<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended December 31, 1999
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 000-20865
e-Net, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-1929282
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12800 Middlebrook Road, Suite 400, Germantown, MD 20874
(Address of principal executive offices) (Zip Code)
(301) 601-8700
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed
since last report.)
Check whether the issuer (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
The number of shares of the Registrant's common stock, $.01 par value per
share, outstanding as of February 4, 2000 was 10,452,640.
Transitional small business disclosure format (check one):
Yes No X
--- ---
The exhibit index appears in sequentially numbered page: 17
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<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
<TABLE>
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Page
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Item 1. Consolidated Financial Statements (Unaudited)
Accountants' Review Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets as of December 31 and March 31, 1999 . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Operations for the three months ended December 31, 1999 and 1998. . . . . . . 5
Consolidated Statements of Operations for the nine months ended December 31, 1999 and 1998 . . . . . . . 6
Consolidated Statements of Cash Flows for the nine months ended December 31, 1999 and 1998 . . . . . . . 7
Consolidated Statements of Stockholders' Equity as of December 31, 1999. . . . . . . . . . . . . . . . . 8
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 2. Management's Discussion and Analysis Or Plan of Operations . . . . . . . . . . . . . . . . . . . . . . . 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
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<PAGE>
Board of Directors
e-Net, Inc.
We have reviewed the accompanying consolidated balance sheet of e-Net, Inc. (a
Delaware Corporation) as of December 31, 1999, and the related consolidated
statements of operations, stockholders' equity and cash flows for the nine-month
periods ended December 31, 1999 and 1998, and the statements of operations for
the three month periods ended December 31, 1999 and 1998. 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, 1999, and the related statements of
operations, stockholders' equity and cash flows for the year then ended (not
presented herein), and in our report dated June 10, 1999, 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, 1999 is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
Grant Thornton LLP
Vienna, Virginia
February 2, 2000
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<PAGE>
e-NET, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 MARCH 31, 1999
----------------- --------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 6,055,632 $ 1,760,627
Short-term investments 6,606,522 4,618,587
Accounts receivable 60,445 749,903
Inventory - 583,634
Prepaid expenses 255,389 120,873
------------------ -----------------
TOTAL CURRENT ASSETS 12,977,988 7,833,624
DEPOSITS AND OTHER ASSETS 37,947 44,322
PROPERTY AND EQUIPMENT, NET 565,066 500,627
SOFTWARE DEVELOPMENT COSTS, NET - 488,570
------------------ -----------------
$ 13,581,001 $ 8,867,143
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable--trade $ 172,849 $ 279,266
Notes Payable, current 16,118 -
Accrued liabilities 972,199 669,652
------------------ -----------------
TOTAL CURRENT LIABILITIES 1,161,166 948,918
LONG TERM DEBT 66,945 -
TOTAL LIABILITIES 1,228,111 948,918
STOCKHOLDERS' EQUITY
Common stock, $.01 par value, 50,000,000 shares
Authorized, 10,442,171 and 8,291,955 shares outstanding
at December 31 and March 31, 1999, respectively 104,421 82,919
Treasury Stock (10,500) -
Stock subscriptions and notes receivable - (23)
Additional paid-in capital 40,757,037 28,479,060
Retained deficit (28,498,068) (20,643,731)
------------------ -----------------
TOTAL STOCKHOLDERS' EQUITY 12,352,890 7,918,225
------------------ -----------------
$ 13,581,001 $ 8,867,143
================== =================
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
e-NET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
SALES
Products $ 2,051 $ 242,946
Services 100,000 124,394
----------------- -----------------
Total sales 102,051 367,340
COST OF PRODUCT SOLD AND SERVICE PROVIDED
Products 2,786 182,828
Services 59,480 43,531
---------------- -----------------
Total cost of product sold and service provided 62,266 226,359
GROSS PROFIT 39,785 140,981
OPERATING EXPENSES
Selling, general and administrative 1,739,873 1,632,680
Research and development 187,155 833,229
----------------- -----------------
LOSS FROM OPERATIONS (1,887,243) (2,324,928)
OTHER INCOME (EXPENSE)
Legal settlement (405,938) -
Other expenses (82,561) (52,936)
Interest income 45,122 109,138
----------------- -----------------
LOSS BEFORE INCOME TAXES (2,330,620) (2,268,726)
INCOME TAX PROVISION - -
----------------- -----------------
NET LOSS $ (2,330,620) $ (2,268,726)
================= =================
LOSS PER SHARE $ (.27) $ (.27)
================= =================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED 8,699,905 8,256,828
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
e-NET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
NINE MONTHS ENDED
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
SALES
Products $ 5,310 $ 678,739
Services 372,905 439,082
------------------ ------------------
Total sales 378,215 1,117,821
COST OF PRODUCT SOLD AND SERVICE PROVIDED
Products 3,370 456,477
Services 259,360 133,268
------------------ ------------------
Total cost of product sold and service provided 262,730 589,745
GROSS PROFIT 115,485 528,076
OPERATING EXPENSES
Selling, general and administrative 4,734,092 4,774,615
Restructuring Costs 1,710,000 -
Research and development 1,081,539 2,106,880
------------------ ------------------
LOSS FROM OPERATIONS (7,410,146) (6,353,419)
OTHER INCOME (EXPENSE)
Legal settlement (405,938) -
Other expenses (187,391) (165,048)
Interest income 149,138 336,410
------------------ ------------------
LOSS BEFORE INCOME TAXES (7,854,337) (6,182,057)
INCOME TAX PROVISION - -
------------------ ------------------
NET LOSS $ (7,854,337) $ (6,182,057)
================== ==================
LOSS PER SHARE $ (.93) $ (.79)
================== ==================
WEIGHTED AVERAGE SHARES OUTSTANDING - BASIC AND DILUTED 8,450,735 7,777,597
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
e-NET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (7,854,337) $ (6,182,057)
Adjustments to reconcile net loss to net cash from
operating activities
Depreciation and amortization 326,281 393,165
Loss on retirement of fixed assets 12,790 -
Stock-based compensation 39,062 -
Non-Cash Restructuring Costs 1,710,000 -
Non-Cash Settlement Costs 405,938 -
Decrease (Increase) in accounts receivable 369,337 (348,223)
Decrease (Increase) in inventory 8,556 (958,025)
Increase in prepaid expenses, deposits and other assets (128,141) (42,943)
Increase in accounts payable and accrued liabilities (217,693) (176,034)
----------------- -----------------
NET CASH USED IN OPERATING ACTIVITIES (5,328,207) (7,314,117)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (222,967) (393,377)
Capitalized software development costs - (30,000)
Investment in short term securities (1,987,935) (4,556,573)
----------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES (2,210,902) (4,979,950)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock 11,854,479 14,336,261
Purchase of treasury stock (10,500) -
Principal payments on long term note (9,888) -
Payments of common stock subscriptions receivable 23 23
----------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,834,114 14,336,284
----------------- -----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,295,005 2,042,217
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,760,627 855,743
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,055,632 $ 2,897,960
================= =================
SUPPLEMENTAL DISCLOSURES:
Income Taxes Paid $ - $ -
================= =================
Interest Paid $ 7,614 $ -
================= =================
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE>
e-NET, INC.
