement would have
been avoided by the use of a then current unaltered release of Seller Product ;
or (ii) a combination of Seller Product with any product or data not included in
Seller Product when delivered to Reseller by Seller.
Following notice of a claim or a threat of actual suit, Seller, at its
sole option, shall as Reseller's sole remedy (except as otherwise provided for
in this section):
<PAGE>
(a) procure for Reseller the right to continue, as provided herein, to
use, distribute and sublicense Seller Product at no additional expense to
Reseller; or
(b) provide Reseller with a non-infringing version of Seller Product.
7.0 PUBLICITY
7.1 Issuance of Publicity. Any and all publicity of any kind whatsoever
with regard to this Agreement shall be determined by Seller in its sole
discretion, except that with respect to the use of the trademarks and trade
names, any publicity is subject to the approval of the party whose trademarks
and trade names are to be used, only to the extent of the use of such trademarks
and trade names and with respect to the portions of the publicity bearing any
such trademarks and trade names.
8.0 GENERAL
8.1 Compliance With Local Laws. Reseller shall be exclusively
responsible at its own expense for compliance with all local laws relating to
Seller Product and the use thereof hereunder by Reseller. Reseller shall
indemnify and save harmless Seller from any claim by a third party arising out
of or related to non-compliance with local laws by Reseller.
8.2 Jurisdiction. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, Montgomery County, Maryland
being the venue for all disputes, except for Federal jurisdiction disputes, the
venue for which shall be the Eastern District of Virginia.
8.3 Dispute Resolution. If either party wishes to commence litigation,
then either before or promptly after doing so, that party shall notify the other
party in writing by Federal Express or facsimile transmission of a request for
meeting. The request shall contain a description of the problem. Within fourteen
(14) days of receipt of the letter requesting the meeting, the parties shall
meet at a mutually convenient location in Montgomery County, Maryland. The
meeting shall be attended by an executive of each party having the authority to
resolve the problem. Each party may bring technical staff or other
representatives having information bearing on the problem; however, neither
party may bring an attorney or be represented in the meeting by an executive who
is an attorney unless agreed in advance in writing by the other party. In the
event such meeting fails to resolve issues in dispute, all actions relating to
dispute hereunder shall have as venue, Montgomery County, Maryland, except for
Federal jurisdiction disputes, the venue for which shall be the Eastern District
of Virginia.
8.4 Independent Contractors. It is expressly agreed that Seller and
Reseller are acting hereunder as independent contractors, and under no
circumstances shall any of the employees of one party be deemed the employees of
the other for any purpose.
<PAGE>
8.5 Notice. Any notice required to be given by either party to the
other shall be deemed given ten (10) days after being deposited in the postal
system in registered or certified form with return receipt requested, postage
paid, addressed to the notified party at the address set forth above.
8.6 Assignment. A party may not assign this agreement or any portion
thereof without the approval of the other party, which shall not be unreasonably
withheld.
8.7 Amendment; Waiver. Any provision of this Agreement may only be
amended or waived if such amendment or waiver is in writing; and, if an
amendment, executed by all parties hereto and, if a waiver, executed by the
party which is waiving the term, condition or right.
8.8 Severability. Any provision of this Agreement that is prohibited or
unenforcable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforcability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
8.9 Headings. The headings of the various sections of this Agreement
have been inserted for ease of reference only and shall be deemed not to be a
part of this Agreement.
8.10 Entire Agreement. This Agreement constitutes the entire
understanding of the parties with relation to the subject matter hereof, and may
be amended only by a writing in accordance with clause 8.7 above.
MADE AND ENTERED INTO this _________ day of _________, 199__, by the
undersigned authorized representatives of the parties.
e-Net, Inc. Reseller - Diamond Telecom
------------------------ ------------------------
(Signature) (Signature)
------------------------ ------------------------
(Name) (Name)
------------------------ ------------------------
(Title) (Title)
------------------------ ------------------------
(Date) (Date)
<PAGE>
ATTACHMENT A
Seller Product and Reseller Prices
<TABLE>
<CAPTION>
Product Designation List Price Each
------------------- ---------------
<S> <C>
T2000-TS $549
T2000-CO $795
T2000-IN (4 port BRI) $8495
T2000-DTI (single span T1/E1) $10,995
Gateways FXS 7300 (single span T1/E1) $29,995
*Network Management System (NMS) $10,000
*Billing System- Interface module only $10,000
(Query to CDR data only)
</TABLE>
*Required to be paid as a license one time per network for one Network
Manager Station when the T2000-DTI (single span T1/E1) or the Gateways FXS 7300
(single span T1/E1) is acquired. Includes one copy of PC Anywhere software per
station.
10% Discount based on these Special Terms and Conditions. Discount is
reflected in T2000-DTI (single span T1/E1) and Gateways FXS 7300 (single span
T1/E1) price above, for which installation is included.
All prices herein are available for certified Resellers only, and are
subject to change by Seller in accordance with the Seller's contractual
agreements and standard practices and policies.
Service Fees ( See Attachment B):
A one-year maintenance contract is available upon initial
order for a fee of fifteen per cent (15%) of the order dollar value. Maintenance
service includes Standard Support as defined in Attachment B. Nonstandard
Support in the areas of enhanced installation service, training, customization,
and relocation is available on a per order basis, when accepted by e-Net, Inc.
Fees for Nonstandard Support are based upon $1500.00 per day, minimum of two
days, plus travel and living.
"Special Terms and Conditions" are outlined below:
1.) Diamond Telecom will order not less than $80,000 worth of product
to be delivered by April 30, 1998;
2.) Diamond Telecom will order not less than $400,000 worth of product
to be delivered by October 31, 1998;
3.) Diamond Telecom will have an exclusive right to use and resell
e-Net's products for data telephony services in the country of Brazil for one
year from the date of this agreement, subject to its compliance with its
purchase commitments hereunder, and Diamond shall use e-Net products exclusively
for data telephony services in the country of Brazil for one year from the date
of this agreement, subject to e-Net's products performance compliance with its
published specifications ;
4.) Either party can cancel the exclusivity granted in (3.) above at
any time by paying the other party an amount of money equal to the money
exchanged between the parties hereunder; and
<PAGE>
5.) Payment Terms are consistent with clause 4.6 of the Agreement.
Initial payment terms are ten per cent (10%) cash down with each order, balance
due net 45 days after receipt or twenty (20%) cash down with each order, balance
due net 60 days after receipt.
6.) Installation of Gateway FXS 7300 hardware is $1500.00 per day for a
two-person installation team, plus travel and living.
7.) Each party agrees that it will not contract with, sell to, or
otherwise circumvent each other's accounts for a period of 5 (five) years from
the date hereof, such accounts introduced bya party to a party identified in
writing in advance by a party, unless the party receiving notice of such
identification disputes that an identified account was introduced to it by other
sources. The dispute should be announced within one business day. Any
circumvention that takes place will constitute a US$ 500,000 liquidated damage
plus compensatory damages.
8.) Notwithstanding anything to the foregoing, Reseller is authorized
hereunder to engage in sales activity hereunder with the Government of Brazil,
including Telebras. Reseller is solely responsible for compliance with all
applicable law with regard to such activity and furthermore Reseller must at all
times reasonably identify and give protection to the intellectual property
ownership rights of e-Net.
ATTACHMENT B
Seller's After-Sale Support of Seller Products
<PAGE>
Support
1.) "Warranty Only", equals no maintenance service unless a defect in
parts or workmanship causes a malfunction. See Clause 5.3. above.
2.) "Standard Support" for 15% of purchase price of ordered item per
year is specified in this attachment below under the title "Product Malfunction
Correction Procedures".
3.) "Nonstandard Support" equals any customized services which Reseller
requests and which Seller agrees to supply, at a cost of $1500 per day plus
Travel and Living, minimum of 2 days.
Product Malfunction Correction Procedures
-----------------------------------------
Problem Classifications - If Reseller or its Customer encounters a
problem (classified below) with the product, then Seller is required to respond
to the Reseller or its Sublicensee in the time specified below:
P1: Critical Systems Problem - Customer is unable to use the product as
documented, and a major operational problem or reliability problem exists.
Seller shall provide acknowledgment of the problem within four (4) hours. At
this time, Reseller or its Customer may be required to provide additional
information to enable Seller to recreate the problem. Seller shall use its best
efforts to provide a work-around (if a work-around is possible) for the problem
and shall provide a plan for resolution within one (1) day from the time at
which the problem can be reproduced by Seller. Reseller or its Customer may be
required to aid in this task if the error can not be reproduced by Seller. A
patch release containing the fix shall be produced according to the plan
mentioned above. Status reports will be provided to Reseller or its Customer as
required, but no less than twice a week.
P2: Minor Operational Problem(s) - An intermittent `bug' in the product
exists, but it is not a critical systems reliability issue; however, the product
does not function as documented, and the `bug' creates a minor operational
impact. Seller shall provide acknowledgment of the problem within one (1)
business day. At this time, Reseller or its Customer may be required to provide
additional information to enable Seller to recreate the problem. Reseller or its
Customer may be required to aid in this task if the error can not be reproduced
by Seller. Seller shall use its best efforts to provide a work-around (if a
work-around is possible) for the problem and shall provide a plan for resolution
within one (1) week from the time at which the problem can be reproduced by
Seller. Any fixes to address this problem shall be incorporated into the next
Maintenance Release.
P3: Annoyance Type Problem - The use of the product produces a user
annoyance while the product is in application. Seller shall provide
acknowledgment of the problem within two (2) business days. At this time,
Reseller or its Customer may be required to provide additional information to
enable Seller to recreate the problem. Seller shall use its best efforts to
provide a work-around (if a work-around is possible) for the problem and shall
provide a plan for resolution within two (2) weeks from the time at which the
problem can be reproduced. Reseller or its Customer may be required to aid in
this task if the error can not be reproduced by Seller. Seller and Reseller or
its Customer will jointly determine if the annoyance is to be fixed. If it is
agreed upon that the annoyance is to be fixed, then Seller shall provide a
schedule for the next Scheduled Release and incorporate the fix into that
release.
Definitions:
------------
1.) Scheduled release - includes new functionality
2.) Maintenance release - takes care of `bug' fixes
3.) Work-around - customer able to make alteration to application or
product as a temporary solution.
<PAGE>
<PAGE>
EXHIBIT 10.9
SOFTWARE DEVELOPMENT AGREEMENT
This Software Development Agreement ("Agreement") is effective
as of December ___, 1997 ("Effective Date"), by and between Com21, Inc., a
Delaware corporation ("Company"), having its principal place of business located
at 750 Tasman Drive, Milpitas, California 95035 and e-Net, Inc., a _____________
corporation ("Developer"), having its principal place of business located at
.
- -----------------
In consideration of the mutual promises and covenants set
forth below, the parties hereto agree as follows:
1. Definitions.
-----------
a. "Acceptance Criteria" means the tests,
Specifications and other acceptance criteria referenced in the Milestone
Schedule.
b. "Project Coordinator" means, for each party, an
individual designated by such party to facilitate communications between the
parties relating to development and acceptance of the Deliverables. Each party
has designated its Project Coordinator as of the Effective Date on Attachment B
hereto. A party may amend Attachment B to designate a new Project Coordinator,
such amendment to be effective upon written notice to the other party.
c. "Company Product" means a commercial version of a
telephone AIM/STU product incorporating the Deliverables or a derivative work of
the Deliverables.
d. "Confidential Information" means any confidential
or proprietary information of the disclosing party either (i) disclosed in
tangible form and conspicuously marked "Confidential," "Proprietary" or the like
or (ii) disclosed in non-tangible form and orally identified as confidential at
the time of disclosure and summarized in tangible form conspicuously marked
"Confidential," "Proprietary" or the like within thirty (30) days of the
original disclosure. By way of example and not limitation, the Deliverables
shall be deemed the Confidential Information of Company hereunder.
e. "Deliverables" means the deliverables identified
in the Milestone Schedule including, without limitation, the Developed Software
and Pre-existing Software.
f. "Developed Software" means the software product
developed by Developer for Company hereunder (in both fully-documented source
code and object code forms).
g. "Field" means those markets (excluding LAN
environments) for broadband or broadcast media products including, without
limitation, cable television and broadband wireless such as MMDS, LMDS and MVDS.
h. "Milestone Date" means the dates set forth in the
Project Timeline contained in the Milestone Schedule for delivery of a
Deliverable.
1
<PAGE>
i. "Milestone Schedule" means the development
milestone schedule set forth in Attachment A hereto.
j. "Pre-existing Software" means software (in both
fully-documented source and object code forms) developed by Developer at its
expense and incorporated into Developer's commercially available products prior
to the Effective Date.
k. "Specifications" means the specifications for the
Deliverables referenced in the Milestone Schedule and as more fully described in
the Telephone AIM Functional Requirement set forth in Attachment C hereto.
2. Developer Deliverables.
----------------------
a. Promptly upon execution of this Agreement,
Developer will commence development of the Deliverables and complete such
development pursuant to the Milestone Schedule.
b. In the event Company proposes any change to the
Deliverables or Milestone Schedule:
i. Developer will accept the change and
continue performance provided the proposed change would, in Developer's
reasonable estimation, not increase Developer's development costs hereunder by
more than twenty percent (20%) and Company agrees to bear the additional cost
required by the change; or
ii. in the event such proposed change would,
in Developer's reasonable estimation, increase Developer's development costs
hereunder by more than twenty percent (20%), Developer will reasonably and in
good faith discuss such change with Company and provide Company with a proposal
for the change within fifteen (15) days of Company's request. Developer shall
not be obligated to continue development work hereunder during such discussions.
3. Acceptance.
a. When Developer has completed a Deliverable,
Developer will deliver the Deliverable to Company. Company will accept or reject
the Deliverable within thirty (30) days after the later of (i) Developer's
delivery of the Deliverable or (ii) the applicable Milestone Date. In the event
Developer delivers a Deliverable prior to the applicable Milestone Date, Company
will proceed in good faith to begin acceptance testing as soon as practical, but
Company shall have no obligation to begin acceptance testing prior to the
applicable Milestone Date. Company may reject any Deliverable that fails to meet
the Acceptance Criteria in any material respect. Any Deliverable not
specifically rejected by Company by written notice in conformance with Section
19 shall be deemed accepted by Company, and any such notice must contain a
reasonably detailed description of the basis for rejection in order to be
effective. If Company rejects a Deliverable, Developer will promptly correct the
failures specified in the rejection notice, but in no event later than thirty
(30) days following receipt of the rejection notice. Following Developer's
re-delivery of the Deliverable, Company shall then repeat its acceptance tests
to ensure all non-conforming elements of the Deliverable have been corrected by
Developer. The foregoing acceptance/rejection/correction process shall be
repeated until all non-conformities have been corrected by Developer and
Company's acceptance of the Deliverable.
2
<PAGE>
b. In the event of any dispute between the parties as
to whether Company's rejection of a Deliverable is proper, or whether the
Developer is making reasonable progress toward resolving the failures identified
by Com21 in a Deliverable, the Project Coordinators shall meet to discuss such
dispute within forty-eight (48) hours of a party's written notice thereof. In
the event the Project Coordinators do not resolve such dispute within five (5)
days thereafter, the Project Coordinators shall submit the problem to the chief
executive officer (CEO) of each party for resolution. For purposes of dispute
resolution pursuant to this Section 3.b, no attorney shall be present at any
discussions or negotiations between the parties except with the prior written
consent of both parties; provided, however, that the foregoing shall not
preclude a party from conferring with counsel at any time outside of such
negotiations and discussions. If the parties are unable to resolve the dispute
within five (5) days thereafter, the dispute shall be resolved by binding
arbitration pursuant to Section 20.a below, except that (i) no discovery by the
parties will be conducted, (ii) each party shall have no more than four (4)
hours to present its case and (iii) the arbitrator shall decide the dispute
within five (5) days of the conclusion of the parties' presentation.
4. License Grant.
a. Developer grants Company a royalty-bearing,
nonexclusive, sublicenseable, worldwide and perpetual license to reproduce,
market, sell, distribute (in object code form only and subject to Company's end
user license agreement), publicly display, develop, modify, prepare derivative
works of and otherwise exploit the Pre-existing Software, solely as incorporated
within a Company Product. The foregoing grant shall not include the right to
market, sell or distribute the Pre-existing Software as a stand alone product.
b. Company grants Developer a royalty-free,
nonexclusive, nonsublicenseable, nontransferable, worldwide license, outside the
Field only, to reproduce, market, sell, distribute, publicly display, develop,
modify and prepare derivative works of the Developed Software.
5. Payment.
a. In consideration of Developer's development of the
Deliverables hereunder, the license of the Pre-existing Software and the
assignment to Company under Section 8 below, Company shall pay Developer a
non-recurring development fee ("Development Fee") in the amount of One Hundred
and Fifty Thousand Dollars ($150,000) in the following installments
corresponding to milestones set forth in the Milestone Schedule:
<TABLE>
<CAPTION>
Milestone: Amount:
<S> <C>
One $10,000
Two $30,000
Three $60,000
Four 0
Five 0
Six $50,000
</TABLE>
b. Payments of each installment of the Development
Fee shall be due and payable upon Company's acceptance of all of the
Deliverables corresponding to the applicable milestone.
3
<PAGE>
c. In further consideration of Developer's
development of the Deliverables hereunder, the license of the Pre-existing
Software and the assignment to Company under Section 8 below, Company shall pay
Developer during the thirty (30) month period following the first shipment by
Company of a Company Product on a general availability basis (the "Royalty
Period") a royalty of Five Dollars ($5) for each unit of Company Product sold or
otherwise distributed by Company, excluding Company Products distributed in
connection with beta testing or demonstration purposes, returns, products
repurchased from inventory and replacements. No further royalties shall accrue
after the expiration of the Royalty Period.
d. All payments will be in U.S. currency drawn on
U.S. banks unless otherwise mutually agreed by the parties in writing. All
royalty payments shall be due and payable on a monthly basis thirty (30) days
following the end of the month in which royalties accrue. If Company fails to
pay any undisputed amount when due, Company shall pay late charges of one and
one half percent (1.5%) per month, but not more than the highest rate permitted
by law, together with all direct collection expenses and charges incurred and
paid by Developer.
6. Audit Rights.
a. In order to assure compliance with Section 5.b
above, Developer shall have a right to audit to verify the amount of royalties
payable to Developer hereunder, with no fewer than ten (10) days prior notice
and no more frequently than twice during the Royalty Period, all sales and
accounting records of Company directly related to sales of Company Products
during the Royalty Period. Such audits shall be conducted during normal business
hours (at the offices or locations of Company) by an independent certified
public accountant of national standing who is bound in writing to maintain the
confidentiality of Company's Confidential Information. Such audits shall be at
Developer's sole expense unless an audit reveals an underpayment of royalties in
excess of five percent (5%). In such event, Company shall immediately upon
notice thereof from Developer pay the underpaid amount and the independent
certified public accountant's fee for conducting such audit.
b. In order to verify any of Developer's additional
development costs resulting from a change requested by Company pursuant to
Section 2.b or Developer's claims for costs pursuant to Section 14 below,
Company shall have a right to audit, with no fewer than ten (10) days prior
notice, all financial and accounting records of Company directly related to
development of the Deliverables hereunder. Such audits shall be conducted during
normal business hours (at the offices or locations of Developer) by an
independent certified public accountant of national standing who is bound in
writing to maintain the confidentiality of Developer's Confidential Information.
Such audits shall be at Company's sole expense unless an audit reveals that
Developer's claim for such costs has been overstated by an amount in excess of
five percent (5%). In such event, Developer shall immediately upon notice
thereof refund such overpayment together with the independent certified public
accountant's fee for conducting such audit.
7. Product Support.
a. Prior to Company's acceptance of each of the
Deliverables (and thereafter in the event of any failure, non-conformity or
other problem with any Deliverable which is a result of Developer's negligence
or willful misconduct), Developer will provide, without any charge to the
Company and during Developer's normal business hours, product support and
assistance. Developer will deliver appropriate senior technical personnel to a
location specified by the Company two (2) separate times, each time for a total
of two (2) days. All costs and expenses (including, without limitation,
transportation and housing) relating to such personnel are to be borne solely by
Developer. Such personnel deliveries will be scheduled reasonably in advance
based upon
4
<PAGE>
mutual agreement of Developer and Company and will be scheduled at times which
support Company's project schedule. It is understood and agreed that the
selection of Developer's senior technical personnel shall be at the reasonable
discretion of Developer. In addition, Company shall be entitled to send, at its
own expense, Company's technical personnel to Developer's place of business two
(2) separate times, each time for a total of two (2) days to work with
Developer's personnel in the development, testing, support of the Deliverables.
b. After Company's acceptance of each of the
Deliverables, Company may request support services relating to the Developer
Product and/or Deliverables at Developer's fee of One Hundred and Fifty Dollars
($150) an hour plus actual transportation related expenses and Developer will
use its commercially reasonable efforts to provide support services on these
terms.
8. Ownership.
a. As between the parties, Company shall own all
right, title and interest (including, without limitation, all copyrights, trade
secret rights and other intellectual property and rights throughout the world)
in and to all Deliverables (excluding the Pre-existing Software) and all
derivative works thereof created by or for the Company hereunder. Developer
agrees to assign and hereby does assign all right, title and interest in and to
the Deliverables (excluding the Pre-existing Software) to the Company. Developer
agrees to perform all acts and execute all documents necessary or desirable to
effectuate the foregoing assignment. In the event Company is unable to obtain
Developer's assistance in executing and perfecting any assignment hereunder for
any reason, Developer irrevocably designates and appoints Company and its duly
authorized officers and agents, as Developer's agents and attorneys-in-fact,
with full power of substitution, to act for, in behalf of and instead of
Developer, to execute and file any documents and to do all other lawfully
permitted acts to further the above assignment with the same legal force and
effect as if executed by Developer.
b. As between the parties and except as licensed
herein, Developer owns all right, title and interest (including, without
limitation, all copyrights, trade secret rights and other intellectual property
and rights throughout the world) in and to the Pre-existing Software.