CONSOLIDATED STATEM ENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Common Shares Stock
-------------------- Subscriptions Additional Total
No. of And Notes Paid in Treasury Retained Stockholders
Shares Amount Receivable Capital Stock Deficit Equity
--------- -------- -------------- ----------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 1, 1999 8,291,955 $ 82,919 $ (23) $28,479,060 $ - $(20,643,731) $ 7,918,225
Issuance of common stock
Associated with:
Stock Option exercises 261,563 2,615 - 1,026,657 - - 1,029,272
Broadwing, Inc. 1,888,653 18,887 10,807,886 10,826,773
Stock-based compensation - - - 39,062 - - 39,062
Payment of stock subscriptions - - 23 - - - 23
Purchase of treasury stock - - - - (10,500) - (10,500)
Warrant rescission - - - (1,566) - - (1,566)
Legal settlement - - - 405,938 - - 405,938
Net loss - - - - - (7,854,337) (7,854,337)
---------- -------- ---------- ----------- -------- ------------ -----------
BALANCE, DECEMBER 31, 1999 10,442,171 $104,421 $ - $40,757,037 $(10,500) $(28,498,068) $12,352,890
========== ======== ========== =========== ======== ============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
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e-NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include
the accounts of e-Net, Inc. and its wholly owned subsidiary, ZeroPlus.com,
Incorporated (collectively, the "Company"), which was incorporated in June 1999.
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 consolidated
results of operations for the quarter and nine months ended December 31, 1999
are not necessarily indicative of the results for the fiscal year ending March
31, 2000. The accompanying unaudited financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1999.
NOTE B--RESTRUCTURING COSTS
During the quarter ended June 30, 1999 the Company recorded a charge of
approximately $1.7 million related primarily to a restructuring program that was
substantially implemented by December 31, 1999. The charge includes a provision
for reductions in the carrying value of various Company assets and the accrual
of expenses related to the Company's network gateway equipment activities. The
other accrued expenses related to restructuring costs at December 31, 1999 were
approximately $156,000 and were associated with estimated equipment and support
costs. The restructuring effort, a refinement of the Company's previously
announced "niche" strategy, refocuses the Company's operating model based on a
comprehensive strategy of making voice and telephony functions easily available
at common entry points to digital data networks. The Company intends to use its
core technology competency in advancement of its voice-over-digital data
networks business by exploiting markets that it believes pose fewer competitive
risks.
NOTE C--INVENTORY
Inventory is stated at the lower of cost or market value. As indicated
in Note B above, the carrying value of inventory has been eliminated as a part
of the restructuring program. The Company continues to maintain the physical
inventory of equipment and integrated circuit boards. Any proceeds received
resulting from inventory disposal will be recorded in the period received.
NOTE D--SOFTWARE DEVELOPMENT COSTS
The Company had capitalized certain software development costs incurred
after establishing technological feasibility. Software costs were amortized over
the estimated useful life of the software once the product was available for
general release to customers. As indicated in Note B above, the capitalized
software carrying value has been eliminated as a part of the restructuring
program.
NOTE E--DEBT FACILITY
In December 1999, the Company signed a promissory note in the amount of
$ 92,951 with an interest rate of 10% and payable monthly over 5 years. This
debt is associated with leasehold improvements at our facility in Germantown,
Maryland. At December 31, 1999, the balance due on this note was $83,064. On
June 25, 1999, the Company signed a one (1) year promissory note for a
$1,000,000 line of credit facility that is secured by investments, receivables
and fixed assets of the Company.
NOTE F--NON-QUALIFIED STOCK OPTION PLAN
At December 31, 1999, the Company had three stock-based compensation
plans. As permitted under generally accepted accounting principles, grants under
those plans are accounted for following APB Opinion No. 25 (APB 25) and related
interpretations. Accordingly, only the compensation cost associated with grants
to non-employees or non-directors of the Company have been recognized in the
amount of $39,062 for the nine months ended December 31, 1999. All options
granted to employees are non-compensatory for financial statement purposes,
under the provisions of APB 25.
NOTE G--INCOME TAXES
The Company has generated net operating losses since its inception. At
December 31, 1999, the Company recorded a valuation allowance in an amount equal
to the deferred tax asset due to the uncertainty of generating future taxable
income.
9
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NOTE H--CONCENTRATION
Approximately 97% of the Company's accounts receivable balance at
December 31, 1999 were from one customer, and approximately 97% of the Company's
sales for the nine months ended December 31, 1999, were from two customers.
NOTE I--ADVERTISING COMMITMENTS
The Company has entered into agreements with various Internet-related
firms, whereby the Company pays a fixed scheduled payment over time in return
for online advertising. Expense is recognized for these programs in the period
in which the advertising is performed. At December 31, approximate future
advertising commitments are as follows:
<TABLE>
<CAPTION>
Year ending March 31,
<S> <C>
2000 (3 months) ............................................................... $ 277,000
2001........................................................................... $ 883,000
2002........................................................................... $ 0
Thereafter .................................................................... $ 0
</TABLE>
Payments made for the nine month period ended December 31, 1999 totalled $
134,000.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
This information should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
consolidated financial statements and notes contained in the our Annual Report
on Form 10-KSB for the fiscal year ended March 31, 1999.
RESULTS OF OPERATIONS
THIRD QUARTER ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
NET SALES
Sales for the third quarter ended December 31, 1999 were approximately
$102,100, a decrease of 72% over the approximately $367,300 recorded for the
corresponding quarter of 1998. The revenue decrease was due to a shift in focus
from sales of our Telecom 2000 customer premises-based gateway - medium systems
products to our restructuring efforts described below. The services sales for
the quarter ended December 31, 1999, were primarily from one customer. Through
the end of the third quarter ended December 31, 1999, we have recorded no sales
from our wholly-owned subsidiary, ZeroPlus.com, Incorporated.
GROSS PROFIT
Gross profits for the third quarter ended December 31, 1999 were
approximately $39,785 or 39% of sales, compared to the approximately $140,981 or
38% of sales for the corresponding quarter of 1998. In total dollars, gross
profit decreased by 72% due to reduced product sales resulting from a shift in
focus from sales of our Telecom 2000 customer premises-based gateway - medium
systems products to our restructuring efforts described below.