9. Confidentiality; Nonsolicitation.
a. Each party will protect the other's Confidential
Information from unauthorized dissemination and use with the same degree of care
that such party uses to protect its own like information.
b. Neither party will use the other's Confidential
Information for purposes other than those necessary to directly further the
purposes of this Agreement. Neither party will disclose to third parties the
other's Confidential Information without the prior written consent of the other
party.
c. The receiving party shall not be obligated under
this Section 9 with respect to information the receiving party can document;
i. is or has become publicly known
through no fault of the receiving party or its employees or agents; or
5
<PAGE>
ii. is received without restriction
from a third party lawfully in possession of such information and lawfully
empowered to disclose such information; or
iii. was rightfully in the possession
of the receiving party without restriction prior to its disclosure by the
disclosing party (except for the Deliverables); or
iv. is independently developed by the
receiving party (except for the Deliverables).
d. Within thirty (30) days after the termination of
this Agreement, each party will return or destroy any Confidential Information
of the other and any copies, extracts and derivatives thereof.
e. During the term of this Agreement and for twelve
(12) months thereafter, neither party will encourage or solicit any employee or
consultant to leave the employ of the other; the foregoing does not prohibit
mass media advertising not specifically directed toward employees or consultants
of a party.
10. Limited Liability. NOTWITHSTANDING ANYTHING ELSE IN THIS
AGREEMENT OR OTHERWISE (EXCEPT FOR A BREACH OF SECTION 9 AND EXCLUDING
DEVELOPER'S OBLIGATIONS UNDER SECTION 15), NEITHER PARTY SHALL BE LIABLE OR
OBLIGATED UNDER ANY SECTION OF THIS AGREEMENT OR UNDER ANY CONTRACT, NEGLIGENCE,
STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR ANY (I) AMOUNTS IN
EXCESS IN THE AGGREGATE OF THE AMOUNTS PAID BY THE COMPANY TO DEVELOPER
HEREUNDER, OR (II) SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES.
11. Warranty and Disclaimer. Developer warrants that (i) the
work under this Agreement will be performed in a professional and workman-like
manner in accordance with industry standards, (ii) the Deliverables and related
services will conform to the Specifications, (iii) Developer has and will obtain
agreements with its employees and contractors sufficient to allow it to grant
Company the assignments provided for herein, (iv) the Pre-existing Software,
Developed Software and Deliverables do not and will not infringe or violate any
third party patent, copyright, trademark, trade secret or other intellectual
property or proprietary right, (v) Developer owns all rights, title and interest
in and to the Pre-existing Software, Developed Software and Deliverables
necessary to effect the licenses and assignments contemplated under this
Agreement and (vi) the Deliverables delivered to Company by Developer hereunder
constitute all information, software, data and other materials necessary and
sufficient for Company to maintain, test, support, enhance and develop the
Developed Software as contemplated hereunder and that there are no third party,
Developer proprietary or other development tools, information or other materials
used by Developer in the creation, testing, support or maintenance of any
Deliverables which are not readily commercially available. OTHER THAN THE
FOREGOING, DEVELOPER MAKES NO WARRANTIES TO ANY PERSON OR ENTITY WITH RESPECT TO
ANY DELIVERABLE OR ANY SERVICES OR LICENSES AND DISCLAIMS ALL IMPLIED WARRANTIES
OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
12. Term and Termination for Cause.
a. This Agreement will remain in effect unless and
until terminated in accordance with the express terms of this Agreement.
6
<PAGE>
b. A party may terminate this Agreement in the event
the non terminating party:
i. materially breaches a material
provision of this Agreement upon thirty (30) days notice unless the breach
is cured within such thirty (30) day notice period;
ii. ceases doing business for any
reason; or
iii. seeks protection under the United
States Bankruptcy Code or similar protection from creditors; or bankruptcy,
receivership, insolvency, reorganization, dissolution, liquidation or other
similar proceedings shall be instituted by or against Developer and not
dismissed within sixty (60) days of filing.
13. Effect of Termination.
a. In the event Developer terminates this Agreement
pursuant to Section 12.b(i) above, the license granted in Section 4.a shall
terminate; provided, however, that Company shall have the right after
termination to sell its then existing inventory of Company Products.
b. In the event Company terminates this Agreement
pursuant to Section 12.b above, the license granted in Section 4.a shall survive
such termination.
c. In the event of any termination by Company prior
to delivery of all Deliverables (except pursuant to Section 14.b below),
Developer shall promptly deliver to Company all works in progress relating to
the Deliverables in the form existing at the time of such termination (whether
or not complete, and together with all documentation, notes, flow charts,
comments and other information and tools necessary to enable to reasonably
skilled programmer to continue development thereof) in Developer's possession or
control.
d. In the event of any termination or expiration of
this Agreement, rights to use of Pre-existing Software by customers of the
Company, Sections 8 through 21 of this Agreement, any accrued rights to payment
and any remedies for breach of this Agreement shall survive any termination of
this Agreement.
14. Termination for Convenience.
a. Company may terminate this Agreement for
convenience at any time; provided, however, that in the event Company terminates
for convenience after acceptance by Company of all Deliverables pursuant to the
Milestone Schedule, Company shall pay within five (5) days of the date of
Company's notice of termination all unpaid amounts of the Development Fee. The
license granted in Section 4 shall survive any termination pursuant to this
Section 14.a subject to all the terms and conditions of this Agreement
including, without limitation, terms relating to royalties.
b. In the event Company gives Developer written
notice of termination pursuant to this Section 14 prior to Developer's delivery
of all the Deliverables pursuant to Milestone one of the Milestone Schedule, no
payments shall be due and neither party shall have any further obligation or
liability to the other hereunder.
7
<PAGE>
c. In the event Company gives Developer written
notice of termination pursuant to Section 14.a above prior to Developer's
delivery of all the Deliverables pursuant to Milestone two of the Milestone
Schedule, Developer shall be entitled to receive (or keep if payment has already
been made) the payment for Milestone one set forth in Section 5.a above and
Company shall reimburse Developer for all costs incurred by Developer up to the
date of Company's notice and paid by Developer that are directly related to
development of the Deliverables pursuant to Milestone two of the Milestone
Schedule, but in no event shall Company be obligated to pay any amount in excess
of the payment corresponding to Milestone two set forth in Section 5.a.
d. In the event Company gives Developer written
notice of termination pursuant to Section 14.a above prior to Developer's
delivery of all the Deliverables pursuant to Milestone three of the Milestone
Schedule, Developer shall be entitled to receive (or keep if payment has already
been made) the payments for Milestones one and two set forth in Section 5.a
above and Company shall reimburse Developer for all costs incurred by Developer
up to the date of Company's notice and paid by Developer that are directly
related to development of the Deliverables pursuant to Milestone three of the
Milestone Schedule, but in no event shall Company be obligated to pay any amount
in excess of the payment corresponding to Milestone three set forth in Section
5.a.
e. Developer's costs for purposes of this Section 14
shall be calculated based on the number of days actually worked by Developer
prior to receipt of Company's termination notice and at a rate of Seven Hundred
and Fifty Dollars ($750) per day per qualified engineer performing such
development work and Two Thousand Dollars ($2,000) per day for development work
performed by [Arthur Henley].
15. Indemnification. Developer shall defend, indemnify and
hold Company and its officers, directors, agents and employees harmless from
liability arising or resulting from infringement or violation by the
Deliverables or Company's possession, use or distribution thereof of any third
party patent, copyright, trademark, trade secret or other intellectual property
or proprietary right, provided that Company notifies Developer of any and all
threats, claims and proceedings related thereto of which Company becomes aware.
Developer shall have sole control of any such action or proceeding at its own
expense. Developer may not enter any settlement or other agreement under which
Company would be obligated to make any payment without Company's prior written
approval.
16. Relationship of the Parties. Notwithstanding any provision
hereof, for all purposes of this Agreement each party shall be and act as an
independent contractor and not as an employee or agent of the other and shall
not bind nor attempt to bind the other to any contract.
17. Publicity and Press Releases. Except to the extent
necessary under applicable laws, the parties agree that all press releases or
other publicity relating to the existence or substance of the matters contained
herein shall be coordinated between Developer and Company and will not be
released without joint approval, which approval shall not be unreasonably
withheld.
18. Assignment; Successors.
a. Neither party shall have any right or ability to
assign or transfer any obligations or benefit under this Agreement without the
written consent of the other, except that Company may assign and transfer this
Agreement and its rights and obligations hereunder to any third party who
succeeds to all or substantially all its business, stock or assets, provided
that such third party successor agrees in writing to assume all of Com21's
obligations
8
<PAGE>
(including, without limitation, royalty obligations) under this Agreement. This
Agreement shall be binding upon and inure to the benefit of the parties and
their respective successors and permitted assigns.
19. Notices. All notices under this Agreement shall be in
writing, and shall be deemed given when personally delivered, or five (5) days
after being sent by prepaid certified or registered U.S. mail or upon receipt
after being sent by commercial overnight courier service with tracking
capabilities, to the address of the party to be noticed as set forth above or
such other address as such party last provided to the other by written notice.
20. Arbitration.
a. Except as otherwise set forth in Section 3.b
above, any controversy arising under or related to this Agreement or any
disputed claim by either party against the other under this Agreement shall be
settled in Chicago, Illinois by arbitration in accordance with the Commercial
Arbitration Rules of the American Arbitration Association and judgment upon the
award rendered by the arbitrators shall be binding upon the parties and may be
entered by either party in the court or forum, state or federal, having
jurisdiction. One arbitrator shall be chosen within thirty (30) days by the AAA
from a panel of arbitrators knowledgeable and experienced in network computing,
development of computer software and/or hardware and commercial transactions.
The written determination of the arbitrator shall be final and shall not be
subject to judicial review; provided, however, that any award or determination
rendered by the arbitrator(s) may be entered in a court of competent
jurisdiction.
b. Notwithstanding anything to the contrary herein,
nothing in this Agreement shall be deemed as preventing either party from
seeking injunctive relief (or any other provisional remedy) from any court
having jurisdiction over the parties and the subject matter of the dispute as
necessary to protect either party's name, proprietary information, patents,
copyrights, trade secrets, know-how or any other proprietary rights. In any
action or proceeding to enforce rights under this Agreement, the prevailing
party will be entitled to recover costs and reasonable attorneys' fees.
21. Miscellaneous.
a. The failure of either party to enforce its rights
under this Agreement at any time for any period shall not be construed as a
waiver of such rights.
b. No changes or modifications to or waivers of any
provision of this Agreement shall be effective unless evidenced in writing and
signed by both parties.
c. In the event that any provision of this Agreement
shall be determined to be illegal or unenforceable, such provision will be
limited or eliminated to the minimum extent necessary so that this Agreement
shall otherwise remain in full force and effect and enforceable.
d. This Agreement shall be governed by and construed
in accordance with the laws of the State of California without regard to the
conflicts of laws provisions thereof. The sole jurisdiction and venue for
actions related to the subject matter of this Agreement shall be the state and
federal courts having within their jurisdiction the location of the Company. In
any action or proceeding to enforce rights under this Agreement, the prevailing
party will be entitled to recover costs and attorneys' fees.
9
<PAGE>
e. Headings herein are for convenience of reference
only and shall in no way affect interpretation of the Agreement.
f. Except as otherwise expressly stated in this
Agreement, the rights and remedies of a party set forth herein with respect to
failure of the other to comply with the terms of this Agreement (including,
without limitation, rights of full termination of this Agreement) are not
exclusive, the exercise thereof shall not constitute an election of remedies and
the aggrieved party shall in all events be entitled to seek whatever additional
remedies may be available in law or in equity.
g. This Agreement, together with all Attachments
hereto, sets forth the entire agreement between the parties with regard to the
subject matter hereof and fully supersedes all proposals, oral or written, all
negotiations, conversations, discussions or agreements between or among the
parties and all past dealing or industry custom.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the Effective Date.
COM21, INC.
By:
-------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
E-NET, INC.
By:
-------------------------------------
Name:
----------------------------------
Title:
----------------------------------
10
<PAGE>
ATTACHMENT A
MILESTONE SCHEDULE
Background and Purpose of Exhibit
This exhibit defines the requirements for e-Net to satisfy in order to complete
its development contract with Com21. It outlines the deliverables from e-Net to
Com21 and from Com21 to e-Net. It defines the milestones that will be used to
measure e-Net's progress on the development contract against which, progress
payments will be made. It defines the work elements to be performed.
Deliverable Definition, Milestone Assignment and Responsibilities
All textual and descriptive specifications, plans, etc. as they apply to the
Telephone AIM product will be provided in a electronic format that may be shared
by both Com21 and e-Net. Deliverables may be combined as appropriate, for
example the SW Design Specification, Diagnostic Design Specification, and SW
Functional Description may be sections within the same document. In addition,
materials to be supplied by Com21 are described in the schedule below.
<TABLE>
<CAPTION>
DELIVERABLE WHO SIGNOFF ACCEPTANCE CRITERIA DESCRIPTION
- ----------- --- ------- ------------------- -----------
Milestone 1 Specification and Planning
- ----------- --------------------------
<S> <C> <C> <C>
Project Plan Com21 Satisfy Com21 Project This is the administrative plan of
Plan objectives. A the AIM project. It contains the
Microsoft Word formatted schedule, personnel assignments,
document is acceptable. assembly build plans, documentation
plan, development tools and
equipment that are planned for the
project. This is provided in a
electronic format that may be shared
by both Com21 and e-Net
Telephone AIM System Com21 Satisfy Com21 Telephone This is the technical definition of
Specification AIM Functional the product. which include the
Requirements set forth in Telephone AIM functional
Attachment C. A Microsoft requirements (which are included as
Word formatted document a separate section of the
is acceptable. Com21/e-Net contract). This includes
HW, SW and mechanical
specifications. Functions to be
implemented in the AIM must be
identified. HW, SW, protocol, and
mechanical interfaces must be
defined. Measurements and statistics
identified in the Project Test Plan
may become requirements
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
DELIVERABLE WHO SIGNOFF ACCEPTANCE CRITERIA DESCRIPTION
- ----------- --- ------- ------------------- -----------
Milestone 1 Specification and Planning
- ----------- --------------------------
<S> <C> <C> <C>
for the product and as such must be
included in this specification. This
is a detailed specification
Project Test Plan Com21 Satisfy Com21 product This plan defines required testing
testing plan objectives. of the AIM, STU, HCX, and overall
A Microsoft Word system, as it relates to operation
formatted document is of the AIM. This includes AIM board
acceptable. diagnostics, network loopbacks from
the STU, network loopbacks from the
HCX, network loopbacks from the ATM
switch and network loopbacks from
the PBX. Required test code may be
limited to product development only,
or may become integral to the
operation and maintenance of the
product. Measurements and statistics
identified in this plan may become
requirements for the product.
Hardware testing includes Design
Verification encompassing
environmental specifications, EMI,
regulatory, and manufacturing
testing. Required equipment and
tools should be specified. The test
plan includes function, unit, system
integration, and overall system
operation (including administration
and maintenance interfaces). Product
performance measurements must be
defined and methods to quantify the
performance identified. E-Net will
provide 6 of its PC based "Telset"
cards to Com21 to expedite SW
prototype development
Milestone 2 Design Implementation
Com21 SW Environment Com21 DSP source code should be Com21 must procure and provide a SW
able to be compiled, design and test environment that
downloaded, and will validate and support the e-Net
executable on the SW deliverables. This is located at
selected emulator. This the Com21 location. This includes HW
environment will be used equipment, HW emulator, SW compiler,
to demonstrate the e-Net and SW code debug tools. It is
DSP SW code. desired that Com21 and e-Net use the
same (vendor) SW design
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
DELIVERABLE WHO SIGNOFF ACCEPTANCE CRITERIA DESCRIPTION
- ----------- --- ------- ------------------- -----------
Milestone 1 Specification and Planning
- ----------- --------------------------
<S> <C> <C> <C>
and debug tools as they relate to
the DSP development.
HW and SW Design e-Net Com21 Satisfy Com21 Telephone This is the definition of HW and SW
Specifications for e-Net AIM requirements. A functions, protocols, and dataflow.
functions (as defined in Microsoft Word formatted Interfaces between functions should
Telephone AIM requirements) document is acceptable. be defined, including HW/SW
interfaces. Performance
specifications of the SW should be
quantified. For example, the real
time required to execute the voice
and AAL1 functions should be less
than 65% of processor real time for
both ports operating. Limits on
internal and external memory
capacity should also be specified.
Com21 will supply AIM interface
functions and specifications. Each
function defines interfaces,
performance, testability, support of
manufacturing test, and compliance
requirements
DSP SW code (src, obj) e-Net Com21 The DSP code should be e-Net will supply the software
compiled at the Com21 source, object and executable code
site using the Com21 DSP using an acceptable transport media
SW tools. The source code (e.g., floppy disk). This
is in an ASCII text deliverable is intended to validate
format. The object code the Com21 SW environment and provide
is generated by the an estimate of the final processor
compiler and should match program memory space requirements.
the e-Net supplied
object code as
determined by a
comparison of the
executable code
generated by the e-Net
and Com21 tools.
DSP/Line I/F schematic e-Net Com21 E-Net provides This is a drawing containing the HW
documentation that can be components and how they are
incorporated into a Com21 interconnected. This deliverable is
schematic; Com21 is able limited to the e-Net supplied design
to recreate any functions.
programmable device
download files. Viewlogic
schematic files are
preferred but ORCAD
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
DELIVERABLE WHO SIGNOFF ACCEPTANCE CRITERIA DESCRIPTION
- ----------- --- ------- ------------------- -----------
Milestone 1 Specification and Planning
- ----------- --------------------------
<S> <C> <C> <C>
is acceptable
DSP/Line I/F BOM e-Net Com21 E-Net provides a This is a list of HW components and
documented Bill of qualified vendors of the components.
Materials of the It is limited to the e-Net supplied
specified design. design functions
Microsoft Word, plain
test or Microsoft Excel
format is acceptable
AIM Bus I/F schematic and Com21 A design review involving This is a drawing containing the HW
incorporation of e-Net HW e-Net and Com21 will be components and how they are
design administered. Format of interconnected. This deliverable is
schematics is determined the entire AIM board assembly,
by Com21 and will most including the e-Net design. After
likely be Viewlogic. this delivery, the HW board related
documentation will be under Com21
control.
Complete AIM BOM including AIM Com21 Documented Bill of This is a list of HW components and
Bus I/F, DSP/Line I/F Materials of the qualified vendors of the components
specified design. and includes the entire AIM board
Microsoft Word, plain assembly.
test or Microsoft Excel
format is acceptable
Milestone 3 Functional Test - individual
components are tested with
dependency only on HW or SW located
within the same physical unit
5 AIM assembled boards Com21 Com21 In addition to assembling Com21 assembles 5 AIM assemblies as
the boards, Com21 documented by the e-Net and Com21
delivers a BOM, schematic and BOM deliverables in
schematics, and rework Milestone 2 and modified by
instructions of the documented rework instructions.
assembled board. Quality Three boards are delivered to e-Net
of the assembly is judged to begin testing.
by visible inspection.
operation of DSP/Line I/F e-Net Com21 E-Net demonstrates the e-Net is able to get hardware and
diagnostics DSP and line interface software diagnostics relating to the
diagnostics (as specified DSP and telephone line interface
in the Design Spec) using operating, running the code
the Com21 development developed by e-Net under this
environment. Com21 development contract. E-Net
updates the AIM HW demonstrates the diagnostics on one
according to e-Net of the three boards delivered to
supplied rework e-Net and on a board that has been
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
DELIVERABLE WHO SIGNOFF ACCEPTANCE CRITERIA DESCRIPTION
- ----------- --- ------- ------------------- -----------
Milestone 1 Specification and Planning
- ----------- --------------------------
<S> <C> <C> <C>
instructions and uses under Com21 rework control. Com21
this AIM for the accepts the e-Net board, leaving
demonstration. It is e-Net with two AIM boards. The
required that this test telephone line interfaces can
be configured and demonstrate the specified
controlled by the ComPort performance using a tone generator
modem processor (rather and demonstrating the required
than a DSP emulator). Signal/Noise quality in the received
signal. Additionally, two people
should be able to talk between
phones collocated on the same AIM. A
further test may include operating a
28.8 kbps modem between collocated
AIM interfaces. It is desired that
these diagnostics be controlled via
the ComPort modem serial craft user
interface.
AIM Bus I/F diagnostics Com21 Com21 demonstrates AIM These diagnostics designed by Com21
register access and data allow access to DSP registers and
transfers between the STU telephone line interface registers.
and AIM over the 16 bit In addition, these diagnostics
AIM bus. exercise the data transfers between
the DSP and STU ASIC interface.
operation of SW functions e-Net/ Com21 e-Net demonstrates the e-Net demonstrates the functional
Com21 operation of the operation of
functions defined in the the software it supplies.
SW Design
Specification. Com21
must provide a working
AIM HW interface that
allows FPGA
initialization and DSP
code download.
DSP SW code (src, obj) update e-Net Com21 Validated by Com21 by e-Net will supply the software code
compiling and executing in source code form using an
code in the Com21 acceptable transport media (e.g.,
development environment floppy disk).
This generated code is
used for the Milestone 3
demonstrations.
telephone line compliance e-Net Com21 Line interface design Com21 is able to configure transmit
specification must be and receive line port gains to allow
tested and results FCC Part 68 telephone transmission
documented as to their line compliance. Other line
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
DELIVERABLE WHO SIGNOFF ACCEPTANCE CRITERIA DESCRIPTION
- ----------- --- ------- ------------------- -----------
Milestone 1 Specification and Planning
- ----------- --------------------------
<S> <C> <C> <C>
success or failure. interface functions must also be
verified, such as ringing loads.