OPERATING EXPENSES
Selling, general & administrative expenses for the third quarter ended
December 31, 1999, were approximately $1,739,900, an increase of 7% over the
approximately $1,632,700 recorded for the corresponding quarter of 1998. The
dollar increase in these expenses over the prior year reflected increased
spending for advertising-related programs in support of our wholly-owned
subsidiary, ZeroPlus.com, Incorporated
Research & development expenses for the third quarter ended December
31, 1999, were approximately $187,200, a 78% decrease over the approximately
$833,200 recorded for the corresponding quarter of 1998. The decreased
expenditures for research and development are due to the decrease in number of
employees and other expenditures devoted to the general development of the
Company's technology products.
OTHER INCOME (EXPENSE)
Other income (expense) includes a non-cash charge of $405,900
associated with the settlement of a lawsuit brought by the holders of warrants
issued in connection with the underwriting of our initial public offering. Under
the terms of the settlement, the Company agreed to lower the exercise price of
certain warrants held by the plaintiffs. In the third quarter ended December 31,
1999, the Company's other income and expenses also included interest income,
which decreased over 1998 due to the use of investments to fund working capital
requirements.
NINE MONTHS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
NET SALES
Net sales for the nine months ended December 31, 1999 were
approximately $378,200, a decrease of 66% over the approximately $1,117,800
recorded for the corresponding period of 1998. The revenue decrease was due to a
shift in focus from sales of our Telecom 2000 customer premises-based gateway -
medium systems products to our restructuring efforts described below. Product
sales were only approximately $5,300 in the nine months ended December 31, 1999
compared to $678,700 recorded for the corresponding period of 1998. The services
sales for the nine months ended December 31, 1999 were primarily from two
customers. Through the end of the third quarter ended December 31, 1999, we have
recorded no sales from our wholly-owned subsidiary, ZeroPlus.com, Incorporated
11
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GROSS PROFIT
Gross profits for the nine months ended December 31, 1999 were
approximately $115,500 or 31% of sales, compared to approximately $528,100 or
47% of sales for the corresponding period of 1998. The amount of gross profit
decrease was due to reduced product sales resulting from a shift in focus from
sales of our Telecom 2000 customer premises-based gateway - medium systems
products to our restructuring efforts described below.
OPERATING EXPENSES
Selling, general & administrative expenses for the nine months ended
December 31, 1999 were approximately $4,734,100, a decrease of 1% over the
approximately $4,774,600 recorded for the corresponding period of 1998. These
expenses reflected decreased spending for personnel in connection with promotion
of our Telecom 2000 technology products. During the nine months ended December
31, 1998 selling, general & administrative expenses included significant costs
associated with advertising and tradeshows that we did not incur in the
corresponding period in 1999. However, we incurred additional expenses for
personnel, travel, and other management efforts in connection with our shift in
focus from sales of our Telecom 2000 customer premises-based gateway - medium
systems products to our restructuring efforts described below.
Restructuring costs in the nine months ended December 31, 1999 were
approximately $1,710,000. The costs were related primarily to a refinement of
our previously announced "niche" strategy. The charge includes a provision for
reductions in the carrying value of various assets and the accrual of expenses
related to our network gateway equipment activities. We have further refined our
operating model, in the direction contemplated by our previously announced
"niche" strategy, toward a comprehensive strategy of making voice and telephony
functions available at common entry points to digital data networks. We intend
to use our core technology competency in voice-over-digital data networks by
exploiting markets that we believe pose fewer competitive risks.
The formation of a wholly owned subsidiary, ZeroPlus.com, Incorporated,
in June 1999, to offer a free software-only voice-over-internet product, is the
first example of our effort. Market access points upon which we intend to
refocus include Telecom 2000 desktop - small systems and selected versions of
our customer-premises-based gateway - medium systems. Through these access
points, we believe that we can provide our customers with quick and easy access
to the advantages of voice-over-digital data network technology, building on our
strengths, specifically, the ability to provide voice-over-digital data network
telephony that operates similarly to the traditional telephone network. We
believe that this initiative will position us to take advantage of partnerships
with Internet service providers, Internet portals, and data network carriers to
leverage off their larger customer distribution capabilities. As we are now
operating under this refined model, we have indefinitely delayed our Telecom
2000 carrier class gateway - large systems project, and we have shifted our
focus in Telecom 2000 customer premises-based gateways - medium systems to
market niches consistent with our refined strategy.
Research & development expenses for the nine months ended December 31,
1999 were approximately $1,081,500, an decrease of 49% over the approximately
$2,106,900 recorded for the corresponding period of 1998. The decrease in the
research and development expenditures for the 1999 period reflected lower
overall workforce costs and reduced third party supplier costs for new
integrated printed circuit boards and the related software. The importance of
ZeroPlus.com, Incorporated to our overall business strategy is demonstrated by
our planned name change from e-Net, Inc. to ZeroPlus.com, Inc., in connection
with a merger of ZeroPlus.com, Incorporated into e-Net, Inc. We expect this
event to occur effective February 15, 2000.
OTHER INCOME (EXPENSE)
Other income (expense) includes a non-cash charge of $405,900
associated with the settlement of a lawsuit brought by the holders of warrants
issued in connection with the underwriting of our initial public offering. Under
the terms of the settlement, the Company agreed to lower the exercise price of
certain warrants held by the plaintiffs. Excluding the legal settlement expense,
the decrease in other income (expense) in 1999 is due primarily to the interest
income decrease over 1998 due to the use of investments to fund working capital
requirements.
12
<PAGE>
OTHER
IMPACT OF INFLATION
The Company does not believe that inflation has had a material adverse
effect on sales or income during the past several years. Increases in supplies
or other operating costs may adversely affect the Company's operations; however,
the Company believes it may increase prices of its products and systems to
offset increases in costs of goods sold or other operating costs.
SEASONALITY
Based our experience to date, the we believe that our future operating
results may be subject to quarterly variations based on a variety of factors,
but seasonal changes in the weather should have little or no effect.
LIQUIDITY AND CAPITAL RESOURCES
In the nine months December 31, 1999, we used approximately
$(5,360,300) in cash flows from operating activities, excluding changes in
assets and liabilities, compared to approximately $(5,788,900) for the
corresponding period of 1998. The total net cash used by operating activities
was approximately $(5,328,200) for the nine months ended December 31, 1999,
compared to approximately $(7,314,100) for the corresponding period of 1998.
Cash used by investing activities totalled approximately $(2,210,900)
for the nine months ended December 31, 1999 as compared to approximately
$(4,979,900) used in investing activities for the corresponding period of 1998.
The main component of that investing activity was the purchase of short-term
securities of approximately $1,988,000, as well as continued expenditures for
equipment of approximately $223,000, the majority of which related to the
refinement of our operating model described above.
Cash provided by financing activities totalled approximately
$11,834,100 compared to approximately $14,336,300 for the corresponding period
in 1998. In December, 1999, Broadwing, Inc exercised a call right to purchase
18.259% of the Company's common stock for an aggregate price of $10,826,800. We
successfully completed a private placement in April 1998 that yielded net
proceeds of approximately $5,100,000, and exercises of our common stock warrants
prior to their redemption in December 1998 yielded net proceeds of approximately
$9,000,000. In December, 1999, the Company signed a promissory note in the
amount of $ 92,951 payable monthly over 5 years. We have 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,
1999.