SW Functional Description e-Net Com21 Com21 reviews the e-Net will supply written text of
documentation for the e-Net related software
implementation details functional implementation. This
that will expedite Com21 includes the major blocks of code
maintenance modifications and the function of each. This can
and SW sustaining support. be an addition to the SW Design
Specification completed in Milestone
2 or some equivalent form (e.g.,
comments within the source code)
that is acceptable to Com21.
Milestone 4 SW Integration - provides a
connection between the AIM and the
other system (e.g., Headend)
equipment
AAL1 SW e-Net Com21 Identification (e.g., This is the ATM AAL1 protocol used
memory dump listing) and for circuit emulation. This format
demonstration of the AAL1 structure may have been available at
formatted ATM cell an earlier time, but may not have
structure. This may use been verified against the
transmission of a tone specification.
within the STU and
between the two
collocated telephone AIM
interfaces.
AAL1 connection with HCX Com21 Using a connection that This uses the AIM, STU, cable
passes through the HCX, a facilities and HCX in a system
voice signal is passed environment. This verifies the HW
between the two and SW interfaces and AAL1 format
telephones located on which have been implemented in each
same AIM. of these devices.
software under version control Com21 All DSP SW code is SW updates are now under Com21 SW
located in the SW version version control.
control system.
Executable code is
generated under the
version control system.
Milestone 5 System Integration - provides an end
to end voice connection including
ATM gateway equipment and PBX
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
DELIVERABLE WHO SIGNOFF ACCEPTANCE CRITERIA DESCRIPTION
- ----------- --- ------- ------------------- -----------
Milestone 1 Specification and Planning
- ----------- --------------------------
<S> <C> <C> <C>
EQA Plan Com21 The test cases are These test cases, written by Com21,
executed and passed verify the product operation
without Priority 1 or 2 according to the Product
bugs. These bugs are specification. These are normally
considered unacceptable executed with all the system
to customer shipments and equipment installed and operational.
do not have a viable
`work around' procedure
to the customer.
STU/AIM EMI compliance Com21 Acceptable FCC Part 15 Com21 will arrange and pay for the
compliance and reports. testing. e-Net must modify DSP and
line interface design as needed for
compliance.
voice loopback at ATM switch Com21 Using a connection that This assumes that the ATM gateway
passes through the HCX switch can provide a loopback
and an external ATM function as needed. This validates
switch, pass a voice AIM/STU/HCX SW and HW with non-Com21
signal between two equipment.
telephones on different
AIM boards.
PBX connection Com21 Demonstrate a phone call This is overall validation of system
and voice connection functions.
which originates at the
PBX and terminates on the
AIM telephone.
Demonstrate a phone call
and voice connection
which originates at the
AIM telephone and
terminates on the PBX.
echo cancellation e-Net Com21 Qualitatively listen that Delays may need to be created to
echo is removed when echo demonstrate the echo cancel
cancellation is enabled. function. This may also require an
Create delay in the enable/disable configuration option
network that causes to expedite this test.
noticeable (and
demonstrable) echo in
an AIM telephone when
echo cancellation is
disabled.
Quantitatively
demonstrate that this
satisfies the maximum
specified delay.
Milestone 6 Field Testing - provides
installation and integration with
customer equipment and administration
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
DELIVERABLE WHO SIGNOFF ACCEPTANCE CRITERIA DESCRIPTION
- ----------- --- ------- ------------------- -----------
Milestone 1 Specification and Planning
- ----------- --------------------------
<S> <C> <C> <C>
Alpha Test Com21 Under engineering This is incorporation of the product
control, the product of into the Com21 internal HFC and PBX
which the Telephone AIM network. This includes the first
is a component is able to customer installation and operation.
demonstrate acceptable
customer perceived
quality and performance.
Beta Test Plan Com21 Under customer control, This is executed with manufacturing
the product of which the controlled HW and SW. These
Telephone AIM is a installations are at a customer
component is able to location using customer supplied
demonstrate acceptable equipment.
customer perceived
quality and performance
</TABLE>
3. Project Timeline
<TABLE>
<CAPTION>
Timeframe Description
--------- -----------
<S> <C> <C>
Milestone 1 60 days after contract signing Specifications and Planning
and commitment of resources
Milestone 2 Two months after Milestone 1 Design Implementation
Milestone 3 one month after Milestone 2 Functional Test
Milestone 4 two months after milestone 3 SW Integration
Milestone 5 two to three months after System Integration
milestone 4
Milestone 6 3 months after milestone 5 and Field Testing
beginning of Beta test
</TABLE>
18
<PAGE>
ATTACHMENT B
COMPANY'S PROJECT COORDINATOR: Kinney Sumal
DEVELOPER'S PROJECT COORDINATOR:
19
<PAGE>
ATTACHMENT C
TELEPHONE AIM FUNCTIONAL REQUIREMENT
1. Background and Purpose of Exhibit
This exhibit defines the basic Telephone AIM functional requirements.
2. Baseline Telephone AIM Specification for e-Net Development
The Telephone AIM is a PCB assembly which will fit into a Com21 ComPort and
provide two RJ11 telephone lines ports. The PCB assembly is approximately 3" x
5". The main function of the board is to interface the telephone line ports to
an internal, ATM formatted, AIM microprocessor bus. The block diagram of the AIM
assembly is shown below.
The basic functions of the board are:
telephone line interface
voice processing and AAL1 formatting
telephone signaling and supervision
AIM bus interface RJ11 RJ11
[GRAPHIC OMITTED]
20
<PAGE>
e-Net design responsibility includes the analog telephone set interface, CODEC,
DSP hardware, DSP voice processing, and DSP AAL1 formatting. Com21 design
responsibility includes the overall HW board layout and fabrication, the AIM bus
interface, ABCD signaling bit assignments, and SW controlled ringing
supervision. While the complete specification is a Milestone 1 deliverable and
will require detailed hardware (signal) and software (register bit) definitions,
this exhibit will describe the e-Net design requirements in order to provide a
scope of the work. Some Com21 requirements will be included to explicitly denote
that these are not an e-Net responsibility.
21
<PAGE>
In the table below an `x' denotes the responsible party.
<TABLE>
<CAPTION>
REQUIREMENTS e-Net Com21
<S> <C> <C>
Hardware
2 Telephone line interfaces x
Ringing for two simultaneous phone lines; minimum 3 RENs per line; disable ringing x
when off hook
Debounced on/off hook detector x
A nominal 18.432 MHz or 9.216 MHz clock source which is synchronized to either an AAL1 x
adaptive clock (via AAL1 adaptive clock recovery) or an external network clock.
The nominal clock shall be accurate to within 200ppm of stated frequency.
AAL1 adaptive clock recovery will be calculated for blocks of 200 (or less) received x
cells. These values will be low pass filtered (averaged) to eliminate the
effects of cell arrival jitter. The results will indicate local clock wander
(drift) from the remote reference clock. The DSP will calculate a signed value
that indicates need to increase clock frequency if positive and decrease clock
frequency if negative. This process will allow the local clock to be
synchronized to the remote clock. The remote clock shall be accurate to at least
250ppm. Cell arrival jitter shall be less than 10 milliseconds. It is desired
that the low pass filter parameter(s) be a configurable register(s) which may be
modified during implementation debug.
128x8 bit EEPROM for configuration storage x
DSP HW x
DSP HW interface for SW code initialization and SW application code download x
AIM bus interface for SW code initialization and SW application code download x
AIM bus interface x
AIM and DSP shared memory; this may be a shared design effort of be designed by either x x
e-Net or Com21
DSP HW JTAG interface x
AIM HW JTAG interface (if required) x
FPGA download from AIM bus x
Software
28.8 kbps MODEM transparency x
Ringing cadence (for selective ringing) x
dual tone generation parameters: freq1, freq2, duration x
local loop echo cancellation (configurable on/off, minimum 6 msec tail) x
SW drivers for hardware functions (e.g., ringing, tones, diagnostic loopbacks,
on/off x hook status)
1 structured AAL1 ATM cell stream channel processing per one port (i.e.,
structure x size equals one)
64 kbps per channel, selectable uLaw/ALaw PCM encoding x
SW structures for ABCD signaling bit buffers, AAL1 headers and payloads, each x x
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
REQUIREMENTS e-Net Com21
<S> <C> <C>
channel is assigned separate buffer spaces; both Com21 and e-Net need to
agree on structure format and memory allocation
48 byte AAL1/ATM payload (byte) processing (including SAR PDU header) x
Compile option for either AAL1 structure format with ABCD signaling (Ref 1) , or x
without signaling (i.e., no insertion of signaling bits in AAL1 payload)
Configurable option to transmit FXS, FXO, E&M signaling x
AAL1 ABCD signaling bit payload write capability (i.e., capability to support x
signaling formats of ABCD bits other than FXS, FXO, E&M formats)
AAL1-CES ATM header byte write processing x
PVC per port call processing (e.g., assigning ATM cell VPI/VCI addresses) x
ATM delay cell jitter buffer (configurable from 1 to 256 byte jitter buffer) x
lost cell interpolation (i.e., fill with silent codes) x
partially full AAL1 payloads, SW configurable from 1 to 47 bytes x
Network Bandwidth management (e.g., allocating cable bandwidth capacity) x
Testing
Configurable Telephone Port 1 to Port 2 PCM local loopback (see figure) x
Configurable Telephone Port 1 to Port 2 AAL1 local loopback (see figure) x
Configurable individual Telephone Port remote loopback, preferably at CODEC if
CODEC x provides support or at DSP serial port (see figure)
FCC Part 68 line interface compliance: transmission level only (level set with compile x
time option)
FCC Part 15 compliance x
DSP Real time performance of 2 telephone lines, less than 65% including 6 msec echo x
cancellation
DSP Power On Self Test, `DSP Ready' register bit indicates successful self test x
Diagnostics: DSP output pin which indicates "fast loop" active state, register
counter x which increments every fast loop completion, register counter which
increments every slow loop completion ("fast loop" is fraction of 125
microsecond interval needed to accomplish Telset interface and AAL1 payload byte
processing; the "slow loop" is used for cell block processing and overlays many
fast loop intervals)
</TABLE>
Required Conformance Specifications:
1) ATM Forum, Circuit Emulation Service Interoperability Specification, Version
2.0, af-vtoa-0078.000, January 1997
2) I.363.1, B-ISDN ATM Adaptation Layer Specification: Type 1 AAL, ITU-T, 8/96
3) EIA/TIA-464A (date and revision to be provided)
Reference 1 contains applicable `AAL1' details. Reference 2 is used within the
AAL1 specification to describe the details of the AAL1 payload and signaling
formats. Reference 2 also describes the AAL1 synchronization specification.
Reference 3 defines ABCD signaling bits for the FXS, FXO, and E&M signaling
formats.
23
<PAGE>
EXHIBIT 10.10
DISTRIBUTOR AGREEMENT
Between Seller, Inc., a Delaware corporation with principal offices at 12800
Middlebrook Rd., Germantown, MD 20874-5204 ("Seller"), and Comtel Electronic
Systems GMBH ("Distributor"), a German corporation with a principal place of
business at Max-Planck-Strasse 9a* 61381 Friedrichsdorf/ Germany,
WHEREAS, Seller is the manufacturer of a product called Telecom 2000(TM), and
WHEREAS, Distributor wishes to make purchases of Telecom 2000(TM) for resale,
and
WHEREAS, the parties believe that it would be mutually beneficial for them to
cooperate in order for Distributor to resell Telecom 2000(TM),
NOW, THEREFORE, in order to establish the terms and conditions under which the
parties' respective goals may be accomplished, in exchange of the mutual
covenants and premises hereinbelow, the parties agree as follows:
1.0 DEFINITIONS
Seller Product shall mean those products listed in Attachment A hereto.
Telecom 2000(TM) shall mean the intellectual property underlying Seller Product
related to or derived from Telecom 2000(TM) and / or related to or derived from
US Patent No. 5, 526, 353 including specifically, for purposes of clarification
and not limitation, algorithms, electronic computer protocols, routines,
subroutines or programs developed by or on behalf of Seller or otherwise owned
by or in the custody of Seller.
2.0 LICENSE AND SCOPE OF AGREEMENT
2.1 License Rights and Scope. Subject to the terms and conditions set forth
herein, Seller hereby grants to Distributor, and Distributor accepts, a
non-transferable and non-exclusive license to distribute Seller Product, with a
geographical focus upon the continent of Europe, non-exclusive therefore.
2.2 Restrictions on Use. All purchase, use, and resale by Distributor of Seller
Product is restricted as follows :
(a) Distributor is strictly prohibited from reverse engineering, reverse
compilation, or reverse assembly of Seller Product;
(b) Distributor is strictly prohibited from making a copy or copies of Seller
Product;
(c) Distributor shall not misuse the trademarks or trade names of Seller, but
Distributor may use the trademarks or trade names of Seller in advertising
Seller Products;
(d) Distributor shall not make any foreign sales without full compliance with
United States import/export laws and restrictions, and shall be responsible to
Seller and indemnify Seller for any failure to abide with this clause; and
(e) Distributor shall not make any government contract sales that impair the
rights of Seller hereunder, and must take all necessary steps to insure
compliance with the intellectual property ownership
<PAGE>
rights of Seller hereunder, and shall be responsible to Seller and indemnify
Seller for any failure to abide with this clause.
2.3 Term. This Agreement shall be for a term of one year, subject to termination
by either party at any time in accordance with the terms hereof.
2.4 Termination. Subject to Section 4.6 hereof, the Agreement may be terminated
by Seller if Distributor does not pay Seller any amount due hereunder or
otherwise materially breaches this Agreement, or if Distributor violates any
material term hereof, including specifically but not as a limitation its
restrictions under 2.0 and its duties under Section 3.0. Distributor shall have
the right to terminate this Agreement if Seller fails to provide support as
described in Attachment B, or if Seller otherwise materially breaches this
Agreement. Either party may terminate this Agreement if a force majeure event
continues for more than ninety (90) days or if the other party becomes insolvent
or bankrupt or makes an assignment for the benefit of creditors.
2.5 Duties Upon Termination. Upon the termination or expiration of this
Agreement for any cause, the parties agree to continue their cooperation in
order to effect an orderly termination of their relationship. Distributor shall
immediately cease representing itself as a Distributor of Seller Product, and
shall accept no new orders for Seller Product except pursuant to firm,
outstanding bids or quotations.
2.6 Survival. Upon the termination or expiration of this Agreement for any
cause, the paragraphs which by their plain meaning, including specifically but
not as a limitation provisions which protect the intellectual property rights of
Seller shall survive.
2.7 Breach or Default. Neither party may terminate this Agreement for breach or
default of the other party unless and until the party seeking to terminate has
specified the breach or default in writing and such breach or default has not
been cured by the receiving party within thirty (30) days after receipt of
written notice.
3.0 OBLIGATIONS OF DISTRIBUTOR
3.1 Reasonable Best Efforts Services and Minimum Commitment. In consideration of
the license granted above and discounting schedules extended in Attachment A,
Distributor agrees to exert its reasonable best efforts to resell Seller
Product, to meet agreed-upon sales goals, and to purchase the Minimum Commitment
of Seller Product outlined in Attachment A.
3.2 Sales Capability. Distributor shall maintain offices as sales locations,
which offices shall be staffed by a sufficient trained capable sales and
technical staff, adequate to provide Distributor's customers with assistance and
instructions on setup, installlation, and use of Seller Product.
3.3 Sales Reports, Sales Estimates, and Product Performance Data. Periodically,
as agreed, Distributor shall provide Seller with a report of sales and licenses
made in that month, to include numbers of units, types of units, dollar value of
units, and, where practicable, customer for and location of units. In addition,
Distributor will, periodically, as agreed, forecast expected sales to be made in
the upcoming three month period on a "rolling" basis. The Distributor is
required to forward to Seller any reports from users of the Seller Product
regarding either (i.) any outages or failures experienced by users of the Seller
Product which become known to Distributor, or (ii) any complaints of users of
the Seller Product regarding the quality, functionality or performance of Seller
Product which become known to Distributor.
3.4 Insurance Coverages. Distributor shall have and maintain ordinary business
insurance including comprehensive general liability insurance in an amount not
less than one million dollars ($1,000,000 US).
<PAGE>
4.0 ORDERING, DELIVERY, ACCEPTANCE, FEES, PAYMENT, AND SUPPORT
4.1 Ordering and Delivery. Individual firm funded purchase orders of Distributor
issued to Seller shall be effective upon acceptance and order receipt
verification in writing by Seller at its headquarters at Germantown, Maryland,
USA. All Seller Products are listed in the initial form of Attachment A with
prices and the purchase orders of Distributor must reflect the description,
prices, and model numbers contained therein. The terms and conditions of this
Agreement override those of the purchase orders, with the exception of
Distributor's rights to return ordered product (if any) after acceptance has
occurred under the provisions of 4.2 below. All Seller Products shall be
delivered on or about the delivery date set forth in the order receipt
verification in writing by Seller. Shipment will be at the risk of Distributor.
Distributor shall have 15 business days to verify that all deliveries have been
received. Delivery of the Seller Products shall be conclusively deemed to be
completed at the end of the 15 business days verification period or at such time
as missing deliverables identified by Distributor in writing during the 15
business days verification period have been replaced by Seller.
4.2 Acceptance. The Seller Product shall be accepted by Distributor if the
Seller Products perform substantially as described in their current
documentation. Failure of Distributor to inform Seller of acceptance or
non-acceptance within thirty (30) days following completed delivery or
commercial use of the deliverables by Distributor shall constitute acceptance.
Purchase prices and license fees shown in the initial form of Attachment A are
due and payable upon acceptance.
4.3 After-Sale Support of Products. Following delivery of the Deliverables,
Distributor shall be exclusively responsible for the installation, testing,
modification, management, and control of its resales of Seller Product, except
for Seller's Warranty responsibility in clause 5.3 below and After-Sale Support
of Products responsibility defined in Attachment B hereto.
4.4 Prices and Price Changes. Distributor agrees to pay Seller the amounts shown
on Attachment A for Seller Product. Distributor shall keep records regarding its
distribution hereunder in detail to permit Seller to make verification of
compliance herewith. Seller may change the price of any Seller Product
subsequent to the date of this agreement effective upon thirty (30) days prior
written notice. Firm funded purchase orders accepted by Seller before the
written notice of price increase is issued and proposals to Distributor's
customers which have been issued prior to the written notice of price increase
shall be honored at the old (lower) price for sixty (60) days after the
effective date of the increase. If prices are decreased, Seller will give
Distributor a written notice thereof effective immediately, and the decrease
shall apply to all unused unopened inventory purchased by Distributor during the
previous thirty (30) days, as well as to orders-in-process.
4.5 Training, Updates, Maintenance & Support Fees. Except as expressly provided
in this Agreement, including the Attachments and Exhibits, all training and
support services provided by Seller shall be at an additional fee in accordance
with Seller's then current standard rates. Unless otherwise stated in
Attachment B, Distributor shall reimburse Seller for all reasonable travel and
other out-of-pocket expenses incurred by Seller in connection with the
assistance furnished hereunder, provided same have been approved and
preauthorized by Distributor. The foregoing provisions do not apply to
warranty-covered Seller Products under clause 5.3 below.
4.6 Payment. All checks will be in U.S. currency unless otherwise agreed and
shall be drawn on U.S. banks. Except as otherwise stated herein, based upon
credit approval in the sole discretion of Seller, all payments including license
fees shall be due and payable within thirty (30) calendar day after the receipt
by Distributor from Seller of an invoice. If Distributor fails to pay any amount
due by the due date, Distributor shall pay late charges of 1.5% per month, but
not more than the highest rate permitted by law, together with all Seller's
expenses and collection charges
4.7 Taxes. In addition to Seller's fees hereunder, Distributor is obligated to
pay any federal, state, provincial, county, local or governmental taxes,
(including but not limited to sales tax and value added
<PAGE>
taxes), duties fees and amounts in lieu thereof, now or hereafter applied on the
licenses granted or products sold herein or Distributor's production, storage,
transportation, import, export, licensing or use of Seller Product. Any such
taxes, duties, fees and amounts payable in lieu thereof, including interest and
penalties thereon ,paid or payable at any time by Seller, exclusive of taxes
based solely on Seller 's net income, shall be reimbursed by Distributor.
5.0 OWNERSHIP AND PROPRIETARY RIGHTS
5.1 Ownership. All rights, title and interest to Telecom 2000(TM) shall at all
times remain the exclusive property of Seller. All applicable copyrights, trade
secrets, patents and other intellectual property rights in Seller Product and
Telecom 2000(TM) shall remain the exclusive property of Seller. No title to
Telecom 2000(TM) is transferred to Distributor. Distributor shall not remove the
copyright, trademark and proprietary rights notices of Seller, and shall
prohibit any such removal by its officers, agents, employees, and contractors.
5.2 Proprietary Rights. Distributor acknowledges that Telecom 2000(TM) is
proprietary and confidential and constitutes valuable trade secrets of Seller.
Distributor agrees to safeguard Telecom 2000(TM) with not less than the same
degree of care as is exercised in connection with Distributor's own most
proprietary and confidential materials.
All aspects of Telecom 2000(TM), including without limitation, programs, methods
of processing, specific design and structure of individual programs and their
interaction and unique programming techniques employed therein, if any, shall
remain the sole and exclusive property of Seller, and shall not be used, sold,
revealed, disclosed or otherwise communicated, directly or indirectly, by
Distributor to any person, company, or institution other than as set forth
herein, excepting such technical and business development communications,
products demonstrations, and detailed technical discussions as Distributor
reasonably may deem necessary to perform the reselling duties described herein.
5.3 Warranty and Disclaimer of Warranty. Seller Product Hardware is warranted as
free from defects in materials and workmanship for a period of one year after
shipment. In the event of warranty claims hereunder, Distributor shall return
ship to seller, prepaid, with a written description of the basis for warranty
claim for a final determination by Seller. Warranty-covered items shall be
repaired or replaced by Seller and shipped to Distributor, at Seller's expense.