We expect to continue to make significant investments in the future to
support our overall growth. We presently have cash and cash equivalents,
investments and a line of credit that we believe will be sufficient to meet
near-term cash requirements. However, we expect that our operational cash
requirements will stay the same or increase as a result of our restructuring
efforts and funding of the business of our subsidiary ZeroPlus.com,
Incorporated. As indicated in the Company's most recent Annual Report on Form
10-KSB, as amended, while operating activities may provide cash in certain
periods, to the extent the Company experiences growth in the future, the Company
anticipates that its operating and product development activities may use cash
and consequently, such growth may require the Company to obtain additional
sources of financing. There can be no assurances that unforeseen events may not
require more working capital than the Company currently has at its disposal.
FUTURE OPERATING RESULTS
The preceding paragraphs and the following discussion include
forward-looking statements regarding our future financial position and results
of operations. Actual financial position and results of operations may differ
materially from these statements. All such statements are qualified by the
cautionary statements set forth in Part I, Item 1 of our most recent Annual
Report on Form 10-KSB, as amended, under "Forward Looking and Cautionary
Statements," as well as the following statements.
We have invested significant amounts in the research and development
and the initial product rollout marketing and selling for the Telecom 2000
product line. Even though our restructuring is substantially completed, the
emphasis, attention, and dedication of our limited resources to the Telecom 2000
product line will, in our view, continue to cause losses. However,
13
<PAGE>
we believe that the value and sales potential of our refocused Telecom 2000
product line outweighs the risk of continued operating losses.
We believe that our revenues will grow as we continue to implement our
revised operating model and deliver new Telecom 2000 products that make voice
and telephony functions easily available at common entry points to digital data
networks, which we will target under our refined strategy. However, our refined
strategy is new. While we believe it offers us the possibility of increased
revenue growth sooner than did our previous equipment-based strategy, we can
make no assurance of this result.
We do not expect revenue growth to occur ratably in the near term.
Revenue growth, if any, in fiscal 2001 will depend to a large extent on the
timing and success of the finalization and rollout of our refined strategy.
Because of these and other uncertainties affecting our future operating
results, past performance should not be considered to be a reliable indicator of
future performance. The use of historical trends to anticipate results or trends
in future periods may be inappropriate. In addition, our participation in a
highly dynamic industry may result in significant volatility in the price of our
common stock.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 10, 1999, at the Company's 1998 Annual Meeting of
Shareholders, the shareholders of the Company voted on the following matters:
Concerning the election of directors:
<TABLE>
<CAPTION>
NOMINEES FOR DIRECTOR VOTES CAST FOR VOTES WITHHELD
- --------------------- -------------- --------------
<S> <C> <C>
Gen. Alonzo E. Short, Jr. 7,765,666 46,353
Robert A. Veschi 7,765,666 46,353
William W. Rogers, Jr. 7,765,616 46,403
William L. Hooton 7,765,666 46,353
Clive G. Whittenbury, Ph.D. 7,765,666 46,353
Michael A. Viren 7,765,616 46,403
Donald J. Shoff 7,765,666 46,353
</TABLE>
Concerning approval of the 1999 Stock Compensation Plan:
<TABLE>
<S> <C>
Votes Cast For: 2,426,839
Votes Cast Against: 316,321
Abstentions: 30,171
Broker Non-Votes 5,038,688
</TABLE>
Concerning ratification of Grant Thornton LLP as the Company's independent
auditors for fiscal year 2000:
<TABLE>
<S> <C>
Votes Cast For: 7,770,771
Votes Cast Against: 19,585
Abstentions: 21,663
Broker Non-Votes not applicable
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
(a) Exhibit Description
<S> <C> <C>
10.1 Amendment Dated December 7, 1999 to Revenue Sharing, Service Development, and Joint
Marketing Alliance Agreement dated September 15, 1999 by and between IXC Communication
Services, Inc. and e-Net, Inc
10.2 Letter Agreement Dated December 20, 1999 from Broadwing, Inc. to e-Net, Inc
10.3 1999 Stock Compensation Plan
</TABLE>
(b) Since the end of its most recent fiscal year on March 31, 1999, e-Net,
Inc. has filed the following reports on Form 8-K:
<TABLE>
<CAPTION>
Date of Report Item Reported
<S> <C>
February 8, 2000 Item 5 - Other Events
December 22, 1999 Press Release
December 14, 1999 Press Release
September 15, 1999 Press Release
</TABLE>
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
e-Net, Inc.
(Registrant)
DATE: February 14 2000 /s/ Donald J. Shoff
------------------------------------------
Donald J. Shoff
Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal
Financial Officer)
16
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE DOCUMENT
- ---- --------
<S> <C>
17 10.1 Amendment Dated December 7, 1999 to Revenue Sharing, Service
Development, and Joint Marketing Alliance Agreement dated September
15, 1999 by and between IXC Communication Services, Inc. and e-Net, Inc
10.2 Letter Agreement Dated December 20, 1999 from Broadwing, Inc. to e-Net, Inc
10.3 1999 Stock Compensation Plan
</TABLE>
17
<PAGE>
Exhibit 10.1
VIA FACSIMILE AND FEDERAL EXPRESS (301) 601-3221
December 7, 1999
Mr. Robert A. Veschi
President & CEO
e-Net, Inc.
12800 Middlebrook Road
Suite 400
Germantown, MD 20874
Re: Equity Investment by Cincinnati Bell Inc. d/b/a Broadwing Inc.