All Seller Product Software is delivered "AS IS". SELLER MAKES NO EXPRESSED OR
IMPLIED WARRANTIES WHATSOEVER WITH RESPECT TO SELLER PRODUCT. IN PARTICULAR, AND
WITHOUT LIMITING THE FOREGOING, THE PARTIES AGREE THAT THERE IS NO EXPRESSED OR
IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE OR OF MERCHANTABILITY.
SELLER SHALL NOT BE FOUND LIABLE FOR ANY MONETARY DAMAGES OF ANY KIND
WHATESOEVER RELATED TO THE USE OF SELLER PRODUCTS, AND ANY AND ALL RISK OF SUCH
USE IS HEREBY SPECIFICALLY ASSUMED BY DISTRIBUTOR.
6.0 INDEMNIFICATION
6.1 Limitation of Liability. IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE
OTHER OR TO ANY OTHER THIRD PARTY BASED ON CONTRACT, TORT OR OTHERWISE FOR LOSS
OF REVENUES, LOST PROFITS, LOST SAVINGS, OR INDIRECT, CONSEQUENTIAL, INCIDENTAL,
SPECIAL OR PUNITIVE DAMAGES ARISING OUT OF OR RELATING IN ANY WAY TO THIS
AGREEMENT, EXCEPT THAT DISTRIBUTOR MAY BE FOUND SO LIABLE TO SELLER FOR ANY
DAMAGES ARISING OUT OF OR RELATING TO DISTRIBUTOR'S INTENTIONAL OR GROSSLY
NEGLIGENT VIOLATION OF CLAUSES 2.2.
6.2 Indemnification by Seller. Seller shall indemnify, defend and hold
Distributor harmless from any claims, damages or judgments, including all
reasonable attorney's fees, directly or indirectly resulting
<PAGE>
from any claimed infringement or violation of any US copyright, US patent or
other US intellectual property right with respect to Seller Product. Seller
shall have no liability for any such claims or liabilities based on use of: (i)
any version, modification or adaptation of Seller Product, if such infringement
would have been avoided by the use of a then current unaltered release of Seller
Product ; or (ii) a combination of Seller Product with any product or data not
included in Seller Product when delivered to Distributor by Seller.
Following notice of a claim or a threat of actual suit, Seller, at its sole
option, shall as Distributor's sole remedy (except as otherwise provided for in
this section):
(a) procure for Distributor the right to continue, as provided herein, to
use, distribute and sublicense Seller Product at no additional expense
to Distributor; or
(b) provide Distributor with a non-infringing version of Seller Product.
7.0 PUBLICITY
7.1 Issuance of Publicity. Any and all publicity of any kind whatsoever with
regard to this Agreement shall be determined by Seller in its sole discretion,
except that with respect to the use of the trademarks and trade names, any
publicity is subject to the approval of the party whose trademarks and trade
names are to be used, only to the extent of the use of such trademarks and trade
names and with respect to the portions of the publicity bearing any such
trademarks and trade names.
8.0 GENERAL
8.1 Compliance With Local Laws. Distributor shall be exclusively responsible at
its own expense for compliance with all local laws relating to Seller Product
and the use thereof hereunder by Distributor. Distributor shall indemnify and
save harmless Seller from any claim by a third party arising out of or related
to non-compliance with local laws by Distributor.
8.2 Jurisdiction. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, Montgomery County, Maryland
being the venue for all disputes, except for Federal jurisdiction disputes, the
venue for which shall be the Eastern District of Virginia.
8.3 Dispute Resolution. If either party wishes to commence litigation, then
either before or promptly after doing so, that party shall notify the other
party in writing by Federal Express or facsimile transmission of a request for
meeting. The request shall contain a description of the problem. Within fourteen
(14) days of receipt of the letter requesting the meeting, the parties shall
meet at a mutually convenient location in Montgomery County, Maryland. The
meeting shall be attended by an executive of each party having the authority to
resolve the problem. Each party may bring technical staff or other
representatives having information bearing on the problem; however, neither
party may bring an attorney or be represented in the meeting by an executive who
is an attorney unless agreed in advance in writing by the other party. In the
event such meeting fails to resolve issues in dispute, all actions relating to
dispute hereunder shall have as venue, Montgomery County, Maryland, except for
Federal jurisdiction disputes, the venue for which shall be the Eastern District
of Virginia.
8.4 Independent Contractors. It is expressly agreed that Seller and Distributor
are acting hereunder as independent contractors, and under no circumstances
shall any of the employees of one party be deemed the employees of the other for
any purpose.
<PAGE>
8.5 Notice. Any notice required to be given by either party to the other shall
be deemed given ten (10) days after being deposited in the postal system in
registered or certified form with return receipt requested, postage paid,
addressed to the notified party at the address set forth above.
8.6 Assignment. A party may not assign this agreement or any portion thereof
without the approval of the other party, which shall not be unreasonably
withheld.
8.7 Amendment; Waiver. Any provision of this Agreement may only be amended or
waived if such amendment or waiver is in writing; and, if an amendment, executed
by all parties hereto and, if a waiver, executed by the party which is waiving
the term, condition or right.
8.8 Severability. Any provision of this Agreement that is prohibited or
unenforcable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforcability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdictio
8.9 Headings. The headings of the various sections of this Agreement have been
inserted for ease of reference only and shall be deemed not to be a part of this
Agreement.
8.10 Entire Agreement. This Agreement constitutes the entire understanding of
the parties with relation to the subject matter hereof, and may be amended only
by a writing in accordance with clause 8.7 above.
MADE AND ENTERED INTO this _________ day of _________, 199__, by the undersigned
authorized representatives of the parties.
e-Net, Inc. Distributor
-----------------------
Company Name
- ------------------------ ------------------------
(Signature) (Signature)
- ------------------------ ------------------------
(Name) (Name)
- ------------------------ ------------------------
(Title) (Title)
- ------------------------ ------------------------
(Date) (Date)
<PAGE>
ATTACHMENT A
Seller Product and Distributor Prices
<TABLE>
<CAPTION>
Product Designation List Price Each
- ------------------- ---------------
<S> <C>
T2000-TS $549
T2000-CO $795
T2000-IN (4 port BRI) $8495
T2000-DTI (PCM single span T1/E1) $10,995
Gateways FXS 7300 (7.3kbps single span T1/E1) $29,995
Network Management System (NMS) $10,000
</TABLE>
INITIAL DISCOUNT FOR DISTRIBUTOR AGREED AS 35%. A LIMITED NUMBER OF
DEMONSTRATION AND TEST UNIT ORDERS SHALL BE DISCOUNTED AT 40%.
- --------------------------------------------------------------
Discounts based on total units purchased per calendar quarter no minimum
committment.
<TABLE>
<CAPTION>
Units Purchased Discount off List
- --------------- -----------------
<S> <C>
0 - 19 0%
20 - 99 10%
100 - 499 15%
500 - 999 20%
1000 - 4999 25%
5000 + 30%
</TABLE>
Discounts based on total units purchased per calendar quarter with a minimum
committment of 100 units per quarter. To qualify, participants must submit a
funded purchase order for a 100 unit order by the beginning of each quarter.
<TABLE>
<CAPTION>
Units Purchased Discount off List
- --------------- -----------------
<S> <C>
100 - 499 25%
500 - 999 30%
1000 - 4999 35%
5000 + 40%
</TABLE>
All prices herein are available for certified Distributors only, and are subject
to change by Seller in accordance with the Seller's contractual agreements and
standard practices and policies.
<PAGE>
Service Fees ( See Attachment B):
A one-year maintenance contract is available upon initial order for a
fee of fifteen per cent (15%) of the order dollar value. Maintenance service
includes Standard Support as defined in Attachment B. Nonstandard Support in the
areas of enhanced installation service, training, customization, and relocation
is available on a per order basis, when accepted by e-Net, Inc. Fees for
Nonstandard Support are based upon $1500.00 per day, minimum of two days, plus
travel and living.
<PAGE>
ATTACHMENT B
Seller's After-Sale Support of Seller Products
Product Malfunction Correction Procedures
Problem Classifications - If Distributor or its Customer encounters a problem
(classified below) with the product, then Seller is required to respond to the
Distributor or its Sublicensee in the time specified below:
P1: Critical Systems Problem - Customer is unable to use the product as
documented, and a major operational problem or reliability problem exists.
Seller shall provide acknowledgment of the problem within four (4) hours. At
this time, Distributor or its Customer may be required to provide additional
information to enable Seller to recreate the problem. Seller shall use its best
efforts to provide a work-around (if a work-around is possible) for the problem
and shall provide a plan for resolution within one (1) day from the time at
which the problem can be reproduced by Seller. Distributor or its Customer may
be required to aid in this task if the error can not be reproduced by Seller. A
patch release containing the fix shall be produced according to the plan
mentioned above. Status reports will be provided to Distributor or its Customer
as required, but no less than twice a week.
P2: Minor Operational Problem(s) - An intermittent `bug' in the product exists,
but it is not a critical systems reliability issue; however, the product does
not function as documented, and the `bug' creates a minor operational impact.
Seller shall provide acknowledgment of the problem within one (1) business day.
At this time, Distributor or its Customer may be required to provide additional
information to enable Seller to recreate the problem. Distributor or its
Customer may be required to aid in this task if the error can not be reproduced
by Seller. Seller shall use its best efforts to provide a work-around (if a
work-around is possible) for the problem and shall provide a plan for resolution
within one (1) week from the time at which the problem can be reproduced by
Seller. Any fixes to address this problem shall be incorporated into the next
Maintenance Release.
P3: Annoyance Type Problem - The use of the product produces a user annoyance
while the product is in application. Seller shall provide acknowledgment of the
problem within two (2) business days. At this time, Distributor or its Customer
may be required to provide additional information to enable Seller to recreate
the problem. Seller shall use its best efforts to provide a work-around (if a
work-around is possible) for the problem and shall provide a plan for resolution
within two (2) weeks from the time at which the problem can be reproduced.
Distributor or its Customer may be required to aid in this task if the error can
not be reproduced by Seller. Seller and Distributor or its Customer will jointly
determine if the annoyance is to be fixed. If it is agreed upon that the
annoyance is to be fixed, then Seller shall provide a schedule for the next
Scheduled Release and incorporate the fix into that release.
Definitions:
1.) Scheduled release - includes new functionality
2.) Maintenance release - takes care of `bug' fixes
3.) Work-around - customer able to make alteration to application or product as
a temporary solution.
<PAGE>
EXHIBIT 10.11
JOINT MARKETING AGREEMENT
Between, Paradyne Corporation (`Paradyne') , a ____________________ corporation
with a principal place of business at 8545 126th Avenue North, Largo, Florida,
33773, and e-Net, Inc. (`e-Net') , a Delaware corporation with principal offices
at 12800 Middlebrook Road, Germantown, Maryland 20874-5204,
WHERAS, Paradyne is the owner and manufacturer of proprietary DSL (Digital
Subscriber Line) products, and
WHEREAS, e-Net is the owner and manufacturer of a proprietary data telephony(
voice over packet data network protocol) product called Telecom 2000(TM), and
WHEREAS, the parties have jointly tested, and continue to test, the efficacy and
marketability of combining their products for sales to prospective customers,
and have decided that it is in their mutual and respective best interests to
enter into a program intended to promote sales under this Agreement,
NOW, THEREFORE, in order to establish the terms and conditions under which the
parties' mutual and respective goals may be accomplished, in exchange of the
mutual covenants and premises below, consideration deemed adequate, the parties
agree as follows:
1.0 Definitions
- ---------------
PARADYNE PRODUCT shall mean Paradyne's proprietary DSL (Digital Subscriber Line)
technology products and all products related to or derived thereto , for
purposes of clarification and not limitation, algorithms, electronic computer
protocols, routines, subroutines or programs developed by or on behalf of
Paradyne or otherwise owned by or in the custody of Paradyne.
E-NET PRODUCT shall mean e-Net's proprietary data telephony( voice over packet
data network protocol) product called Telecom 2000(TM), and all products related
to or derived from Telecom 2000(TM) and / or related to or derived from US
Patent No. 5, 526, 353 including specifically, for purposes of clarification and
not limitation, algorithms, electronic computer protocols, routines, subroutines
or programs developed by or on behalf of e-Net or otherwise owned by or in the
custody of e-Net.
PROJECT shall mean a mutual effort by the parties to promote, sell, deliver, and
support a combination of the product technology capabilities of PARADYNE PRODUCT
and E-NET PRODUCT in a marketing endeavor further known as "DSL with Data
Telephony".
2.0 Scope of Agreement
- -----------------------
(a) e-Net shall:
1) Sell and license E-NET PRODUCT to Paradyne under mutually acceptable terms;
2) Give reasonable cooperation to the Project and Paradyne in terms of
advertising, media and press relations, trade expositions and shows, and dealer
and distributor support;
3) Make management, marketing and technical personnel reasonably available to
assist the Project and Paradyne to resolve issues and achieve joint and
respective sales goals;
4) Provide training, technical data and product documentation to the Project and
Paradyne, where such training, technical data and product documentation is
reasonably required to achieve joint and respective sales goals, but such
provision shall be under mutually acceptable terms;
1
<PAGE>
5) Make available after-sale support to the Project and Paradyne including
maintenance, software support, and spare parts, technical data and product
documentation, under mutually acceptable terms; and
6) Perform design enhancements, modifications, or improvements of E-NET
PRODUCT when required by the Project in the joint determination of the
parties, under mutually acceptable terms.
(b) Paradyne shall:
1) Sell and license PARADYNE PRODUCT to e-Net under mutually acceptable terms;
2) Give reasonable cooperation to the Project and e-Net in terms of advertising,
media and press relations, trade expositions and shows, and dealer and
distributor support;
3) Make management, marketing and technical personnel reasonably available to
assist the Project and e-Net to resolve issues and achieve joint and
respective sales goals;
4) Provide training, technical data and product documentation to the Project
and e-Net, where such training, technical data and product documentation is
reasonably required to achieve joint and respective sales goals, but such
provision shall be under mutually acceptable terms;
5) Make available after-sale support to the Project and e-Net including
maintenance, software support, and spare parts, technical data and product
documentation, under mutually acceptable terms; and
6) Perform design enhancements, modifications, or improvements of PARADYNE
PRODUCT when required by the Project in the joint determination of the
parties, under mutually acceptable terms.
3.0 Restrictions on Use of Products, Trademarks, Trade Names, and Publicity
All use by a party of the other's product is restricted as follows :
(a) A party is strictly prohibited from reverse engineering, reverse
compilation, or reverse assembly of the other's product;
(b) A party is strictly prohibited from making a copy or copies of the other's
product;
(c) A party is strictly prohibited from sublicensing or otherwise transferring
the other's product;
(d) A party shall not use the trademarks or trade names of the other; and
(e) A party shall not publicize this agreement without the consent of the other
party.
4.0 Term.
This Agreement shall be for a term of one year, subject to termination by either
party at any time, except that obligations of nondisclosure and proprietary
rights shall survive termination, and, further, the specific agreements of the
parties pertaining to after-sale support (clauses 2.a.5. and 2.b.5.) may survive
termination hereof.
5.0 Ownership and Proprietary Rights
(a)Ownership of Paradyne Products. All rights, title and interest to PARADYNE
PRODUCT shall at all times remain the exclusive property of Paradyne. All
applicable copyrights, trade secrets, patents and other intellectual property
rights in PARADYNE PRODUCT shall remain the exclusive property of Paradyne. No
title to PARADYNE PRODUCT is transferred to e-Net. e-Net shall not remove the
copyright, trademark and proprietary rights notices of Paradyne, and shall
prohibit any such removal by its officers, agents, employees, and contractors.
e-Net acknowledges that PARADYNE PRODUCT is proprietary and confidential and
constitutes valuable trade secrets of Paradyne. e-Net agrees to safeguard
PARADYNE PRODUCT with not less than the same degree of care as is exercised in
connection with e-Net 's own most proprietary and confidential materials.
2
<PAGE>
All aspects of PARADYNE PRODUCT, including without limitation, programs, methods
of processing, specific design and structure of individual programs and their
interaction and unique programming techniques employed therein, if any, shall
remain the sole and exclusive property of Paradyne, and shall not be used, sold,
revealed, disclosed or otherwise communicated, directly or indirectly, by e-Net
to any person, company, or institution other than as set forth herein, excepting
such technical and business development communications, products demonstrations,
and detailed technical discussions as e-Net reasonably may deem necessary to
perform the Project.
(b) Ownership of e-Net Products. All rights, title and interest to E-NET PRODUCT
shall at all times remain the exclusive property of e-Net. All applicable
copyrights, trade secrets, patents and other intellectual property rights in
E-NET PRODUCT shall remain the exclusive property of e-Net. No title to E-NET
PRODUCT is transferred to Paradyne. Paradyne shall not remove the copyright,
trademark and proprietary rights notices of e-Net, and shall prohibit any such
removal by its officers, agents, employees, and contractors.
Paradyne acknowledges that E-NET PRODUCT is proprietary and confidential and
constitutes valuable trade secrets of e-Net. Paradyne agrees to safeguard E-NET
PRODUCT with not less than the same degree of care as is exercised in connection
with Paradyne's own most proprietary and confidential materials.
All aspects of E-NET PRODUCT, including without limitation, programs, methods of
processing, specific design and structure of individual programs and their
interaction and unique programming techniques employed therein, if any, shall
remain the sole and exclusive property of e-Net, and shall not be used, sold,
revealed, disclosed or otherwise communicated, directly or indirectly, by
Paradyne to any person, company, or institution other than as set forth herein,
excepting such technical and business development communications, products
demonstrations, and detailed technical discussions as Paradyne reasonably may
deem necessary to perform the Project.
6.0 Limitation of Liability.
- ---------------------------------
IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER OR TO ANY OTHER THIRD PARTY
BASED ON CONTRACT, TORT OR OTHERWISE FOR LOSS OF REVENUES, LOST PROFITS, LOST
SAVINGS, OR INDIRECT, CONSEQUENTIAL, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES
ARISING OUT OF OR RELATING IN ANY WAY TO THIS AGREEMENT, EXCEPT THAT A PARTY MAY
BE FOUND SO LIABLE FOR ANY DAMAGES ARISING OUT OF OR RELATING TO A PARTY'S
INTENTIONAL OR GROSSLY NEGLIGENT VIOLATION OF CLAUSES 3.a, 5.a, or 5.b.
7.0 General
- ----------------
7.1 Compliance With Law.
- ------------------------------
The parties agree that they each responsible at their own expense for compliance
with all laws, and shall indemnify and save harmless the other from any claim by
a third party arising out of or related to non-compliance with law.
7.2 Jurisdiction.
- ----------------------
This Agreement shall be governed by and construed in accordance with the laws of
the State of Delaware.
7.3 Dispute Resolution.
- ----------------------------
Disputes hereunder are to be settled by arbitration under the rules and
administration of the American Arbitration Association("AAA"). Such arbitration
shall be heard by three arbitrators, all of whom have credentials in the fields
of telecommunications, intellectual property, or both. Each party shall select
one arbitrator, and those two shall select the third and final arbitrator. Each
party shall bear their own costs during the arbitration, and AAA fees and costs
will be divided and paid equally during the arbitration, but the panel of
arbitrators shall be empowered to assess costs against a party, as well as other
damages or sanctions. The arbitration shall take place in Atlanta, Georgia,
governed by Delaware law of corporations and contracts.
3
<PAGE>
7.4 Independent Contractors.
- ---------------------------------
It is expressly agreed that e-Net and Paradyne are acting thereunder as
independent contractors, and under no circumstances shall any of the employees
of one party be deemed the employees of the other for any purpose.
7.5 Notice.
- ----------------
Any notice required to be given by either party to the other shall be deemed
given ten (10) days after being deposited in the postal system in registered or
certified form with return receipt requested, postage paid, addressed to the
notified party at the address set forth above.
7.6 Assignment.
- --------------------
A party may not assign this agreement or any portion thereof without the
approval of the other party, which shall not be unreasonably withheld.
7.7 Amendment; Waiver.
- --------------------------
Any provision of this Agreement may only be amended or waived if such amendment
or waiver is in writing; and, if an amendment, executed by all parties hereto
and, if a waiver, executed by the party which is waiving the term, condition or
right.
7.8 Severability.
- --------------------
Any provision of this Agreement that is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
7.9 Headings.
- ----------------
The headings of the various sections of this Agreement have been inserted for
ease of reference only and shall be deemed not to be a part of this Agreement.
7.10 Entire Agreement.
- --------------------------
This Agreement constitutes the entire understanding of the parties with relation
to the subject matter hereof, and may be amended only by a writing in accordance
with clause 7.7 above.
MADE AND ENTERED INTO this _________ day of _________, 199__, by the undersigned
authorized representatives of the parties.
e-Net, Inc. Paradyne Corporation
- ----------- --------------------
- ------------------------ ------------------------
(Signature) (Signature)
- ------------------------ ------------------------
(Name) (Name)
- ----------------------- ------------------------
(Title) (Title)
4
<PAGE>
EXHIBIT 10.12
PRODUCT SALES AGREEMENT
Between e-Net, Inc., a Delaware corporation with principal offices at 12800
Middlebrook Rd., Germantown, MD 20874-5204 ("Seller") , and PC Importers, Inc.
d/b/a Unicent Technologies and/or Unicent Communications("Reseller"), a
_______________________corporation with a principal place of business
at
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WHEREAS, Seller is the manufacturer of a product called Telecom 2000(TM), and
WHEREAS, Reseller wishes to make purchases of Telecom 2000(TM) for resale,
and
WHEREAS, the parties believe that it would be mutually beneficial for them to
cooperate in order for Reseller to resell Telecom 2000(TM),
NOW, THEREFORE, in order to establish the terms and conditions under which the
parties' respective goals may be accomplished, in exchange of the mutual
covenants and premises hereinbelow, the parties agree as follows:
1.0 DEFINITIONS
Seller Product shall mean those products listed in Attachment A hereto.
Telecom 2000(TM) shall mean the intellectual property underlying Seller Product
related to or derived from Telecom 2000(TM) and / or related to or derived from
US Patent No. 5, 526, 353 including specifically, for purposes of clarification
and not limitation, algorithms, electronic computer protocols, routines,
subroutines or programs developed by or on behalf of Seller or otherwise owned
by or in the custody of Seller.
2.0 LICENSE AND SCOPE OF AGREEMENT
2.1 License Rights and Scope. Subject to the terms and conditions set forth
herein, Seller hereby grants to Reseller, and Reseller accepts, a
non-transferable and non-exclusive license to resell or sublicense Seller
Product. A transfer of Reseller's rights hereunder may be permitted in the event
of a sale by Reseller of all or substantially all of its assets or stock, upon
the request of Reseller and with the written consent of Seller, which shall not
be unreasonably withheld.
2.2 Restrictions on Use. All purchase, use, and resale by Reseller of Seller
Product is restricted as follows :
(a) Reseller is strictly prohibited from reverse engineering, reverse
compilation, or reverse assembly of Seller Product;
(b) Reseller is strictly prohibited from making a copy or copies of Seller
Product (except for a single copy for back-up or archival purposes);
(c) Reseller shall not misuse the trademarks or trade names of Seller, but
Reseller may use the trademarks or trade names of Seller in advertising
Seller Products;
<PAGE>
(d) Reseller shall not make any foreign sales without full compliance with
United States import/export laws and restrictions, and shall be responsible to
Seller and indemnify Seller for any failure to abide with this clause; and
(e) Reseller shall not make any government contract sales that impair the rights
of Seller hereunder, and must take all necessary steps to insure compliance with
the intellectual property ownership rights of Seller hereunder, and shall be
responsible to Seller and indemnify Seller for any failure to abide with this
clause.
2.3 Term. This Agreement shall be for a term of one year, subject to termination
by either party at any time in accordance with the terms hereof.
2.4 Termination. Subject to Section 4.6 hereof, the Agreement may be terminated
by Seller if Reseller does not pay Seller any amount due hereunder or otherwise
materially breaches this Agreement, or if Reseller violates any material term
hereof, including specifically but not as a limitation its restrictions under
2.0 and its duties under Section 3.0. Reseller shall have the right to terminate
this Agreement if Seller fails to provide support as described in Attachment B,
or if Seller otherwise materially breaches this Agreement. Either party may
terminate this Agreement if a force majeure event continues for more than ninety
(90) days or if the other party becomes insolvent or bankrupt or makes an
assignment for the benefit of creditors.
2.5 Duties Upon Termination. Upon the termination or expiration of this
Agreement for any cause, the parties agree to continue their cooperation in
order to effect an orderly termination of their relationship. Reseller shall
immediately cease representing itself as a reseller of Seller Product, and shall
accept no new orders for Seller Product except pursuant to firm, outstanding
bids or quotations.
2.6 Survival. Upon the termination or expiration of this Agreement for any
cause, the paragraphs which by their plain meaning, including specifically but
not as a limitation provisions which protect the intellectual property rights of
Seller shall survive.
2.7 Breach or Default. Neither party may terminate this Agreement for breach or
default of the other party unless and until the party seeking to terminate has
specified the breach or default in writing and such breach or default has not
been cured by the receiving party within thirty (30) days after receipt of
written notice.
3.0 OBLIGATIONS OF RESELLER
3.1 Reasonable Best Efforts Services and Minimum Commitment. In consideration of
the license granted above and discounting schedules extended in Attachment A,
Reseller agrees to exert its reasonable best efforts to resell Seller Product,
to meet agreed-upon sales goals, and to purchase the Minimum Commitment of
Seller Product outlined in Attachment A.
3.2 Sales Capability. Reseller shall maintain offices as sales locations, which
offices shall be staffed by a sufficient trained capable sales and technical
staff, adequate to provide Reseller's customers with assistance and instructions
on setup, installlation, and use of Seller Product.
3.3 Sales Reports, Sales Estimates, and Product Performance Data. Periodically,
as agreed, Reseller shall provide Seller with a report of sales and licenses
made in that month, to include numbers of units, types of units, dollar value of
units, and, where practicable, customer for and location of units. In addition,
Reseller will, periodically, as agreed, forecast expected sales to be made in
the upcoming three month period on a "rolling" basis. The Reseller is required
to forward to Seller any reports from users of the Seller Product regarding
either (i.) any outages or failures experienced by users of the Seller Product
which
<PAGE>
become known to Reseller, or (ii) any complaints of users of the Seller
Product regarding the quality, functionality or performance of Seller Product
which become known to Reseller.
3.4 Insurance Coverages. Based upon Seller's determination, Reseller shall
acquire reasonable insurance coverages related hereto of the kinds and in the
amounts specified by Seller, at Reseller's expense, with loss payees and
subrogation as specified by Seller.
4.0 ORDERING, DELIVERY, ACCEPTANCE, FEES, PAYMENT, AND SUPPORT
4.1 Ordering and Delivery. Individual firm funded purchase orders of Reseller
issued to Seller shall be effective upon acceptance and order receipt
verification in writing by Seller at its headquarters at Germantown, Maryland,
USA. All Seller Products are listed in the initial form of Attachment A with
prices and the purchase orders of Reseller must reflect the description, prices,
and model numbers contained therein. The terms and conditions of this Agreement
override those of the purchase orders, with the exception of Reseller's rights
to return ordered product (if any) after acceptance has occurred under the
provisions of 4.2 below. All Seller Products shall be delivered on or about the
delivery date set forth in the order receipt verification in writing by Seller.
Shipment will be at the risk of Reseller. Reseller shall have 15 business days
to verify that all deliveries have been received. Delivery of the Seller
Products shall be conclusively deemed to be completed at the end of the 15
business days verification period or at such time as missing deliverables
identified by Reseller in writing during the 15 business days verification
period have been replaced by Seller.
4.2 Acceptance. The Seller Product shall be accepted by Reseller if the Seller
Products perform substantially as described in their current documentation.
Failure of Reseller to inform Seller of acceptance or non-acceptance within
thirty (30) days following completed delivery or commercial use of the
deliverables by Reseller shall constitute acceptance. Purchase prices and
license fees shown in the initial form of Attachment A are due and payable upon
acceptance.
4.3 After-Sale Support of Products. Following delivery of the Deliverables,
Reseller shall be exclusively responsible for the installation, testing,
modification, management, and control of its resales of Seller Product, except
for Seller's Warranty responsibility in clause 5.3 below and After-Sale Support
of Products responsibility defined in Attachment B hereto.
4.4 Prices and Price Changes. Reseller agrees to pay Seller the amounts shown on
Attachment A for Seller Product. Seller will have the right through its
independent auditors to inspect Reseller 's facilities and records to verify the
amounts and fees charged to Reseller's customers hereunder. Reseller shall keep
records regarding its resales and sublicenses to Reseller's customers hereunder
in detail to permit Seller to make such a verification. Seller may change the
price of any Seller Product subsequent to the date of this agreement. If prices
are increased, Seller will give Reseller a written notice thereof effective
immediately upon increase.Firm funded purchase orders accepted by Seller before
the written notice of price increase is issued shall be honored at the old
(lower) price so long as the scheduled shipment date therefore is not later than
thirty (30) days after the date of the written notice of price increase. If
prices are decreased, Seller will give Reseller a written notice thereof
effective immediately, and the decrease shall apply to all unused unopened
inventory purchased by Reseller during the previous thirty (30) days, as well as
to orders-in-process.
4.5 Training, Updates, Maintenance & Support Fees. Except as expressly provided
in this Agreement, including the Attachments and Exhibits, all training and
support services provided by Seller shall be at an additional fee in accordance
with Seller 's then current standard rates. Unless otherwise stated in
Attachment B, Reseller shall reimburse Seller for all reasonable travel and
other out-of-pocket expenses incurred by Seller in connection with the
assistance furnished hereunder, provided same have been approved and
preauthorized by Reseller.
<PAGE>
4.6 Payment. All checks will be in U.S. currency unless otherwise agreed and
shall be drawn on U.S. banks. Except as otherwise stated herein, based upon
credit approval in the sole discretion of Seller, all payments including license
fees shall be due and payable within thirty (30) calendar day after the receipt
by Reseller from Seller of an invoice. If Reseller fails to pay any amount due
by the due date, Reseller shall pay late charges of 1.5% per month, but not more
than the highest rate permitted by law, together with all Seller 's expenses and
collection charges
4.7 Taxes. In addition to Seller 's fees hereunder, Reseller is obligated to pay
any federal, state, provincial, county, local or governmental taxes, (including
but not limited to sales tax and value added taxes), duties fees and amounts in
lieu thereof, now or hereafter applied on the licenses granted or products sold
herein or Reseller 's production, storage, transportation, import, export,
licensing or use of Seller Product. Any such taxes, duties, fees and amounts
payable in lieu thereof, including interest and penalties thereon ,paid or
payable at any time by Seller, exclusive of taxes based solely on Seller 's net
income, shall be reimbursed by Reseller.
5.0 OWNERSHIP AND PROPRIETARY RIGHTS
5.1 Ownership. All rights, title and interest to Telecom 2000(TM) shall at all
times remain the exclusive property of Seller. All applicable copyrights, trade
secrets, patents and other intellectual property rights in Seller Product and
Telecom 2000(TM) shall remain the exclusive property of Seller. No title to
Telecom 2000(TM) is transferred to Reseller. Reseller shall not remove the
copyright, trademark and proprietary rights notices of Seller, and shall
prohibit any such removal by its officers, agents, employees, and contractors.
5.2 Proprietary Rights. Reseller acknowledges that Telecom 2000(TM) is
proprietary and confidential and constitutes valuable trade secrets of Seller.
Reseller agrees to safeguard Telecom 2000(TM) with not less than the same degree
of care as is exercised in connection with Reseller's own most proprietary and
confidential materials.
All aspects of Telecom 2000(TM), including without limitation, programs, methods
of processing, specific design and structure of individual programs and their
interaction and unique programming techniques employed therein, if any, shall
remain the sole and exclusive property of Seller, and shall not be used, sold,
revealed, disclosed or otherwise communicated, directly or indirectly, by
Reseller to any person, company, or institution other than as set forth herein,
excepting such technical and business development communications, products
demonstrations, and detailed technical discussions as Reseller reasonably may
deem necessary to perform the reselling duties described herein.
5.3 Warranty and Disclaimer of Warranty. Seller Product Hardware is warranted as
free from defects in materials and workmanship for a period of one year after
shipment. In the event of warranty claims hereunder, Reseller shall return ship
to seller, prepaid, with a written description of the basis for warranty claim
for a final determination by Seller. Warranty-covered items shall be repaired or
replaced by Seller and shipped to Reseller, at Seller's expense. All Seller
Product Software is delivered "AS IS". SELLER MAKES NO EXPRESSED OR IMPLIED
WARRANTIES WHATSOEVER WITH RESPECT TO SELLER PRODUCT. IN PARTICULAR, AND WITHOUT
LIMITING THE FOREGOING, THE PARTIES AGREE THAT THERE IS NO EXPRESSED OR IMPLIED
WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE OR OF MERCHANTABILITY. SELLER SHALL
NOT BE FOUND LIABLE FOR ANY MONETARY DAMAGES OF ANY KIND WHATESOEVER RELATED TO
THE USE OF SELLER PRODUCTS, AND ANY AND ALL RISK OF SUCH USE IS HEREBY
SPECIFICALLY ASSUMED BY RESELLER.
6.0 INDEMNIFICATION
6.1 Limitation of Liability. IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE
OTHER OR TO ANY OTHER THIRD PARTY BASED ON CONTRACT, TORT OR OTHERWISE FOR LOSS
<PAGE>
OF REVENUES, LOST PROFITS, LOST SAVINGS, OR INDIRECT, CONSEQUENTIAL, INCIDENTAL,
SPECIAL OR PUNITIVE DAMAGES ARISING OUT OF OR RELATING IN ANY WAY TO THIS
AGREEMENT, EXCEPT THAT RESELLER MAY BE FOUND SO LIABLE TO SELLER FOR ANY DAMAGES
ARISING OUT OF OR RELATING TO RESELLER'S INTENTIONAL OR GROSSLY NEGLIGENT
VIOLATION OF CLAUSES 2.2.
6.2 Indemnification by Seller . Seller shall indemnify, defend and hold Reseller
harmless from any claims, damages or judgments, including all reasonable
attorney's fees, directly or indirectly resulting from any claimed infringement
or violation of any US copyright, US patent or other US intellectual property
right with respect to Seller Product. Seller shall have no liability for any
such claims or liabilities based on use of: (i) any version, modification or
adaptation of Seller Product, if such infringement would have been avoided by
the use of a then current unaltered release of Seller Product ; or (ii) a
combination of Seller Product with any product or data not included in Seller
Product when delivered to Reseller by Seller.
Following notice of a claim or a threat of actual suit, Seller, at its sole
option, shall as Reseller's sole remedy (except as otherwise provided for in
this section):
(a) procure for Reseller the right to continue, as provided herein, to use,
distribute and sublicense Seller Product at no additional expense to
Reseller; or
(b) provide Reseller with a non-infringing version of Seller Product.
7.0 PUBLICITY
7.1 Issuance of Publicity. Any and all publicity of any kind whatsoever with
regard to this Agreement shall be determined by Seller in its sole discretion,
except that with respect to the use of the trademarks and trade names, any
publicity is subject to the approval of the party whose trademarks and trade
names are to be used, only to the extent of the use of such trademarks and trade
names and with respect to the portions of the publicity bearing any such
trademarks and trade names.
8.0 GENERAL
8.1 Compliance With Local Laws. Reseller shall be exclusively responsible at its
own expense for compliance with all local laws relating to Seller Product and
the use thereof hereunder by Reseller. Reseller shall indemnify and save
harmless Seller from any claim by a third party arising out of or related to
non-compliance with local laws by Reseller.
8.2 Jurisdiction. This Agreement shall be governed by and construed in
accordance with the laws of the State of Ohio, Cuyahoga County, Ohio being the
venue for all disputes, except for Federal jurisdiction disputes, the venue for
which shall be the Northern District of Ohio.
8.3 Dispute Resolution. If either party wishes to commence litigation, then
either before or promptly after doing so, that party shall notify the other
party in writing by Federal Express or facsimile transmission of a request for
meeting. The request shall contain a description of the problem. Within fourteen
(14) days of receipt of the letter requesting the meeting, the parties shall
meet at a mutually convenient location in Cuyahoga County, Ohio. The meeting
shall be attended by an executive of each party having the authority to resolve
the problem. Each party may bring technical staff or other representatives
having information bearing on the problem; however, neither party may bring an
attorney or be represented in the meeting by an executive who is an attorney
unless agreed in advance in writing by the other party. In the event such
meeting fails to resolve issues in dispute, all actions relating to dispute
hereunder shall have as venue, Cuyahoga County, Ohio, except for Federal
jurisdiction disputes, the venue for which shall be the Northern District of
Ohio.
<PAGE>
8.4 Independent Contractors. It is expressly agreed that Seller and Reseller are
acting hereunder as independent contractors, and under no circumstances shall
any of the employees of one party be deemed the employees of the other for any
purpose.
8.5 Notice. Any notice required to be given by either party to the other shall
be deemed given ten (10) days after being deposited in the postal system in
registered or certified form with return receipt requested, postage paid,
addressed to the notified party at the address set forth above.
8.6 Assignment. A party may not assign this agreement or any portion thereof
without the approval of the other party, which shall not be unreasonably
withheld.
8.7 Amendment; Waiver. Any provision of this Agreement may only be amended or
waived if such amendment or waiver is in writing; and, if an amendment, executed
by all parties hereto and, if a waiver, executed by the party which is waiving
the term, condition or right.
8.8 Severability. Any provision of this Agreement that is prohibited or
unenforcable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforcability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdictio
8.9 Headings. The headings of the various sections of this Agreement have been
inserted for ease of reference only and shall be deemed not to be a part of this
Agreement.
8.10 Entire Agreement. This Agreement constitutes the entire understanding of
the parties with relation to the subject matter hereof, and may be amended only
by a writing in accordance with clause 8.7 above.
MADE AND ENTERED INTO this _________ day of _________, 199__, by the undersigned
authorized representatives of the parties.
e-Net, Inc. Reseller
--------------------------
Company Name
- ------------------------ ------------------------
(Signature) (Signature)
- ------------------------ ------------------------
(Name) (Name)
- ------------------------ ------------------------
(Title) (Title)
- ------------------------ ------------------------
(Date) (Date)
10
<PAGE>
ATTACHMENT A
Seller Product and Reseller Prices
<TABLE>
<CAPTION>
Product Designation List Price Each
- ------------------- ---------------
<S> <C>
T2000-TS $549
T2000-CO $795
T2000-CH $2995
T2000-IN (4 port BRI) $8495
T2000-DTI (single span T1/E1) $10,995
T2000-SV-100 $4995
Gateways FXS 7300 (single span T1/E1) $29,995
*Network Management System (NMS) $10,000
*Billing System- Interface module only $10,000- $25,000
(Query to CDR data only)
</TABLE>
*Required to be paid as a license one time per network for one Network Manager
Station.
Discounts based on total units purchased per calendar quarter no minimum
committment.
<TABLE>
<CAPTION>
Units Purchased Discount off List
- --------------- -----------------
<S> <C>
0 - 19 -
20 - 99 -
100 - 499 -
500 - 999 -
1000 - 4999 -
5000 + -
</TABLE>
Discounts based on total units purchased per calendar quarter with a minimum
committment of 100 units per quarter. To qualify, participants must submit a
funded purchase order for a 100 unit order by the beginning of each quarter. All
prices herein are available for certified Resellers only, and are subject to
change by Seller in accordance with the Seller's contractual agreements and
standard practices and policies.
Service Fees ( See Attachment B):
A one-year maintenance contract is available upon initial order for a
fee of fifteen per cent (15%) of the order dollar value. Maintenance service
includes Standard Support as defined in Attachment B.
<PAGE>
Nonstandard Support in the areas of enhanced installation service, training,
customization, and relocation is available on a per order basis, when accepted
by e-net, Inc. Fees for Nonstandard Support are based upon $1500.00 per day,
minimum of two days, plus travel and living.
ATTACHMENT B
Seller's After-Sale Support of Seller Products
Product Malfunction Correction Procedures
Problem Classifications - If Reseller or its Customer encounters a problem
(classified below) with the product, then Seller is required to respond to the
Reseller or its Sublicensee in the time specified below:
P1: Critical Systems Problem - Customer is unable to use the product as
documented, and a major operational problem or reliability problem exists.
Seller shall provide acknowledgment of the problem within four (4) hours. At
this time, Reseller or its Customer may be required to provide additional
information to enable Seller to recreate the problem. Seller shall use its best
efforts to provide a work-around (if a work-around is possible) for the problem
and shall provide a plan for resolution within one (1) day from the time at
which the problem can be reproduced by Seller. Reseller or its Customer may be
required to aid in this task if the error can not be reproduced by Seller. A
patch release containing the fix shall be produced according to the plan
mentioned above. Status reports will be provided to Reseller or its Customer as
required, but no less than twice a week.
P2: Minor Operational Problem(s) - An intermittent `bug' in the product exists,
but it is not a critical systems reliability issue; however, the product does
not function as documented, and the `bug' creates a minor operational impact.
Seller shall provide acknowledgment of the problem within one (1) business day.
At this time, Reseller or its Customer may be required to provide additional
information to enable Seller to recreate the problem. Reseller or its Customer
may be required to aid in this task if the error can not be reproduced by
Seller. Seller shall use its best efforts to provide a work-around (if a
work-around is possible) for the problem and shall provide a plan for resolution
within one (1) week from the time at which the problem can be reproduced by
Seller. Any fixes to address this problem shall be incorporated into the next
Maintenance Release.
P3: Annoyance Type Problem - The use of the product produces a user annoyance
while the product is in application. Seller shall provide acknowledgment of the
problem within two (2) business days. At this time, Reseller or its Customer may
be required to provide additional information to enable Seller to recreate the
problem. Seller shall use its best efforts to provide a work-around (if a
work-around is possible) for the problem and shall provide a plan for resolution
within two (2) weeks from the time at which the problem can be reproduced.
Reseller or its Customer may be required to aid in this task if the error can
not be reproduced by Seller. Seller and Reseller or its Customer will jointly
determine if the annoyance is to be fixed. If it is agreed upon that the
annoyance is to be fixed, then Seller shall provide a schedule for the next
Scheduled Release and incorporate the fix into that release.
Definitions:
1.) Scheduled release - includes new functionality
2.) Maintenance release - takes care of `bug' fixes
3.) Work-around - customer able to make alteration to application or product as
a temporary solution.
<PAGE>
EXHIBIT 10.13
NONQUALIFIED STOCK OPTION PLAN
1. Purpose
The Stock Option Plan (the "Plan") of e-Net, Inc. ("the Company"), is designed
to enable key employees and directors of the company and its Subsidiaries to
acquire or increase a proprietary interest in the Company, and thus to share in
the future success of the Company's business. Accordingly, the Plan is intended
as a further means not only of attracting and retaining outstanding management
personnel but also of promoting a closer identity of interests between
executives and stockholders. Since the executives eligible to receive Options
under the Plan will be those who are in positions to make important and direct
contributions to the success of the Company, the directors believe that the
grant of Options under the Plan will be in the Company's interest.
2. Definitions
Unless the context clearly indicates otherwise, the following terms, when used
in the Plan, shall have the meanings set forth in this Section 2.