Dear Robert:
This letter will serve to confirm our agreement of the following:
1) e-Net, Inc. hereby consents to the assignment by IXC Internet Services,
Inc. to Cincinnati Bell Inc. of the Call Right contained in Section
XI.A, and the Registration Rights contained in Section XI.B, of the
Revenue Sharing, Service Development and Joint Marketing Alliance
Agreement dated September 14, 1999 by and between IXC Communication
Services Inc. and e-Net, Inc. (the "Agreement");
2) Cincinnati Bell Inc. hereby exercises the Call Right to purchase
1,888,653 shares of e-Net, Inc.'s common stock, i.e., the number of
shares of common stock equal to eighteen and two hundred fifty-nine
thousandths percent (18.259%) of the outstanding common shares of
e-Net, Inc. (as calculated pursuant to the terms of the Agreement),
subject only to approval by Cincinnati Bell Inc.'s Board of Directors;
3) The price per share shall be $5.742875, i.e., 1.25 times the closing
price of e-Net, Inc.'s common stock as listed on the Nasdaq SmallCap
Market on December 7, 1999;
4) The aggregate exercise price for the Call Right shall be
$10,845,000.00;
5) e-Net, Inc. hereby consents to an extension of the deadline for
exercise of the Call Right until December 14, 1999, solely for purposes
of allowing Cincinnati Bell Inc. to obtain Board approval at its
meeting on December 13, 1999, provided that if such approval is
obtained and Cincinnati Bell Inc. so notifies e-Net, Inc. in writing on
or before December 14, 1999, this letter agreement shall be
automatically effective retroactively to a Call Right Exercise Date of
the date hereof, but if Cincinnati Bell Inc. does not so notify e-Net,
Inc., then this letter agreement will be null and void;
6) The final exercise of the Call Right after Cincinnati Bell's Board
approval, as and to the extent set forth above, shall be sufficient to
invoke the full exclusivity rights and obligations as set forth in the
Agreement, particularly Section VII.K;
7) Cincinnati Bell Inc. shall fund the exercise of the Call Right and
deliver the exercise price to e-Net, Inc. as soon as practicable after
Board approval, but no later than December 20, 1999;
8) Upon funding and delivery of the exercise price, the shares of e-Net,
Inc common stock shall be issued to Cincinnati Bell Holdings Inc., a
wholly owned subsidiary of Cincinnati Bell Inc.; and
<PAGE>
9) Cincinnati Bell Inc. requests e-Net, Inc. to give full consideration to
negotiation of the following business points, none of which shall be
conditions to exercise of the Call Right or the closing thereof but are
set forth herein solely as a non-binding expression of the parties'
intent as to the direction of their future discussions:
i granting two (2) seats on e-Net, Inc.'s Board of Directors,
one for a business person, and one for a technology expert;
ii allowing Broadwing Communications, Inc. to private label
e-Net, Inc.'s ZeroPlus service for the business to business
market; and
iii having discussions with Cincinnati Bell Inc. regarding the
possibility of Cincinnati Bell Inc. taking a larger position
in e-Net, Inc. or ZeroPlus Inc. at a future date.
Except as modified by this letter, all terms and conditions of the
Agreement remain in effect.
If the above accurately represents your understanding of our agreement,
I would appreciate you signing and returning a copy of this letter to me. Upon
signature, please work with Mike Callaghan to coordinate the closing and proper
issuance of the shares.
Very Truly Yours,
/s/ Richard G. Ellenberger
- ------------------------------------
Richard G. Ellenberger
AGREED:
/s/ Robert A. Veschi
- ----------------------------
Robert A. Veschi
Date: 12/8/99
2
<PAGE>
Exhibit 10.2
VIA FACSIMILE AND FEDERAL EXPRESS (301) 601-3221
December 20, 1999
Mr. Robert A. Veschi
President & CEO
e-Net, Inc.
12800 Middlebrook Road
Suite 400
Germantown, MD 20874
Re: Equity Investment by Cincinnati Bell Inc. d/b/a Broadwing Inc.
Dear Robert:
This letter will serve to confirm our agreement of the following with regard to
the Revenue Sharing, Service Development and Joint Marketing Alliance Agreement
dated September 14, 1999 between e-Net, Inc. and IXC Communications, Inc., as
amended by letter agreement between e-Net and Cincinnati Bell Inc. d/b/a
Broadwing Inc. (as so amended, the "Agreement").
Upon funding and delivery of the exercise price, the shares of e-Net, Inc.
common stock shall be issued to Broadwing Holdings Inc., a Delaware corporation
that is wholly owned subsidiary of Cincinnati Bell Inc., and which has its
principal place of business in Delaware.
Except as modified by this letter, all terms and conditions of the Agreement
remain in effect.
If the above accurately represents your understanding of our agreement, I would
appreciate you signing and returning a copy of this letter to me.
Very Truly Yours,
/s/ Richard G. Ellenberger
- ---------------------------------
Richard G. Ellenberger
AGREED:
/s/ Donald J. Shoff
- -------------------------
Donald J. Shoff, VP Finance & CFO
Date: 12/17/99
<PAGE>
Exhibit 10.3
e-NET, INC.
1999 STOCK COMPENSATION PLAN
EFFECTIVE AS OF OCTOBER 26, 1999
e-NET, INC.
1999 STOCK COMPENSATION PLAN
I. THE PLAN
1.1 PURPOSE. The purpose of the e-Net, Inc. 1999 Stock Compensation
Plan is to promote the success of the Corporation and its Subsidiaries by
providing an additional means through the grant of Awards to provide officers
and employees with stock compensation that is comparable with compensation for
employment with other similar companies in order to attract, motivate, retain
and reward officers and employees; to provide incentives for high levels of
individual performance and improved financial performance; to attract, motivate
and retain experienced and knowledgeable independent directors; to attract,
motivate and retain experienced and knowledgeable independent contractors; and
to promote a close identity of interests between directors, officers, employees,
independent contractors and stockholders.
1.2 DEFINITIONS.
The following terms shall have the meanings set forth below:
(1) "AWARD" shall mean an award of any Option authorized under
Section 1.6, that is authorized by and granted under this plan.
(2) "AWARD DATE" shall mean the date upon which the Outside
Board or the Board, as applicable as determined pursuant to Section
1.3, takes the action granting an Award or such later date as the
Outside Board or the Board designates as the Award Date at the time of
granting the Award.
(3) "AWARD DOCUMENT" shall mean any writing, which may be an
agreement, setting forth the terms of an Award that has been granted by
the Outside Board or the Board.
(4) "AWARD PERIOD" shall mean the period beginning on an Award
Date and ending on the expiration date of such Award.
(5) "BENEFICIARY" shall mean the person or persons designated
by a Participant in writing to the Board to receive the benefits
specified in an Award Document and under this Plan in the event of the
1
<PAGE>
Participant's death, or, if the Participant has not designated such
person or persons, or such person or persons shall all have predeceased
the Participant, the executor or administrator of the Participant's
estate.
(6) "BOARD" shall mean the Board of Directors of the
Corporation.
(7) "CODE" shall mean the Internal Revenue Code of 1986, as
amended from time to time. Any reference herein to a section of the
Code shall include any corresponding future provision of federal tax
law.
(8) "COMMON STOCK" shall mean the common stock of the
Corporation and, in the event such common stock is converted to another
security or property pursuant to Section 3.2, such other security or
property.
(9) "CORPORATION" shall mean e-Net, Inc. and its successors,
and, where the context requires, its Subsidiaries.
(10) "EMPLOYEE" shall mean any employee of the Corporation or
a Subsidiary, including a director who is also an employee.
(11) "ELIGIBLE PARTICIPANT" shall mean any Employee or
Independent Contractor.
(12) "ERISA" shall mean the Employee Retirement Income
Security Act of 1947, as amended.
(13) "EXCHANGE ACT" shall mean the Securities Exchange Act of
1934, as amended from time to time, and any successor provision.
(14) "FAIR MARKET VALUE" shall have such meaning as determined
by the Outside Board from time to time based upon its reasonable
judgement as indicated by its written approval.