(a) "Beneficiary" means the person or persons designated in writing by the
Grantee or, in the absence of such a designation or if the designated
person or persons predecease the Grantee, the Grantee's Beneficiary
shall be the person or persons who acquire the right to exercise the
Option by bequest or inheritance. In order to be effective, a Grantee's
designation of a Beneficiary must be on file with the Committee before
the Grantee's death. Any Such designation may be revoked and a new
designation substituted therefore at any time before the Grantee's
death.
(b) "Board of Directors" or "Board" means the Board of Directors of the
Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
(d) "Committee" means committee consisting of the members of the
Compensation Committee of the Board of Directors who are "disinterested
persons" within the meaning of Rule 16b-3 under the Securities and
Exchange Act of 1934 (or any successor rule of similar import).
(e) "Disability" means a disability as defined in the Company's Long-Term
Disability Plan, as amended from time to time.
(f) "Grantee" means a person to whom an Option has been granted under the
Plan.
(g) "Option" means an option to purchase a share or shares of the Company's
par value common stock.
(h) "Option Agreement" means the written agreement to be entered into by
the Company and the Grantee, as provided in Section 7 hereof.
(i) "Quota" means the portion of the total number of Shares subject to an
Option which the Grantee may purchase during each of the several
periods of the Term of the Option (if the Option is subject to Quotas),
as provided in Section 10(b) hereof.
(j) "Retirement" means retirement pursuant to the Company's Retirement
Pension Plan, as amended from time to time.
(k) "Shares" means shares of the Company's par value common stock.
(l) "Subsidiary" means a subsidiary corporation as defined in Section
424(f) of the Code (or a successor provision of similar import).
<PAGE>
(m) "Term" means the period during which a particular Option or Right may
be exercised in accordance with Section 10(a) hereof.
(o) Whenever used herein, unless the context indicates otherwise, words in
the masculine form shall be deemed to refer to females as well as to
males.
3. Effective Date of Plan
This Plan shall become effective when adopted by the Board of Directors;
provided, however, that if the Plan is not approved by the holders of a majority
of the outstanding Shares prior to the first anniversary date of its adoption by
the Board, the Plan and all Options and Rights granted under the Plan prior to
such anniversary shall be null and void and shall be of no effect.
4. Number and Source of Shares Subject to the Plan
(a) The Company may grant Options under the Plan for not more than Five
Hundred Thousand (500,000) Shares, together with the Shares for which
Options were previously authorized under the Plan prior to its
amendment and extension, (subject, however, to adjustment as provided
in Section 15 hereof) Which shall be provided from Shares in the
treasury or by the issuance of Shares authorized but unissued.
(b) In the event that an Option shall for any reason lapse or be terminated
without being exercised in whole or in part, for any reason other than
the exercise of an alternative Right, the Shares subject to the Option
shall be restored to the total number of Shares with respect to which
Options and rights may be granted under the Plan, but only to the
extent that the Option or any related alternative right has not
previously been exercised.
5. Administration of the Plan
(a) The Plan shall be administered by the Committee, except that
non-Committee members of the Board shall approve awards of options, if
any, to any Committee members.
(b) The Committee shall adopt such rules or procedures as it may deem
proper; provided, however, that it may take action upon the agreement
of a majority of its members then in office. Any action that the
Committee may take through a written instrument signed by a majority of
its members then in office shall be as effective as though taken as a
meeting duly called and held.
(c) The powers of the committee shall include plenary authority to
interpret the Plan, and, subject to the provisions hereof, the
Committee may determine(1) the persons to whom Options shall be
granted, (2) the number of Shares subject to each Option, and (3) the
Term of each Option and Right, the date on which each Option shall be
granted, and (5) the provisions of each Option Agreement.
6. Employees Eligible to Receive Options
(a) Options may be granted under the Plan to key employees or Directors of
the Company or any Subsidiary (including employees who are directors).
All determinations by the Committee as to the identity of the persons
to whom Options shall be granted hereunder shall be conclusive.
(b) An individual employee may receive more than one Option.
7. Option Agreement
(a) No Option shall be exercised by a Grantee unless he shall have executed
and delivered an Option Agreement.
<PAGE>
(b) Appropriate officers of the company are hereby authorized to execute
and deliver Option Agreements in the name of the company as directed
from time to time by the Committee.
8. Nonqualified Options
It is intended that the Options granted hereunder will not be "incentive stock
options" within the meaning of Section 422(b) of the Code.
9. Option Price
The option price to be paid by the Grantee to the company for each Share
purchased upon the exercise of the Option shall be equal to the fair market
value of the Share on the date the Option is granted. In no event may an Option
be granted under the Plan if the Option price per share is less than the par
value of a Share.
10. Term and Quotas of Options; Exercise of Option During life of Grantee
(a) Each Option granted under the Plan shall be exercisable only during a
Term commencing at least one year after the date when the option was
granted; provided, that in the case of an Option that is granted at the
time the Grantee first becomes employed by the company or a Subsidiary,
the Committee shall have the authority to shorten or eliminate the
foregoing one-year period. The Term of each Option shall end (unless
the Option shall have terminated earlier under any other provision of
the Plan) on a date fixed by the Committee and set forth in the
applicable Option Agreement. In no event shall the Term of the Option
extend beyond ten years from the date of grant of the Option.
(b) The Committee shall have authority to grant both Options exercisable in
full at any time during their Term and/or Options exercisable in
Quotas. Quotas or portions thereof not purchased in earlier periods
shall be cumulative and shall be available for purchase in later
periods within the Term of the Option. In exercising an Option, the
Grantee may purchase less than the full Quota available under the
Option.
(c) Options shall be exercised by delivering or mailing to the Committee:
(1) a notice, in the form and in the manner prescribed by the
Committee, specifying the number of Shares to be purchased, and
(2) payment in full of the Option price for the Shares by money order,
cashier's check, or certified check, and/or by the tender of
Shares to the Company; provided that Shares tendered in exchange
for Shares issued under the Plan must be held by grantee for at
least one year prior to their tender to the company; and provided
further, that the committee shall determine acceptable methods fro
tendering Shares to exercise an Option under the Plan, and may
impose such limitations and prohibitions on the use of Shares to
exercise an Option as it deems appropriate. The Committee shall
determine the fair market value of any shares used to exercise an
Option. The date of exercise shall be deemed to be the date that
the notice of exercise and payment of the Option Price are
received by the Committee.
(d) Subject to Section 12(a) below, upon receipt of the notice of exercise
and upon payment of the Option price, the Company shall promptly
deliver to the Grantee a certificate or certificates for the Shares
purchased, without charge to him for issue or transfer tax.
11. Conditions on Exercise
(a) The exercise of each Option granted under the Plan shall be subject to
the condition that if at any time the Company shall determine in its
discretion that the satisfaction of withholding tax or other
withholding liabilities, or that the listing, registration or
qualification of any Shares otherwise deliverable upon such exercise
upon any
<PAGE>
securities exchange or under any State or federal law, or the consent
or approval of any regulatory body, is necessary or desirable as a
condition of, or in connection with, such exercise or the delivery or
purchase of Shares thereunder, then in any such event such exercise
shall not be effective unless such withholding, listing, registration,
qualification, consent or approval shall have been effected or obtained
free of any conditions not acceptable to the Company. Any such
postponement shall not extend the time within which the Option may be
exercised; and neither the Company nor its directors or officers shall
have any obligations or liability to the Grantee or to a Beneficiary
with respect to any Shares as to which the Option shall lapse because
of such postponement.
(b) All Options granted under the Plan shall be nontransferable other than
by will or by the laws of descent and distribution in accordance with
Section 12(a) hereof, and an Option may be exercised during the
lifetime of the Grantee only by him.
(c) Upon the purchase of Shares under an Option, the stock certification or
certificates may, at the request of the Grantee or his Beneficiary, be
issued in his name and the name of another person as joint tenants
with right of survivorship.
12. Exercise of Options After Death, Disability, Retirement, or Other
Termination of Employment
(a) Death. If a Grantee's employment with the Company or a Subsidiary shall
cease due to the Grantee's death, or if the Grantee shall die within
twelve months after cessation of employment while the Option is
exercisable pursuant to paragraph (b) below, or if the Grantee shall
die within three months after cessation of employment while the Option
is exercisable pursuant to paragraph (c) below, any Option held by the
Grantee on the date of his death may be exercised only within twelve
months after the Grantee's death, and only by the Grantee's
Beneficiary, to the extent that such Option have been exercised by such
deceased Grantee immediately before the Grantee's death. In no event
shall the Option be exercisable after the expiration date thereof
specified in the Option Agreement.
(b) Disability. If a Grantee's employment with the Company or a Subsidiary
ceases due to his disability, after at least one year of continuous
employment with the Company and/or such Subsidiary immediately
following the date on which an Option, to the extent that the Option
could be exercised at the cessation of employment, then the Option may
be exercised at any time within twelve months after the Grantee shall
cease to be an employee. In no event shall the Option be exercisable
after the expiration date thereof specified in the Option Agreement.
(c) Retirement. If a Grantee's employment with the Company or a Subsidiary
ceases due to his retirement, after at least one year of continuous
employment with the Company and/or such Subsidiary immediately
following the date on which an Option was granted, the Grantee may
exercise the Option to the extent the Option could be exercised at the
cessation of employment, at any time within three months after the
Grantee shall so cease to be an employee. In n o event shall the Option
be exercisable after the expiration date thereof specified in the
Option Agreement.
(d) Termination for Other Reasons. Upon termination of a Grantee's
employment with the Company and its Subsidiaries for any reason other
than those specified in subsections (a) through (c) above, the
Grantee's outstanding Options and Rights shall be immediately canceled.
13. Stockholder Rights
No person shall have any rights of a stockholder by virtue of an Option except
with respect to Shares actually issued to him, and the issuance of Shares shall
confer no retroactive right to dividends.
14. Adjustment for Changes in Capitalization
<PAGE>
In the event that there is any change in the Shares through merger,
consolidation, reorganization, recapitalization or otherwise, or if there shall
be any dividend on the Company's Shares, payable in such Shares, or if there
shall be a stock split or a combination of Shares, the aggregate number of
Shares available for Options, the number of Shares subject to outstanding
Options, and the Option price per Share of each outstanding Option shall be
proportionately adjusted by the Board of Directors as it deems equitable in its
absolute discretion, to prevent dilution or enlargement of the rights of the
Grantees; provided, that any fractional Shares resulting from such adjustments
shall be eliminated. The Board's determination with respect to any such
adjustments shall be conclusive.
15. Effect of Merger or Other Reorganization
If the Company shall be the surviving corporation in a merger or other
reorganization, Options shall extend to stock and securities of the Company to
the same extent that a holder of that number of Shares immediately before the
merger or consolidation corresponding to the number of Shares covered by the
Option would be entitled to have or obtain stock and securities of the Company
under the terms of the merger or consolidation. If the Company dissolves, sells
substantially all of its assets, is acquired in a stock for stock or securities
exchange, or is a party to a merger or other reorganization in which it is not
the surviving corporation, then each Option shall be exercisable in full within
the period 60 days commencing upon the date the action of the shareholders (or
of the Board if shareholders' action is not required) is taken to approve the
transaction, and upon the expiration of that period all Options shall
automatically terminate.
16. Termination, Suspension or Modification of Plan
The Board of Directors may at any time terminate, suspend, or modify the Plan,
except that the Board of Directors shall not, without the authorization of the
holders of a majority of the Company's outstanding Shares at a shareholders'
meeting duly called and held, change (other than through adjustment for changes
in capitalization as provided in Section 14 hereof (a) the aggregate number of
Shares with respect to which Options may be granted; (b) the class of persons
eligible for Options, (c) the Option price; or (d) the maximum duration of the
Plan. No termination, suspension or modification of the Plan shall adversely
affect any right acquired by any Grantee, or by any Beneficiary, under the terms
of an Option granted before the date of such termination, suspension or
modification, unless such Grantee or Beneficiary shall consent; but it shall be
conclusively presumed that any adjustment for changes in capitalization in
accordance with Section 14 hereof does not adversely affect any such right.
17. Application of Proceeds
The proceeds received by the company from the sale of Shares under the Plan
shall be used for general corporate purposes.
18. Duration of the Plan
Unless sooner terminated in accordance with Section 16 hereof, the amended and
extended Plan shall remain in effect for a period of ten years from the date of
its amendment and extension by the Board of Directors.
19. Competition by Participant.
In the event a participant , within such period of time as shall be specified in
the related Option Agreement, directly or indirectly, individually or as an
employee, partner, officer, director, or stockholder or in any other capacity
whatsoever of any person, firm, partnership or corporation: (i) recruits, hires,
assists others in recruiting or hiring, discusses employment with or refers to
others any person who is, or within the preceding 12 months was, an employee of
the Company or any
<PAGE>
subsidiary thereof or any present, prospective of former subsidiary thereof ;
(ii) competes with the Company or any subsidiary thereof in such segments of the
business of the Company and within such territory as shall be specified in such
related Agreements: (iii) uses in competition with the Company or any subsidiary
thereof, customer, prospective customer or former customer, within such segments
and specified territory, any of the methods, information or systems developed by
the Company or any subsidiary thereof for its customers, prospective customers
or former customers where the Company or any subsidiary thereof or such customer
, prospective customer or former customer does business; or (iv) calls upon,
solicits, accepts employment with, sells or endeavors to sell to, within such
segments and specified territory, any customer, prospective customer or former
customer of the Company or any subsidiary thereof; the following provisions
shall apply with respect to any shares of Option Stock received and options
granted under this Plan as of the date of the first occurrence prohibited under
this provision:
A. Such participant: (i) shall immediately sell and deliver to the Company(as
designated by the Committee), upon demand, all shares of Option Stock sold or
awarded to the participant under the Plan as to which the participant is still
the direct or indirect beneficial owner at the cash price per share, if any,
paid by the participant; and (ii) shall pay to the Company (as designated by the
Committee) an amount in cash with respect to each share of Option Stock, not
still so held equal to the Fair Market Value of each such share on the first
date on which such share is no longer held less the price paid by him for such
share.
B. Any option outstanding under the Plan shall automatically terminate
and shall no longer be execrable and all Restricted Stock Units then held shall
automatically terminate.
C. The provisions of this Section shall not limit or restrict in any
manner any rights or remedies which the Company and its subsidiaries may have
under any separate employment agreement with a participant and or otherwise with
respect to competition by a participant.
If any provisions of this Section 19 should be found by any court
of competent jurisdiction to be unreasonable by reason of its being too broad as
to the period of time, territory, aspects of business or customers covered or
otherwise, then, and in that event, such provision shall nevertheless remain
valid and fully effective, but shall be considered to be amended so that the
period of time, territory, aspects of business of customers covered or otherwise
set forth shall be changed to be the maximum period of time, the largest
territory, the most aspects of business and customers covered and/or the
broadest other limitations, as the case may be, which would be found reasonable
and enforceable by such court and similarly, if any remedy is so found to be
unenforceable in whole or in part, or to any extent, such provision shall remain
in effect only to the extent the remedies would be enforceable by such court.
20. Related Agreements.
In order to enforce the restrictions imposed upon shares issued and rights and
options granted hereunder and to comply with Federal and state securities laws
and the Code, the Company shall enter into a Option Stock Agreements with each
participant containing such terms and conditions, including additional
restrictions as the Committee shall determine, and the Committee may require
that the certificates representing shares of Unvested Stock shall remain in the
physical custody of the Company. The Committee shall have full authority upon
the consent of a participant to amend the terms and provisions of any such
agreement relating to the participant or the terms of any rights or options
relating to the participant or the terms of any rights or options relating to
the participant which are outstanding under the Plan.
21. No Effect on Employment.
Nothing herein, contained, including the sale or award of any shares and the
grant of any rights or options, shall affect the rights of the Company to
terminate any participant's employment at any time for any reason.
22. General Provisions
<PAGE>
The grant of an Option in any year shall not give the Grantee any right to
similar grants in future years or any right to be retained in the employ of the
Company or its Subsidiaries.
23. Governing Law
The Plan shall be construed and its provisions enforced and administered in
accordance with the laws of Delaware except to the extent that such laws may be
superseded by any Federal law.
<PAGE>
EXHIBIT 10.14
GOVERNMENT RESELLER AGREEMENT
This GOVERNMENT RESELLER AGREEMENT, which shall include the exhibits
hereto (the "Agreement"), is entered into by and between Government Technology
Services, Inc., a Delaware corporation with its principal location at 4100
Lafayette Center Drive, Chantilly, Virginia 20153-0808, and all of its
subsidiaries ("GTSI"), and e-Net, Inc., a corporation doing business at 12800
Middlebrook Road, Suite 200, Germantown, MD 20874 and all of its subsidiaries
("Vendor"), with reference to the following facts:
A. GTSI is a leading remarketer of microcomputer software, hardware,
peripherals and connectivity systems to commercial entities, the Federal
Government, its agencies, its departments and its employees (collectively, the
"U.S. Government"), to state and local governments, their agencies, their
departments and their employees (collectively, "State Governments"), and to
foreign governments, international agencies and their respective departments,
agencies and employees (collectively, "Foreign Governments").
B. Vendor is a leading manufacturer, developer or distributor of
microcomputer products and desires that these products be marketed and
distributed to Government Customers by GTSI.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties agree as follows:
1. DEFINITIONS
For purposes of this Agreement, the following terms shall have the
meanings set forth:
1.1 "Effective Date" - the date on which the latter of GTSI
or Vendor executes this Agreement.
1.2 "End User" - any Government Customers or governmental entity
acquiring the Products to fulfill its internal data processing needs.
1.3 "Government Customers" - Federal Customers and Other
Government Customers.
1.4 "Federal Customers" - the U.S. Government, international
agencies of which the U.S. Government is or becomes a member, North Atlantic
Treaty Organization, U.S. Government-funded Agency for International
Development grant projects, Systems Integrators and other entities reselling
or relicensing the Products to the U.S. Government, and any entity authorized
to purchase off of General Services Administration schedule contracts.
1.5 "Other Government Customers" - State, District, County or City
Governments, Systems Integrators and other entities reselling or relicensing the
Products to any State, District, County or City Government.
1.6 "Price" - license fee or sale price.
1.7 "Products" - any and all microcomputer-related products offered by
Vendor at any time during the term of this Agreement for sale to any of Vendor's
dealers, distributors, Systems Integrators, VARs or retail customers
(collectively and individually, "Resellers").
1.8 "Sell" or "sale" - sale, license or sublicense of a Product.
"Purchase" shall include the purchase, license or sublicense of a Product.
1.9 "Systems Integrator" - any prime contractor or subcontractor on any
government product supply obligation.
2. GTSI OBLIGATIONS
<PAGE>
2.1 GTSI shall use commercially reasonable efforts to promote the
marketing and distribution of the Products to Government Customers. Although
Vendor may publish suggested retail prices for the Products, GTSI shall, in its
sole discretion, determine its own prices charged to its customers for the
Products. GTSI will distribute Vendor Products with all packaging, warranties,
disclaimers and license agreements intact as shipped by Vendor
3. VENDOR OBLIGATIONS
3.1 Vendor shall provide to GTSI, at no additional cost, mutually
agreed upon reasonable quantities of: (i) evaluation and demonstration copies of
the Products and any updates thereto; and (ii) product brochures, posters,
displays and other point of sale materials. Vendor shall provide reasonable
training in the marketing, use and technical support of the Products to GTSI's
sales and technical support personnel at GTSI's Authorized Locations, at no
additional cost to GTSI. In addition to the foregoing, Vendor shall credit
GTSI's account in the amount of 0% of GTSI's net purchases so that GTSI may
provide post-delivery technical support of the Products for the first ninety
days hereof, then an amount to be mutually agreed-upon based upon GTSI's
post-delivery technical support level of effort on behalf of Products. For as
long as Vendor markets any of the Products, and notwithstanding any termination
or expiration of this Agreement, Vendor shall maintain a policy of product
liability insurance covering all Products, at no cost to GTSI, and shall name
GTSI as an additional insured under such policy. Such policy shall have limits
of not less than $1,000,000 per occurrence and not less than $2,000,000
aggregate per claim year. Vendor shall provide GTSI with a certificate of
insurance upon GTSI's request. Vendor's failure to timely provide such
certificate or other sufficient evidence of insurance shall be a material breach
of this Agreement.
4. VENDOR WARRANTIES AND REPRESENTATIONS
4.1 Vendor represents and warrants to GTSI that the Products will
perform substantially in accordance with the associated user documentation and
specifications published by Vendor
4.2 Vendor represents and warrants to GTSI that Vendor is the owner of
the Products or otherwise has the unencumbered right to convey to GTSI the
rights granted under this Agreement and to perform its other obligations
hereunder, and that no part of the Products violates or infringes upon any
common law or statutory rights of any person or entity, including, but not
limited to, rights relating to copyrights, patents, trademarks, contractual
rights or trade secret rights.
4.3 Vendor represents and warrants to GTSI that it will comply with the
terms and conditions in Exhibit D, which are incorporated by reference herein,
if Vendor supplies Products to GTSI for resale under GTSI's GSA Schedule
contract pursuant to this Agreement. If Vendor's Products are not on GTSI's GSA
Schedule contract during the term of this Agreement, Exhibit D shall have no
force and effect.
4.4 Year 2OOO - The vendor warrants that each hardware, software, and
firmware product delivered under this contract and listed below shall be able to
accurately process date data (including, but not limited to, calculating,
comparing, and sequencing) from, into, and between the twentieth and
twenty-first centuries, including leap year calculations, when used in
accordance with the product documentation provided by the vendor, provided that
all listed or unlisted products (e.g. hardware, software, firmware) used in
combination with such listed product properly exchange date data with it. The
duration of this warranty and the remedies available to the Government for
breach of this warranty shall be as defined in, and subject to, the terms and
limitations of the vendor's standard commercial warranty or warranties contained
in
2
<PAGE>
this contract, provided that notwithstanding any provision to the contrary in
such commercial warranty or warranties, the remedies available to the Government
under this warranty shall include repair or replacement of any listed product
whose non-compliance is discovered and made know to the vendor in writing within
ninety (90) days after acceptance.