(15) "INDEPENDENT CONTRACTOR" shall mean any individual who
engages in service for hire for the Corporation or a Subsidiary under a
written contract approved by the Board.
(16) "INSIDER" shall mean an officer of the Corporation, a
director of the Corporation, or a beneficial owner of ten percent (10%)
or more of the Corporation's issued and outstanding Common Stock or
other equity security registered pursuant to Section 12 of the Exchange
Act, as defined pursuant to Section 16 of the Exchange Act and the
rules and regulations thereunder.
(17) "NONMANAGEMENT DIRECTOR" shall mean a member of the Board
who is not an officer or employee of the Corporation or a Subsidiary.
(18) "OPTION" shall mean an option to purchase Common Stock
pursuant to an Award.
(19) "OUTSIDE BOARD" shall mean the Outside Directors, as a
group.
(20) "OUTSIDE DIRECTOR" shall mean a member of the Board who
is a Non-management Director and who otherwise falls under the
definition of "Non-Employee Director" in Rule 16b-3.
(21) "PARTICIPANT" shall mean a Nonmanagement Director or an
Eligible Participant who has been granted an Award under this Plan.
(22) "PERSONAL REPRESENTATIVE" shall mean to person or persons
who, upon the incompetence of a Participant, shall have acquired on
behalf of the Participant, by legal proceeding,
2
<PAGE>
pursuant to a durable power of attorney or otherwise, the power to
exercise the rights or receive benefits under this Plan and who shall
have become the legal representative of the Participant.
(23) "PLAN" shall mean this e-Net, Inc. 1999 Stock
Compensation Plan.
(24) "PLAN TERMINATION DATE" shall mean the tenth anniversary
of the effective date of the Plan, as determined pursuant to Section
3.7.
(25) "QDRO" shall mean a qualified domestic relations order as
defined in Section 414(p) of the Code or Section 206(d)(3) of ERISA (to
the same extent as if this Plan were subject thereto), or the
applicable rules thereunder.
(26) "RETIREMENT" shall mean, in the case of an Employee,
retirement as defined in the Corporation's Retirement Pension Plan, as
amended from time to time.
(27) "RULE 16b-3" shall mean Rule 16b-3 as promulgated by the
Securities and Exchange Commission pursuant to the Exchange Act.
(28) "SUBSIDIARY" shall mean any subsidiary of the Corporation
which meets the definition of a "subsidiary corporation" set forth in
Section 424(f) of the Code.
(29) "TOTAL DISABILITY" shall mean complete and permanent
inability by reason of illness or accident to perform the duties of the
occupation at which the Participant was employed when the illness
commenced or accident occurred, as determined by the Corporation's
independent medical consultant, and, in the case of Eligible
Participants who are Insiders, ratified by the Outside Board.
1.3 ADMINISTRATION AND AUTHORIZATION; POWER AND PROCEDURE.
(a) THE OUTSIDE BOARD AND THE BOARD. This Plan shall be administered
by, and all Awards to Eligible Participants shall be authorized by, the Outside
Board in the cases of Eligible Participants who are Insiders and of
Nonmanagement Directors, and the Board in the case of Eligible Participants who
are not Insiders. Action of the Outside Board or the Board with respect to the
administration of this Plan shall be taken pursuant to a majority vote or by
unanimous written consent of the respective members, PROVIDED, HOWEVER, that no
director may participate in a decision to grant an Award to himself or herself.
All references in this Plan to actions or determinations in respect of Awards by
the Outside Board shall be references to Awards granted to Eligible Participants
who are Insiders and to Nonmanagement Directors. All references in this Plan to
action or determinations in respect of Awards by the Board shall be references
to Awards granted to Eligible Participants who are not Insiders. The Outside
Board shall administer this Plan with respect to all Awards held by Eligible
Participants who are Insiders and by Nonmanagement Directors, including Awards
granted prior to the time that any such Eligible Participant becomes an Insider.
(b) PLAN AWARDS; INTERPRETATION; POWERS. Subject to the express
provisions of this Plan, the Outside Board or the Board shall have the
authority:
(i) to determine the Eligible Participants and Nonmanagement
Directors who will receive Awards; PROVIDED, HOWEVER, that no director
may participate in a decision to grant an Award to himself or herself;
(ii) to grant Awards to such Eligible Participants and
Nonmanagement Directors, to determine the amount of and the price at
which Common Stock will be offered or awarded thereto, to determine the
other specific terms and conditions of such Awards consistent with the
express limits of this Plan, to establish the installments (if any) in
which such Awards shall become exercisable or shall vest, and to
establish the expiration date and the events of termination of such
Awards; PROVIDED, HOWEVER, no director may participate in a decision to
grant an Award to himself of herself;
3
<PAGE>
(iii) to construe and interpret this Plan and any Award
Documents, to further define the terms used in this Plan, and to
prescribe, amend and rescind rules and regulations relating to the
administration of this Plan;
(iv) to cancel, modify, or waive the Corporation's rights with
respect to, or modify, discontinue, suspend, or terminate any or all
outstanding Awards held by Eligible Participants and Nonmanagement
Directors, subject to any required consents under Section 3.5;
(v) to accelerate or extend the ability to exercise or extend
the term of any or all outstanding Awards (subject to the maximum term
of Awards under Section 1.7);
(vi) to offer to buy out outstanding Awards for cash, Common
Stock or other consideration, and to accept the surrender of Awards in
satisfaction of obligations to the Corporation; and
(vii) to make all other determinations and take such other
actions as contemplated by this Plan or as may be necessary or
advisable for the administration of this Plan and effectuation of its
purposes.
(c) BINDING DETERMINATIONS. Any action taken by, or inaction of, the
Corporation, any Subsidiary, the Board or the Outside Board, relating or
pursuant to this Plan shall be within the absolute discretion of that entity or
body and shall be conclusive and binding upon all persons. Subject only to
compliance with the express provisions hereof, the Board and the Outside Board
may act in their absolute discretion in matters within their authority related
to this Plan.
(d) RELIANCE ON EXPERTS. In making any determination or in taking or
not taking any action under this Plan, the Board and the Outside Board may
obtain and may rely upon the advice of experts, including professional advisors
to the Corporation.
(e) DELEGATION. The Board may delegate some or all of its authority
under the Plan to one or more members of the Board. The Outside Board and the
Board may delegate ministerial, non-discretionary functions to individuals who
are officers or employees of the Corporation.
(f) NO LIABILITY. No member of the Board, or director, officer or
employee of the Corporation or any Subsidiary, shall be liable, responsible or
accountable in damages or otherwise for any determination made or other action
taken or any failure to act by such person so long as such person is not
determined to be guilty by a final adjudication of willful misconduct with
respect to such determination, action or failure to act.
(g) INDEMNIFICATION. To the extent permitted by law, each of the
members of the Board, and each of the directors, officers and employees of the
Corporation and any Subsidiary, shall be held harmless and be indemnified by the
Corporation for any liability, loss (including amounts paid in settlement),
damages or expenses (including reasonable attorneys' fees) suffered by virtue of
any determinations, acts or failures to act, or alleged acts or failures to act,
in connection with the administration of this Plan so long as such person is not
determined by a final adjudication to be guilty of willful misconduct with
respect to such determination, action or failure to act.
1.4 PARTICIPATION. Awards may be granted by the Outside Board or the
Board only to Eligible Participants or to Nonmanagement Directors; PROVIDED
HOWEVER, that no director may participate in a decision to grant an Award to
himself or herself. An Eligible Participant or Nonmanagement Director who has
been granted an Award may, if otherwise eligible, be granted additional Awards
if the Outside Board or the Board shall so determine.
1.5 SHARES AVAILABLE FOR AWARDS.
(a) COMMON STOCK. Subject to the provisions of Section 3.2, the Common
Stock that may be delivered under this Plan shall be shares of the Corporation's
authorized but unissued Common Stock, any shares of
4
<PAGE>
Common Stock held as treasury shares, and shares of Common Stock purchased by
the Corporation on the open market.
(b) NUMBER OF SHARES. Subject to adjustments in accordance with Section
3.2, the maximum number of shares of Common Stock that may be delivered pursuant
to Awards granted to Eligible Participants and Nonmanagement Directors under
this Plan shall not exceed one million (1,000,000) shares.
(c) CALCULATION OF AVAILABLE SHARES AND REPLENISHMENT. A good faith
estimate of the number of shares of Common Stock subject to outstanding Awards
that will be satisfied by delivery of shares of Common Stock, plus the number of
shares of Common Stock referenced for purposes of determining other Awards,
shall be reserved from the number of shares of Common Stock available for Awards
under this Plan. The aggregate number of shares of Common Stock delivered under
this Plan plus the number of shares referenced with respect to Awards paid in
cash shall reduce the number of shares of Common Stock remaining available. If
any Award shall expire or be canceled or terminated without having been
exercised in full, or any Common Stock subject to an Award shall not vest or be
delivered, the unpurchased, nonvested or undelivered shares of Common Stock
subject thereto or the shares of Common Stock referenced with respect thereto
shall again be available under this Plan; PROVIDED, HOWEVER, that no such
unpurchased, nonvested or undelivered shares shall again be available if the
holder received dividends with respect to such shares or any other benefits of
ownership of such shares, other than voting rights or the accumulation of
dividends that are never paid to the holder. If the Corporation withholds shares
of Common Stock pursuant to Section 3.4, the number of shares that would have
been deliverable with respect to an Award but that are withheld pursuant to the
provisions of Section 3.4 shall be treated as issued and the aggregate number of
shares issuable with respect to the applicable Award and under this Plan shall
be reduced by the number of shares so withheld and such shares shall not be
available for additional Awards.
1.6 GRANT OF AWARDS. Subject to the express provisions of this Plan,
the Outside Board or the Board shall determine the number of shares of Common
Stock subject to each Award, the price (if any) to be paid for the shares or the
Award and other terms and conditions of the Award. Each Award to an Eligible
Participant or a Nonmanagement Director shall be evidenced by an Award Document
signed by the Corporation and, if required by the Outside Board or the Board, by
the Eligible Participant or Nonmanagement Director.
1.7 AWARD PERIOD. Each Award and all executory rights or obligations
under the related Award Document shall expire on such date (if any) as shall be
determined by the Outside Board or the Board, but in the case of Options or
other rights to acquire Common Stock, not later than ten (10) years after the
Award Date.
1.8 LIMITATIONS ON EXERCISE AND VESTING OF AWARDS.
(a) PROVISIONS FOR EXERCISE. An Award shall be exercisable or shall
vest as determined by the Outside Board or the Board.
(b) PROCEDURE. Any exercisable Award shall be exercised when the person
appointed by the Outside Board or the Board receives written notice of such
exercise from the Participant, together with satisfactory arrangements for any
required payment to be made in accordance with Sections 2.2. or 3.4 or the terms
of the Award Document, as the case may be.
(c) FRACTIONAL SHARES/MINIMUM ISSUE. Fractional share interests shall
be disregarded, but may be accumulated. However, the Outside Board or the Board
may determine that cash will be paid or transferred in lieu of any fractional
share interests.
(d) HOLDING PERIOD. Notwithstanding any provision of this Plan to the
contrary, except in the case of sales by an executor or administrator of the
estate of a deceased Participant, shares of Common Stock acquired by an Insider
through the exercise of an Award granted hereunder may not be sold until a date
six (6) months after the date of the grant of such Award as specified in the
Award Document.
5
<PAGE>
1.9 ACCEPTANCE OF NOTES TO FINANCE EXERCISE. Where the Outside Board or
the Board deems it appropriate under the circumstances as indicated by its
written approval, the Corporation may accept one or more notes from any
Participant in connection with the exercise or receipt of any outstanding Award
or the payment of the amount of any taxes that the Corporation may be required
to withhold with respect to such exercise or receipt; PROVIDED, HOWEVER, that
any such note shall be subject to the following terms and conditions:
(1) The principal of the note shall not exceed the amount
required to be paid to the Corporation upon the exercise or receipt of
one or more Awards under the Plan, including the amount of any taxes
required to be withheld, and the note shall be delivered directly to
the Corporation in consideration of such exercise or receipt.
(2) The initial term of the note shall be determined by the
Outside Board or the Board; PROVIDED, HOWEVER, that the term of the
note, including extensions, shall not exceed ten (10) years.
(3) The note shall provide for full recourse of the
Participant, including a right of set-off against amounts otherwise
payable by the Corporation to the Participant, and shall bear interest
at a rate determined by the Outside Board or the Board, but not less
than the applicable federal rate determined under Section 1274.
(4) If the employment of the Participant terminates, the
unpaid principal balance of the note shall become due and payable on
the tenth business day after such termination.
(5) If required by the Outside Board or the Board or by
applicable law, the note shall be secured by a pledge of any shares or
rights financed thereby in compliance with applicable law.
(6) The terms, repayment provisions, and collateral release
provisions of the note and the pledge securing the note shall conform
with applicable rules and regulations of the Federal Reserve Board as
then in effect.
1.10 NO TRANSFERABILITY. Awards may be exercised only by the
Participant or the Participant's Personal Representative, if any, or, if the
Participant has died, the Participant's Beneficiary. Amounts payable or shares
of Common Stock issuable pursuant to an Award shall be paid to (or registered in
the name of) such person or persons as specified by the person exercising the
Award. Other than by will or the laws of descent and distribution or pursuant to
a QDRO or other exception to transfer restrictions under Rule 16b-3, no right or
benefit under this Plan or any Award, including, without limitation, any Option
that has not vested, shall be transferable by the Participant or shall be
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance or charge (other than to the Corporation), and any such
attempted action shall be void. The Corporation shall disregard any attempt at
transfer, assignment or other alienation prohibited by the preceding sentences
and shall pay or deliver such cash or shares of Common Stock in accordance with
the provisions of this Plan. The designation of a Beneficiary hereunder shall
not constitute a transfer for these purposes.