5. ORDER PROCEDURE
5.1 There shall be no minimum quantity (or initial stocking order) for
orders by GTSI, nor shall there be a minimum or required product mix. There
shall be no initial stocking order required.
5.2 The terms and conditions of this Agreement and of the applicable
GTSI written order shall apply to each order accepted or shipped by Vendor
hereunder. Vendor agrees that any terms or conditions contained in any
acknowledgment, invoice or other form issued by Vendor shall not be binding on
GTSI to the extent that such terms and conditions are additional to or
inconsistent with those contained in this Agreement, and no act of GTSI other
than an express agreement in writing shall be deemed an acceptance of any such
term or condition.
5.3 Vendor agrees to honor orders placed pursuant to and in accordance
with the requirements of the Defense Priorities and Allocations System (DPAS),
15 CFR 700 et. seq.
5.4 Vendor reserves the right to cancel any orders placed by GTSI, or
to refuse or delay shipment thereof, if GTSI: (i) fails to make any payment as
provided herein or under such other terms of payment as the parties may agree
upon, except for disputed items, as provided in Section 10.3 herein, (ii)
exceeds the credit limit established reasonably and in good faith by Vendor, or
(iii) is in material breach of this Agreement. In the event that Vendor cancels,
refuses or delays any shipment under this Section, GTSI may nevertheless acquire
Products C.0.D. and F.0.B. Vendor's point of shipment, for purposes of
satisfying existing contractual commitments to Government Customers.
6. SHIPMENT; RISK OF LOSS; DELIVERY
6.1 Vendor shall ship all Products F.0.B destination to GTSI's
warehouse facility or freight forwarder or to any Authorized Location. GTSI
shall select carrier. Title and risk of loss shall pass to GTSI upon delivery to
GTSI (except where Vendor has reserved title, in which case title shall not pass
at all). Vendor shall bear all risk of loss or damage in transit.
7. DELIVERY DELAYS; PRODUCT UNAVAILABILITY
7.1 Vendor shall notify GTSI of Vendor's good faith estimate of the
date on which orders will be delivered. In the event that Vendor is unable to
deliver GTSI's entire order according to the delivery schedule, GTSI may, at its
sole option, (i) cancel the order without penalty, or (ii) accept partial
delivery, in which event such delivery shall be separately invoiced and paid
for. If GTSI accepts partial delivery, it may cancel the remainder of its order
at any time at least five days prior to Vendor's shipment of the remaining
portion.
8. STOCK BALANCING; NEW PRODUCTS AND UPGRADES; DISCONTINUED PRODUCTS;
DEFECTIVE PRODUCTS
8.1 GTSI may return unused, unopened units of Products as provided in
this Section 8 to Vendor without penalty, not less often than once per calendar
quarter which have been returned to GTSI by the customer for any reason within
the first thirty (30) days after receipt. Returns shall be shipped at GTSI's
expense and need not be accompanied by a purchase order. Vendor shall credit
GTSI's account in the amount of 100% of the price paid by GTSI for such returned
Products or, in the event of prior termination of this Agreement, promptly issue
a check to GTSI. There shall be no restocking fee charged to GTSI. Any delay by
Vendor in approving
3
<PAGE>
return requests from GTSI shall extend the permitted time for GTSI to return the
particular units by the length of the delay.
8.2 Vendor shall notify GTSI not less than 90 days prior to the first
commercial shipment of any new product or any upgrade or update of an existing
Product (an "Upgrade"). Upon commercial availability of such new product or
Upgrade, it shall be deemed added to Exhibit A and it shall be deemed a Product
for all purposes of this Agreement and shall be subject to a discount equal to
or better than the existing Products' discount structure in place at that time.
Vendor shall use commercially reasonable efforts to provide GTSI with sufficient
information, training and evaluation and demonstration copies to enable GTSI to
market such Upgrade or new product immediately upon its commercial availability.
8.3 Vendor shall notify GTSI not less than 90 days prior to the
discontinuation of any existing Product. For purposes of this Section 8.3, a
discontinuation of a Product version shall take place at the time of release of
any corresponding Upgrade or at such time as Vendor's management makes the
corporate decision that an existing Product will no longer be sold or licensed
and that there will not be a upgrade for such Product. Notwithstanding Section
8.2 above, GTSI shall have until the later of (i) 90 days after receipt by GTSI
of notice of discontinuation or (ii) 90 days after the effective date of such
discontinuation, to return units of any discontinued Product for full credit
based upon the price paid by GTSI for such units or, in the event of prior
termination of this Agreement, a check for such amount. The discontinued Product
shall be deemed deleted from Exhibit A and, in the case of Upgrades, the latter
shall automatically replace any such corresponding discontinued Product.
8.4 GTSI may return to Vendor at Vendor's expense and Vendor shall
accept any defective or damaged Product unit not previously sold or marketed by
GTSI within 180 days of receipt by GTSI. Additionally, GTSI may return to Vendor
at Vendor's expense and Vendor shall accept any defective or damaged Product
units returned by GTSI's customers within the terms of Vendor's warranty; GTSI
shall have 60 days from the date of receipt from the customer to return each
such Product to Vendor. Any such return need not be accompanied by a purchase
order. Notwithstanding Section 8.1 above, defective or damaged Product units
need not be returned in unopened, unused form. Any such returns shall result in
Vendor crediting GTSI's account in the amount of the price paid by GTSI for such
returned Products or, in the event of prior termination of this Agreement,
promptly issuing a check to GTSI.
8.5 With respect to all Products returned to Vendor in accordance with
this Section 8: (i) GTSI agrees to comply with Vendor's reasonable policies
concerning return authorization procedures, including, if necessary, obtaining a
return authorization number from Vendor's shipping department prior to returning
the Product(s); and (ii) Vendor agrees to use commercially reasonable efforts to
promptly approve and effectuate any such Product returns and, in each case, to
take no more than 15 calendar days to effectuate same.
9. ORDER STATUS REPORT
Vendor agrees to provide, in writing, weekly order status reports.
These reports will consist of the status of all open orders; any product shipped
over the past 7 days; and any products with a more than 3 week delivery. These
reports will be transmitted by fax to the buyer no later than close of business
on Monday of each week.
10. PRICE AND PAYMENT
10.1 The prices for Products hereunder shall be sold for the Term to
GTSI at no higher price than the price set forth in Exhibit B hereto. The stated
prices on Exhibit B shall be firm, notwithstanding any provision relating to
potential future adjustments contained in Exhibit B.
4
<PAGE>
10.2 Due to the customarily long Government Customer payment cycle,
payment terms shall be net 60 days from the date of receipt of Product. GTSI
shall be entitled to an additional discount off of the invoice amount in the
amount of 5% of invoice for all payments made prior to or concurrently with
delivery of an order, and in the amount of 2% of invoice for all payments made
within 10 days of the later of product or invoice receipt date. The cash
discounts set forth herein shall apply to any payment made under any section of
this Agreement.
10.3 In the event that GTSI disputes, in good faith and reasonably, the
price, condition, shipment or other material element concerning any Product item
and so informs Vendor in writing, such dispute shall not be sufficient cause for
Vendor to delay, cancel or refuse existing or new orders. Additionally, GTSI may
suspend payment for any such disputed items for a reasonable time during which
the parties shall use prompt and reasonable efforts to settle the dispute.
11. MOST FAVORED CUSTOMER;PRICE PROTECTION
11.1 Vendor represents and warrants that the prices, discounts, terms
and conditions of this Agreement are the most favorable offered by Vendor to any
Reseller, under same or similar terms and conditions and quantities, and that if
during the term of this Agreement Vendor offers more favorable terms and
conditions to any other Reseller, such terms and conditions shall be deemed to
apply to GTSI automatically, and retroactive to the date on which such terms and
conditions became effective for such other Reseller.
11.2 In the event that Vendor decreases the price of any Product, the
decrease shall apply to all units of the Product on open purchase orders or in
GTSI's inventory as of the effective date of the price decrease. Vendor, upon
receipt of supporting documentation from GTSI, shall credit GTSI's account in an
amount equal to the difference between the price paid by GTSI for each such unit
and the current reduced price within 30 days of receiving the supporting
documentation.
12. CO-OPERATIVE MARKETING FUND
GTSI shall be entitled to accrue a co-operative marketing fund as set
forth in Exhibit C attached hereto for the promotion and marketing of the
Products. GTSI shall be entitled to liberal use of such co-operative marketing
funds, including, but not limited to, expenses of promotion paid to third
parties and GTSI's internal costs incurred for promotion. There shall be no time
limit on GTSI's use of any such accrual.
13. TERM AND TERMINATION
13.1 This Agreement shall become effective on the Effective Date and
shall continue through March 31, 1998. This Agreement shall be automatically
renewed for successive one year terms unless either party gives notice to the
other party not less than 90 days prior to expiration of the initial term or any
renewal term that it does not intend to renew this Agreement, or unless this
Agreement is otherwise terminated in accordance with this Section.
13.2 This Agreement may not be terminated without cause except by
non-renewal as set forth in Section 13.1 above.
13.3 This Agreement may be terminated for cause at any time, without
limiting any party's other rights or remedies, upon written notice identifying
with specificity the cause and providing the period to cure as set forth:
(a) by either party if the other (non-terminating) party
commits a material breach of this Agreement, and such breach continues
unremedied for a period of 30 days after receipt by the other party of written
notice thereof; or
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<PAGE>
(b) by either party if the other (non-terminating)
party: (i) has a receiver appointed for itself or its property; (ii) makes an
assignment for the benefit of its creditors; (iii) any proceedings are
commenced by, for or against the non-terminating party under any bankruptcy,
insolvency or debtor's relief law seeking a reorganization of such party's
debts and such proceedings are not dismissed within 90 days of their
commencement; or (iv) the non-terminating party is liquidated or dissolved.
13.4 Neither party to this Agreement shall be liable to the other by
reason of termination of this Agreement in accordance with its terms for
compensation, reimbursement or damages on account of any loss of prospective
profits on anticipated sales or on account of expenditures, investments, leases
or other commitments relating to the business or goodwill of either party,
notwithstanding any law to the contrary. No termination of this Agreement shall
release either party from its obligation to pay the other party any amounts
which accrued prior to such termination or which shall accrue after such
termination.
14. EFFECT OF TERMINATION
In the event that either party terminates this Agreement or that it
expires without being renewed, Vendor shall honor all orders placed by GTSI
prior to the date on which any termination or expiration becomes effective (the
"Termination Date"), and Vendor may require that any such orders be shipped
C.0.D.
15. CONFIDENTIALITY
15.1 Each party agrees not to use any confidential information of the
other party except in performance of this Agreement and not to disclose such
information to third parties (other than, as determined by the receiving party
in good faith, those persons with a genuine "need to know" and who will
similarly limit the use and disclosure of the information, such as attorneys,
accountants, commercial and investment bankers, consultants, Board members and
certain key employees). All information which the disclosing party considers
confidential shall be clearly identified as such. With respect to both parties
hereto, for purposes hereof, confidential information shall not include any
information that: (i) is now or becomes in the public domain through no breach
of this Agreement; (ii) is in the possession of the receiving party as of the
date of execution hereof; (iii) is independently learned by the receiving party
from a third party without breach of this Agreement; (iv) is required by law or
order of a court, administrative agency or other governmental body to be
disclosed by the receiving party; or (v) is disclosed by the receiving party
more than two years after that party's receipt of such information.
15.2 Either party shall have the right in its good faith discretion to
make such public press releases, announcements or other communications as it
reasonably believes are necessary in order to comply with applicable federal and
state securities or other laws and the rules and regulations promulgated by the
National Association of Securities Dealers (NASD) and/or appropriate securities
exchanges, as the case may be, but only to the extent of not divulging any
confidential proprietary information of the other party.
15.3 Notwithstanding Sections 15.1 and 15.2 hereof, the parties may
mutually agree to issue one or more press releases or other public disclosures
concerning the subject of this Agreement. The form and content of any such press
release or disclosures shall be agreed to by both parties prior to release
16. WARRANTIES TO END USERS
Vendor makes no warranty to End Users other than Vendor's limited
warranty, if any, accompanying the Products. Notwithstanding the foregoing, GTSI
may, in its sole discretion and at its sole expense, extend the period during
which it will honor warranty requests, provided that
6
<PAGE>
GTSI advises its customers that Vendor has no warranty responsibilities after
the expiration of Vendor's warranty.
17. INDEMNITY
Vendor shall defend, at its sole expense, any and all claims brought
against GTSI based upon an allegation that (i) any Product or portion thereof
infringes or constitutes wrongful use of any patent, copyright, trademark, trade
secret or other proprietary right of any third party; and/or (ii) any Product is
in any way defective or does not conform to Vendor's published specifications,
warranty, user documentation, advertisements or trade representations, provided
GTSI gives Vendor prompt written notice of any such claim which is brought to
GTSI's attention and provides Vendor with reasonable cooperation and assistance.
Vendor shall pay any damages and costs assessed against GTSI (or paid or payable
by GTSI pursuant to a settlement agreement approved by Vendor) in connection
with such claim. Vendor agrees to indemnify and hold GTSI harmless from and with
respect to any such loss or damage (including, but not limited to, reasonable
attorneys' fees and costs). Vendor's obligations under this Section 17 shall not
be affected or limited in any way by any extension of warranties by GTSI to its
customers beyond that provided by Vendor; provided, however, that the foregoing
indemnity shall not apply to any portion of any claim which arises solely under
such GTSI extension.
18. SURVIVAL
The definitions and obligations set forth in Sections 1, 4, 8.4, 8.5,
12, 13, 15.1, 17, 18, 20.7, and 20.8 shall survive any termination of this
Agreement for any reason whatsoever.
19. LIMITATIONS OF LIABILITY; EXCLUSION OF CONSEQUENTIAL DAMAGES
19.1 NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, EXCEPT
AS EXPRESSLY SET FORTH HEREIN, NEITHER PARTY SHALL, UNDER ANY CIRCUMSTANCES, BE
LIABLE TO THE OTHER PARTY FOR CONSEQUENTIAL, INCIDENTAL, INDIRECT OR SPECIAL
DAMAGES, INCLUDING BUT NOT LIMITED TO LOST PROFITS, EVEN IF SUCH PARTY HAS BEEN
APPRISED OF THE LIKELIHOOD OF SUCH DAMAGES OCCURRING.
19.2 The limitations on liability contained in this Section shall not
apply to any indemnity of GTSI under Section 17.
20. MISCELLANEOUS
20.1 This Agreement, including the Exhibits attached hereto,
constitutes the entire understanding and agreement between the parties hereto
with respect to the matters herein, except that any and all written agreements
previously existing between the parties shall remain in full force and effect.
20.2 Neither party may assign this Agreement or any of its rights or
obligations hereunder (including without limitation rights and duties of
performance) to any third party or entity, and this Agreement may not be
involuntarily assigned or assigned by operation of law, without the prior
written consent of the non-assigning party, which consent may be given or
withheld by such non-assigning party in the sole exercise of its discretion,
except that either party may assign this Agreement as part of: (i) any transfer
of 50% or more of its capital stock; or (ii) any transfer of all or
substantially all of the assets of such party in a single transaction.
20.3 Nothing in this Agreement is intended to create, or shall be
construed as creating, a joint venture, partnership, or agency, or taxable
entity between the parties, or any right to pledge the other's credit, it being
understood that Vendor and GTSI are independent contractors.
7
<PAGE>
20.4 This Agreement may not be canceled, altered, modified, amended or
waived, in whole or in part, in any way, except by an instrument in writing
signed by duly authorized officers of GTSI and Vendor.
20.5 Performance of any obligation required of a party hereunder may be
waived only by a written waiver signed by a duly authorized officer of the party
for whose benefit such obligation was to be performed. Any waiver shall in no
way be construed as a waiver of any subsequent breach of this Agreement by the
other party.
20.6 If any provision of this Agreement is found void, invalid or
unenforceable, it shall not affect the validity of the balance of this
Agreement, which shall remain valid and enforceable according to its terms.
20.7 This Agreement shall be governed by and interpreted in accordance
with the laws of the Commonwealth of Virginia. Any and all claims, controversies
or disputes arising out of or in connection with this Agreement shall be
resolved in accordance with this Section and shall be arbitrated pursuant to the
Commercial Rules of the American Arbitration Association, before a single
arbitrator. Said arbitrator shall apply Virginia law unless the issue relates to
Federal procurement regulations or statutes and in such case said arbitrator
shall apply Federal procurement law as interpreted by the United States Boards
of Contract Appeals and the United States Court of Federal Claims. Any such
arbitration shall be held in the Washington, D.C metropolitan area. The
arbitrator's resolution of the dispute shall be final and binding upon the
parties. Judgment upon an award rendered by the arbitrator may be entered in any
court of competent jurisdiction. Pending the final resolution of any dispute
under this Section, both parties shall diligently proceed to perform this
Agreement. Both parties' obligations under this Section survive termination or
expiration of this Agreement. The prevailing party in any action shall be
entitled to recover its costs and attorneys' fees.
20.8 Neither GTSI nor Vendor shall be deemed in default if its
performance or obligations hereunder are delayed or become impossible or
impractical by reason of any act of God, war, fire, earthquake, labor dispute,
accident, civil commotion, epidemic, act of government or government agency or
officers, or any other cause beyond such party's reasonable control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the dates specified below.
Government Technology Services, Inc. e-Net, Inc.
By: By:
------------------------------ ----------------------------
Print Name: Name:
---------------------- --------------------------
Print Title: Print Title:
--------------------- -------------------
Date: Date:
---------------------------- --------------------------
8
<PAGE>
EXHIBIT A
VENDOR PRODUCTS AND SUGGESTED RESALE PRICES
-------------------------------------------
9
<PAGE>
EXHIBIT B
PRICE SCHEDULE
--------------
10
<PAGE>
EXHIBIT C
CO-OPERATIVE MARKETING FUND
---------------------------
Attachment I
Flat Fee Reimbursement
----------------------
Attachment II
Marketing Account Information
-----------------------------
11
<PAGE>
EXHIBIT C
ATTACHMENT I
------------
Vendor
----------------------------------
Re: Flat Fee Reimbursement
GTSI has developed a flat fee reimbursement structure due to the nature of our
customer base and volume of promotional activities it serves. GTSI recognizes
vendor concerns regarding logos and trademarks on printed materials and strives
to adhere to those concerns, as well as related textual requirements for
specific product lines. All printed materials shall be produced with the direct
participation and concurrence of the vendor-designated approving authority and
sales team. The Activity Agreements we present for approval detail the activity
and fee structure. The following proof of performance documentation shall be
provided:
All Activities:
- - Copy of signed GTSI activity agreement
- - Copy of signed vendor prior authorization form (if applicable)
- - Copy of GTSI project profile (if separate from activity agreement form)
- - Completed vendor claim form (if applicable)
- - Waiver of logo requirements (if applicable)
Additional documentation by activity category:
Trade Shows and Seminars
- - Copy of vendor participation roster listing sales representative(s)
attending
- - Invitation or flier (if applicable)
Print Media
- - Publication tearsheet or published sample
Mass Mailing/Faxes, Catalogs and Brochures
- - Published sample(s)
Audio Media
- - Cassette Tape
Acceptance of the flat fee policies above is approved once this document is
executed by a corporate officer or other approving fiscal authority. This
acceptance is effective until written notification of modification or
termination is provided to GTSI.
- ------------------------ ------------------------ --------
Officer Signature Title Date
12
<PAGE>
Designated person(s) authorized to approve promotions on the GTSI Activity
Agreements:
- ------------------------ ------------------------ --------
Signature Print Name Date
- ------------------------ ------------------------ --------
Signature Print Name Date
13
<PAGE>
EXHIBIT C
ATTACHMENT II
-------------
Marketing Account Information
Vendor: Date:
-------------------------------------- ------------
Account Type: _______ Accrual _______% purchases (Earnings statements provided
monthly)
_______ Direct Pay
Corporate Address Billing Address
- ----------------- ---------------
- ------------------------------ -------------------------------
- ------------------------------ -------------------------------
- ------------------------------ -------------------------------
- ------------------------------ -------------------------------
Contact: Contact:
---------------------- -----------------------
Phone: Phone:
------------------------ -------------------------
Fax: Fax:
-------------------------- ---------------------------
Local Office
- ------------
Contact:
- ------------------------------ -----------------------
Phone:
- ------------------------------ -------------------------
Fax:
- ------------------------------ --------------------------
GTSI Contacts:
- --------------
Product Marketing: Extension:
---------------------------- -------------
Activity Marketing: Extension:
--------------------------- ------------
14
<PAGE>
EXHIBIT D
GSA SCHEDULE CONTRACT CLAUSES INCORPORATED BY REFERENCE
IN GOVERNMENT RESELLER AGREEMENT
The clauses of the Federal Acquisition Regulations ("FAR") set forth
below are hereby incorporated by reference in this Government Reseller
Agreement. The obligations of the "Contractor" to the "Government" as provided
in said clauses shall be deemed to be the obligations of the Vendor to GTSI.
However, whenever said clauses include a requirement for the settlement of
disputes between the parties in accordance with the "Disputes" clause, the
dispute shall be disposed of in accordance with the applicable dispute
resolution terms in this Government Reseller Agreement. The referenced clauses
shall be those in effect on the effective date of this Government Reseller
Agreement. If there is a conflict between (or modification to) a FAR clause in
effect on the effective date of this Government Reseller Agreement and a FAR
clause in GTSI's GSA Schedule contract, the GSA Schedule contract FAR clause
shall govern.
Whenever necessary to make the context of the clauses set forth in this
Exhibit D applicable to this Government Reseller Agreement, the term
"Contractor" shall mean Vendor, the term "Contract" shall mean this Government
Reseller Agreement, and the term "Government," "Contracting Officer" and
equivalent phrases shall mean GTSI, except the terms "Government" and
"Contracting Officer" do not change: (1) in the phrases "Government Property,"
"Government-Owned Property," "Government Equipment" and "Government-Owned
Equipment;" (2) when a right, act, authorization or obligation can be granted or
performed only by the Government or the GSA Schedule Contracting Officer or his
duly authorized representative; (3) when access to proprietary financial
information or other proprietary data is required; (4) when title to property is
to be directly transferred to the Government; and (5) wherever the context of
the clause requires no change.
For more detailed information concerning the FAR clauses visit the following WEB
Site:
http://www.gsa.gov/far/current/html/toc.htm/#top
15
<PAGE>
EXHIBIT D - Continued
FAR CLAUSES INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
FAR CLAUSE # TITLE
<S> <C> <C> <C>
52.203-6 JUL 1985 Restrictions on Subcontractor Sales to the Government
52.203-11 APR 1991 Certification and Disclosure Regarding Payments to Influence Certain
Federal Transactions
52.203-13 SEP 1990 Procurement Integrity - Service Contracting
52.209-6 JUL 1995 Protecting the Government's Interest when Subcontracting with
Contractors Debarred, Suspended, or Proposed for Debarment
52.211-15 SEP 1990 Defense Priority and Allocation Requirements
52.212-7 SEP 1990 Notice of Priority Ratings for National Defense Use
52.215-2 AUG 1996 Audit and Records - Negotiation
52.215-22 OCT 1995 Price Reduction for Defective Cost or Pricing Data
52.215-23 OCT 1995 Price Reduction for Defective Cost or Pricing Data - Modifications
52.215-24 OCT 1995 Subcontractor Cost or Pricing Data
52.215-25 OCT 1995 Subcontractor Cost or Pricing Data - Modifications
52.215-26 OCT 1995 Integrity of Unit Prices
52.215-40 FEB 1995 Notification of Ownership Changes
52.216-22 OCT 1995 Indefinite Quantity
52.217-8 AUG 1989 Option to Extend Services
52.219-8 OCT 1995 Utilization of Small, Small Disadvantaged and Women-Owned Small
Business Concerns
52.222-1 APR 1984 Notice to the Government of Labor Disputes
52.222-3 AUG 1996 Convict Labor
52.222-24 APR 1984 Pre-award Oil-Site Equal Opportunity Compliance Review
52.222-26 APR 1984 Equal Opportunity
52.222-28 APR 1984 Equal Opportunity Pre-award Clearance of Subcontracts
52.222-35 APR 1984 Affirmative Action for Special Disabled and Vietnam Era Veterans
52.222-36 APR 1984 Affirmative Action for Handicapped Workers
52.222-37 JAN 1988 Employment Reports on Special Disabled Veterans and Veterans of the
Vietnam Era
52.222-41 MAY 1989 Service Contract Act of 1965, as Amended
52.222-43 MAY 1989 Fair Labor Standards Act and Service Contract Act - Price Adjustment
(Multiple Year and Option Contracts)
52.222-46 FEB 1993 Evaluation of Compensation for Professional Employees
52.223-2 APR 1984 Clean Air and Water
52.223-3 NOV 1991 Hazardous Material Identification and Material Safety Data
52.224-2 APR 1984 Privacy Act
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
52.225-3 JAN 1994 Buy American Act - Supplies
52.225-8 JAN 1994 Buy American Act - Trade Agreements - Balance of Payments Program
Certificate
52.225-9 JAN 1996 Buy American Act - Trade Agreements - Balance of Payments Program
52.225-11 MAY 1992 Restrictions on Certain Foreign Purchases
52.225-14 AUG 1989 Inconsistency Between English Version and Translation of Contract
52.227-2 AUG 1996 Notice and Assistance Regarding Patent and Copyright Infringement
52.227-3 APR 1984 Patent Indemnity
52.227-14 JUN 1987 Rights in Data - General
52.227-19 JUN 1987 Commercial Computer Software Restricted Rights
52.229-1 APR 1984 State and Local Taxes
52.230-2 AUG 1992 Cost Accounting Standards
52.230-3 APR 1996 Disclosure and Consistency of Cost Accounting Practices
52.230-4 AUG 1993 Consistency of Cost Accounting Practices
52.230-6 APR 1996 Administration of Cost Accounting Standards
52.237-3 JAN 1991 Continuity of Services
52.239-1 AUG 1996 Privacy or Security Safeguards
52.224-1 FEB 1995 Subcontracts (Fixed-Price Contracts)
52.244-5 JAN 1995 Competition in Subcontracting
52.247-29 JUN 1988 F.o.b. Origin
52.247-34 NOV 1991 F.o.b. Destination
52.247-63 APR 1984 Preference for U.S.-Flag Air Carriers
52.247--64 AUG 1996 Preference for Privately Owned U.S. -Flag Commercial Vessels
52.249-2 SEP 1996 Termination for Convenience of the Government (Fixed-Price)
52.249-8 APR 1984 Default (Fixed-Price Supply and Service)
</TABLE>
17
<PAGE>
EXHIBIT 10.15
MEMORANDUM OF UNDERSTANDING
This Memorandum of Understanding (MOU) is entered into this lst day of
April, 1998 by and between Summa Four, Inc., with principal offices at 25
Sundial Avenue, Manchester, New Hampshire 03109 (Summa Four), and e-NET, with
principal offices at 12800 Middlebrook Road, Germantown MD 20874.
WHEREAS, Summa Four is in the business of manufacturing open
programmable switches for the telecommunications industry, and
WHEREAS, e-NET is in the business of manufacturing proprietary data
telephony (voice over data network) products, including a product known as
Telecom 2000, and applicable Voice Over IP (VOIP) algorithms, and
WHEREAS the parties presently desire to formally document their desire
to work together to deliver VOIP solutions to Network Operators, and
WHEREAS both parties agree that the next steps include: 1.) completion
of the Business Plan, and 2.) to promptly engage in a joint design review which
shall culminate in a mutually agreed upon development plan/schedule and Product
Requirements document for the Summa Four/e-NET integrated product and 3.) upon
completion of the above, entering into a comprehensive Strategic Technology
Sales and Licensing Agreement which shall have as a goal, deployment of the
integrated product before the end of calendar 1998, in accordance with the
Business Plan.
<PAGE>
NOW THEREFORE, the parties agree as follows:
1. It is intended that the e-Net Business Plan shall be completed within
30 days of the executed MOU. Such Business Plan shall generally
provide the basis upon which e-NET shall distribute, market and resell
the integrated Summa Four/e-Net system ("Telephony Switch") to
its customers, worldwide. Summa Four shall assist e-NET in the
completion of such Business Plan, which shall include a.) an
assessment of the market opportunities for the Telephony Switch
product, and b.) the identification of the preferred sales and
distribution channels therefore, and c.) a determination of commercial
terms for product deployment including pricing, warranty, and support
terms, and d.) e-NET's projected annual purchase commitment for Summa
Four switch products for the initial 24 months following product
introduction.
2. As soon as practicable, but in no event later than the completion of
the Business Plan, both parties shall initiate a Product Design and
Engineering Development Plan (Plan) to determine the specifications of
the Telephony Switch in light of market requirements (i.e. the
Business Plan) and the present capabilities of the products of the
respective parties. It is anticipated that such Plan shall culminate
in a high level Product Requirements Specification which shall include
the
<PAGE>
anticipated specifications and performance requirements of the desired
Telephony Switch, any anticipated adjustments, alterations and/or
modifications which may be required to each party's presently
available (and/or under development) products to achieve the timely
development and deployment of the Telephony Switch. Such Plan shall
also include each party's best estimate(s) with regard to the
anticipated product development schedule as well as all costs,
resource allocations and expenses which may reasonably be anticipated
to be incurred by the parties
3. Upon completion of the Plan, the parties shall determine the most
feasible development plan to proceed with the mutual development of
the Telephony Switch product. At that time, the parties shall enter
into a formal Product Development Agreement, setting forth in greater
detail the respective obligations of the parties. Throughout the term
of that agreement, it is understood that both parties will use
reasonable, commercially practical, best efforts to design and develop
the Telephony Switch product in accordance with the schedule as
agreed.
4. Notwithstanding the above, the parties recognize that unforeseen
circumstances may exist which, in the course of the product
development effort, lead the parties to conclude, jointly or
individually, that it is no longer in their best interests to continue
the
<PAGE>
product development effort. In the event of any such decision, neither
party shall be obligated or liable to the other, other than for any
such cost or obligation which it may have incurred to the other under
the terms of such development agreement as of the date of such
termination.
5. Summa Four acknowledges that it has already agreed upon an internal
development schedule which will address and resolve (prior to
December, 1998) two technical issues which have been raised by e-NET:
a.) the integrated product shall be engineered to be capable of
performing packet communication across the Time Division Multiplex
(TDM) bus structure which currently exists between the ICC and the SPC
at a rate adequate to allow reasonable performance parameters to be
achieved for a product handling 960 simultaneous IP telephony calls,
and b.) the integrated product will support ethernet capabilities
greater than 7 Mbps.
6. In order to facilitate the development process, e-NET shall,
simultaneously with the execution of this agreement, purchase a VCO 4K
lab switch from Summa Four, the configuration of which shall be as
determined by the parties.
7. Summa Four shall provide e-NET with Sigma Pricing as soon as it is
available. E-NET, within ten business days of receipt of Sigma
<PAGE>
pricing, will issue Summa Four a purchase order for a Sigma Lab Switch
to be delivered as soon as available in Beta format. For this
consideration, Summa Four will give e-NET the first Sigma lab switch
for any Voice over IP customer and Summa Four will provide the Sigma
Lab Switch at list price less: a) appropriate discount per signed
Volume Purchase Agreement between e-NET and Summa Four, Inc., and b)
100% trade in credit for the VCO 4K Lab Switch purchased by e-NET upon
return of such switch in working condition. In no event shall the
Sigma Lab Switch net purchase price be less than zero.
8. Summa Four may from time to time decrease its published prices and
volume discount standard schedule. Should Summa Four issue a new
standard price list and discount schedule for its Sigma Products for
Voice Over IP customers with volume commitments equal to e-NET's, from
that time forward Customer may have the lower of the net prices that
are (i) calculated by reference to the new price list, using the new
volume discount schedule at Customer's then volume of purchases or
(ii) the prices that are calculated using the prices and discounts
found in their current Volume Purchase Agreement.
- Entire Agreement This agreement constitutes the full and complete
agreement of the parties with respect to the subject matter hereof.
<PAGE>
- Applicable Law This agreement and the rights and obligations of the
parties hereunder shall be governed by and interpreted, construed and
enforced in accordance with the laws of the State of New Hampshire
applicable to agreements made and to be fully performed therein.
IN WITNESS WHEREOF, the parties have signed and sworn to this agreement as of
the date written above.
e-NET, Inc. Summa Four, Inc.
- ----------- ----------------
By: By:
-------------------- --------------------
-------------------- --------------------
Title Title
-------------------- --------------------
Date Date
<PAGE>
EXHIBIT 10.16
NET2PHONE - BUNDLING AGREEMENT
THIS NET2PHONE BUNDLING AGREEMENT ("Agreement") is made on this 23rd day of
April, 1998, by and between IDT Corporation ("IDT"), a Delaware corporation,
having its principal offices at 294 State Street, Hackensack, NJ 07601 and E-Net
Incorporated, ("AGENT"), a Delaware corporation, having its principal offices at
12800 Middlebrook Road, Suite 200, Germantown, MD 20874.
WITNESSETH
WHEREAS, IDT desires to provide AGENT with a SOURCECODED version of Net2Phone
Software (hereinafter "SOFTWARE") which is owned by IDT for AGENT to bundle with
AGENT's product; and
WHEREAS, AGENT desires to bundle IDT's SOFTWARE with AGENT's product and boxed
product (hereinafter "BUNDLED PRODUCT") according to the terms set forth herein;
and
WHEREAS, the parties have agreed to cooperate with each other under the terms
and conditions contained herein for the parties' mutual benefit.
NOW, THEREFORE, in consideration of the mutual covenants and conditions herein
contained, the parties hereto do hereby agree as follows:
I. DEFINITIONS:
1. "SOFTWARE" shall mean IDT's Net2Phone (PC to telephone) Internet
Telephony Software.
2. "BUNDLED PRODUCT" shall mean the packaging together of the SOFTWARE and
AGENT's product.
3. "SOURCECODED" shall mean the embedded alphanumeric code contained in the
SOFTWARE as assigned by IDT in order to track usage. For the purposes of this
Agreement the source code shall be ENET.
II. IDT's OBLIGATIONS:
1. IDT will provide AGENT with a SOURCECODED version of the SOFTWARE from which
AGENT may duplicate onto CD ROM or floppy disk.
2. ALL SERVICES PROVIDED HEREUNDER BY IDT ARE PROVIDED "AS IS". IDT DISCLAIMS
ALL WARRANTIES EXPRESS OR IMPLIED OF WARRANTIES OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE.
<PAGE>
3. IDT agrees to provide users of the SOFTWARE contained within the BUNDLED
PRODUCT with any and all additional technical support which may be required for
the SOFTWARE.
4. IDT agrees to indemnify and hold AGENT harmless for any and all claims or
damages from end-users utilizing the SOFTWARE arising out of IDT's gross
negligence or willful misconduct.
III. AGENT'S OBLIGATIONS:
1. AGENT agrees to bundle the SOFTWARE with the BUNDLED PRODUCT and agrees to be
responsible for all associated packaging and/or placement costs.
2. AGENT agrees to use its best efforts to distribute and advertise the location
of the BUNDLED PRODUCT.
3. AGENT acknowledges that IDT is the sole owner of the SOFTWARE and that AGENT
acquires no interest in them except as provided herein. AGENT will not
disassemble, decompile, or reverse engineer the object code or any program in
the SOFTWARE or prepare any derivative work, or grant any interest in the
SOFTWARE.
4. AGENT agrees that it may not place the IDT or Net2Phone name in any format on
the face or wrapper of any packaging which contains the BUNDLED PRODUCT
(containing IDT's Net2Phone Software) which will be distributed in the United
States retail market as set forth in the AGREEMENT. Any failure to comply with
this provision shall constitute material breach of the AGREEMENT and AGENT shall
indemnify and hold IDT harmless for any and all damages and claims which may
occur due to AGENT's failure to comply with such requirement.
5. AGENT further agrees to submit to IDT for prior written approval all
packaging and/or artwork which shall be placed on the face or wrapper of the
BUNDLED PRODUCT.
6. AGENT acknowledges that all of IDT's trademarks and tradenames will remain
the exclusive property of IDT.
7. AGENT agrees not to misrepresent any of IDT's services in any way and AGENT
agrees to indemnify and hold IDT harmless for any of its fraudulent or negligent
acts regarding IDT's services.
8. AGENT agrees to submit to IDT for prior written approval of any and all
advertising materials or otherwise that AGENT wishes to disseminate using the
IDT or Net2Phone name or logos.
IV. PAYMENT AND COMMISSIONS:
1. IDT agrees to pay AGENT six and one half (6.5%) percent of all revenues
collected by IDT that is generated by users of the SOURCECODED version of the
SOFTWARE who receive the BUNDLED PRODUCT and utilize the SOFTWARE contained
within the BUNDLED
2
<PAGE>
PRODUCT. All monies paid to AGENT shall be based solely upon payments which IDT
collects from such end-users. AGENT shall be entitled to compensation upon IDT's
receipt of such payment.
2. All payments shall be made to AGENT on a monthly basis on or about the first
week of every month, based upon revenues generated on the previous calendar
month. IDT will, at AGENT's written request, provide auditing summaries
capturing the purchase history generated from each of AGENT's end-users
utilizing the SOURCECODED version of the SOFTWARE contained within the BUNDLED
PRODUCT.
V. INTELLECTUAL PROPERTY RIGHTS:
All right, title, and interest in the Software shall remain vested in IDT and
its licensors, as applicable. IDT grants to AGENT a worldwide, non exclusive,
royalty-free license under any intellectual property right, including any
patent, patent application, trademark, copyright, trade secret, or mask work
right, assertable by IDT or its licensors with respect to the SOFTWARE to
reproduce, use, distribute, and sub-license end-users to use copies of the
SOFTWARE under this Agreement.
VI. CONFIDENTIALITY:
During the term of this Agreement and at all times thereafter, each party will
hold strictly confidential within such party's organization, and shall only
disclose to those employees or agents of such party as have a need to know in
connection with the implementation of this agreement and who are subject to
appropriate confidentiality obligations, (i) all confidential documents and
information concerning the business, goods, or services of the other party
furnished to such party in connection with this memorandum of understanding and
the negotiation of the transactions contemplated hereby, and (ii) the terms of
this memorandum of understanding; provided that the foregoing confidentiality
obligation shall not apply to the extent that (i) the information being
disclosed is publicly known at the time of proposed disclosure by such party or
subsequently becomes publicly known through no act or omission of such party,
(ii) the information otherwise is or becomes legally known to such party other
than through disclosure by the other party or in relation with this agreement,
or (iii) disclosure is required by law or legal process.
VII. TERM AND TERMINATION:
1. Either party may terminate this agreement upon thirty (30) days prior written
notice to the other party in the event that the other party neglects or fails to
perform and observe any of the material covenants, conditions or agreements
contained in this Agreement and such default is not cured within such thirty
(30) day period. However, the obligation to pay the Commissions, as set forth in
section IV herein, shall only continue, for six (6) months after the termination
of this Agreement, if the termination was not due to breach of this Agreement on
the part of AGENT.
2. This Agreement may also be terminated by either party upon providing written
proof to the other party hereto of a determination by any governmental entity
having jurisdiction over the services provided hereunder that the relationship
of the parties or the services provided
3
<PAGE>
hereunder are contrary to then existing laws or the other party becomes or is
declared insolvent or bankrupt.
3. This Agreement shall commence at the effective date set forth above and
continue for one (1) year. Thereafter, this Agreement shall continue on a year
to year basis unless terminated by either party upon thirty (30) days written
notice prior to the expiration of any term.
VIII. ASSIGNMENT:
This Agreement may not be assigned or transferred by either party without the
prior written consent by the other party hereto, which will not be unreasonably
withheld, except that either party may assign this Agreement without consent to
any affiliate or wholly owned subsidiary.
IX. FORCE MAJURE:
Neither Party shall be liable under this Agreement for delays, failures to
perform, damages, losses or destruction, or malfunction of any equipment, or any
consequence thereof, caused or occasioned by, or due to fire, earthquake, flood,
water, the elements, labor disputes or shortages, utility curtailments, power
failures, explosions, civil disturbances, governmental actions, shortages of
equipment or supplies, unavailability of transportation, acts or omissions of
third parties, or any other cause beyond its reasonable control. Such affected
Party shall use its best efforts to resume performance in a timely manner, as
soon as may be practicable.
X. NOTICE:
All notices shall be deemed effective upon receipt when properly addressed as
follows:
IDT CORPORATION E-NET INCORORATED
294 State Street ___________________________
Hackensack, NJ 07601 ___________________________
Attn: Josh Weisman
with copy to:
IDT Legal Department
All notices may be sent by registered or certified mail, by overnight courier
service, facsimile transfer with confirmation or by other means agreed upon by
both parties.
XI. SEVERABILITY:
Any article or any other provision of this Agreement which is, or becomes,
illegal, invalid or unenforceable shall be severed herefrom and shall be
ineffective to the extent of such illegality, invalidity or unenforceability and
shall not affect or impair the remaining provisions hereto, which provisions
shall be severed from any illegal, invalid, or unenforceable Articles or any
other provision of this Agreement and otherwise remain in full force and effect.
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XII. NO WAIVER:
No waiver by either party to any provisions of this Agreement shall be binding
unless made expressly and confirmed in writing. Any such waiver shall relate
only to such matter, non-compliance or breach as it relates to and shall not
apply to any subsequent or other matter, non-compliance or breach.
XIII. HEADINGS:
All headings hereunder are for convenience only and shall not be construed as
part of the agreement.
XIV. NO AGENCY:
The relationship between and among the parties hereto shall not be that of
partners. Nothing herein contained shall be deemed to constitute a partnership
between and amongst them, merge their assets, or their fiscal or other
liabilities or undertakings. The common enterprise between and among the parties
shall be limited to the express provisions of this Agreement. Nothing herein
contained shall allow a party to act as a mandatory or agent of any other party
or all of them, except to the extent expressly permitted hereunder.
XV. AUTHORITY:
This Agreement, and the purchase or provision of Service by either party
hereunder, is expressly contingent upon the obtaining and maintenance of each
party hereto of such approvals, consents, governmental and regulatory
authorizations, licenses and permits as may be required or deemed necessary by
the Parties, who Shall endeavor to obtain and continue same.
XVI. CHOICE OF LAW:
This agreement shall be construed under the laws of the State of New Jersey.
Both parties consent that venue and jurisdiction are proper in the State of New
Jersey, County of Bergen.
IN WITNESS THEREOF, the undersigned parties have executed this Agreement on the
date set forth above and both parties agree that they have appropriate authority
to execute this Agreement.
IDT CORP. E-NET INCORPORATED
- -------------------------------- ------------------------------
Signature Signature
- -------------------------------- ------------------------------
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Name Name
- -------------------------------- ------------------------------
Title Title
- -------------------------------- ------------------------------
Date Date
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Exhibit 24.0
Consent of Independent Certified Public Accountants
We have issued our reports dated May 2, 1997, accompanying the financial
statements of e-Net, Inc. as of March 31, 1997 and 1996, and for the year
ended March 31, 1997, and the period from the beginning of operations (June
8, 1995) to March 31, 1996, contained in the Registration Statement and
Prospectus. We consent to the use for the aforementioned reports in the
Registration Statement and to the use of our name as it appears under the
caption "Experts."
Grant Thornton LLP
Vienna Virginia
April 27, 1998