1.11 SECTION 83(b) ELECTIONS. If a Participant shall file an election
with the Internal Revenue Service to include the value of any Award in the
Participant's gross income while such Award remains subject to restrictions, the
Participant shall promptly furnish the Corporation with a copy of such election.
II. OPTIONS
2.1 GRANTS. One or more Options may be granted under this Article to
any Eligible Participant or Nonmanagement Director.
2.2 OPTION PRICE.
(a) PRICING LIMITS. The exercise price for shares of Common Stock
covered by Options shall be determined by the Outside Board or the Board at the
time of the Award.
6
<PAGE>
(b) PAYMENT PROVISIONS. The exercise price for any shares of Common
Stock purchased on exercise of an Option granted under this Article shall be
paid in full at the time of each purchase in one or a combination of the
following methods: (i) in cash or by electronic funds transfer; (ii) by good
check payable to the order of the Corporation; (iii) by the delivery of shares
of Common Stock already owned by the Participant; or (iv) if authorized by the
Outside Board or the Board or specified in the applicable Award Document, by a
promissory note of the Participant consistent with the requirements of Section
1.9; PROVIDED, HOWEVER, that the Outside Board or the Board may, in its absolute
discretion, limit the Participant's ability to exercise an Option by delivering
shares of Common Stock, including by imposing a requirement that the Participant
satisfy a minimum holding period with respect to the shares so delivered. Shares
of Common Stock used to satisfy the exercise price of an Option shall be valued
at their Fair Market Value on the date of exercise.
2.3 NOT INCENTIVE STOCK OPTIONS. It is not intended that any Option
granted under this Plan shall constitute an incentive stock option as defined in
Section 422 of the Code.
2.4. OPTION PERIOD.
(a) AWARD PERIOD. Each Option shall specify the Award Period for which
the Option is granted and shall provide that the Option shall expire at the end
of such Award Period. The Outside Board or the Board may extend the Award Period
by amendment of an Option. Notwithstanding the foregoing, the Award Period with
respect to an Option, including all extensions, shall not exceed ten (10) years.
(b) EFFECT OF TERMINATION OF EMPLOYMENT OR SERVICE. Notwithstanding the
provisions of Section 2.4(a), unless otherwise provided by the Outside Board or
the Board, an Option shall expire on the earliest to occur of (i) the end of the
Award Period, (ii) if the Participant is an Employee or Nonmanagement Director,
the date three (3) months following the Participant's termination of employment
or service for the Corporation for any reason other than Retirement, Total
Disability or death, (iii) if the Participant is an Employee or Nonmanagement
Director, the date twelve (12) months following the Participant's termination of
employment or service for the Corporation by reason of Retirement, Total
Disability or death, (iv) if the Participant is an Independent Contractor, the
date three (3) months following the termination of the Participant's contract
with the Corporation, and (v) the date of termination of the Option pursuant to
Section 3.14.
2.5. VESTING; FORFEITURE.
(a) An Option shall be exercisable or shall vest upon such terms and
conditions or pursuant to such schedule as the Outside Board or the Board shall
determine at the time of the Award. Notwithstanding the foregoing, unless
otherwise specified by the Outside Board or the Board, an Option shall become
immediately exercisable and fully vested upon the termination of the
Participant's employment by, service for or contract with the Corporation by
reason of Retirement, Total Disability or death. Unless otherwise specified by
the Outside Board or the Board, an Option that is not vested upon the
termination of the Participant's employment by, service for or contract with the
Corporation shall be forfeited.
(b) Notwithstanding the provisions of Section 2.5(a), an Option shall
become immediately exercisable and fully vested in the event of (i) a merger,
consolidation or reorganization to which the Corporation is a party other than
as the surviving entity, unless the surviving entity shall elect to continue the
Plan in its existing form and abide by the terms of all Awards granted
thereunder, (ii) a merger, consolidation or reorganization to which the
Corporation is a party as the surviving entity, other than any such merger,
consolidation or reorganization resulting in a change of ownership of less than
fifty percent (50%) of the then outstanding Common Stock; (iii) any transaction
or series of related transactions resulting in the acquisition of a majority of
the outstanding shares of Common Stock; (iv) any transfer of all or
substantially all of the assets of the Corporation; or (v) the liquidation or
dissolution of the Corporation. In such event, the Corporation may, but shall
not be required to, give the Participant prior written notice of the
effectiveness of any such event, and the Participant may exercise the Option (to
the extent it is still in effect) on or prior to the last day specified by the
Corporation; to the extent that the
7
<PAGE>
Option has not been exercised, it will expire at 5:00 P.M. on the last day
specified in such notice by the Corporation.
2.6 OPTION REPRICING, CANCELLATION, SUBSTITUTION OR WAIVER OF
RESTRICTIONS. Subject to Sections 1.5 and 3.5 and the specific limitations on
Awards contained in this Plan, the Outside Board or the Board from time to time
may authorize, generally or in specific cases only, for the benefit of any
Participant who is an Employee or an Independent Contractor, any adjustment in
the exercise or purchase price, the vesting schedule, the number of shares
subject to, the restrictions upon or the term of, an Award granted under this
Article by cancellation of an outstanding Award and a subsequent granting of an
Award, by amendment, by substitution of an outstanding Award, by waiver or by
other legally valid means. Such amendment or other action may result, among
other changes, in an exercise or purchase price that is higher or lower than the
exercise or purchase price of the original or prior Award, provide for a greater
or lesser number of shares subject to the Award, or provide for a longer or
shorter vesting or exercise period.
III. OTHER PROVISIONS
3.1 RIGHTS OF ELIGIBLE PARTICIPANTS, PARTICIPANTS AND BENEFICIARIES.
(a) EMPLOYMENT STATUS. Status of an Eligible Participant or a
Nonmanagement Director shall not be construed as a commitment that any Award
will be made under this Plan to an Eligible Participant or a Nonmanagement
Director or to Eligible Participants or Nonmanagement Directors generally.
(b) NO EMPLOYMENT CONTRACT. Nothing contained in this Plan (or in any
other documents related to this Plan or to any Award) shall confer upon any
Participant any right to continue in the employ or other service of the
Corporation or constitute any contract or agreement of employment or other
service, nor shall this Plan interfere in any way with the right of the
Corporation to change such person's compensation or other benefits or to
terminate the employment of such person, with or without cause; PROVIDED,
HOWEVER, that nothing contained in this Plan or any document related hereto
shall adversely affect any independent contractual right of any Participant
without his or her consent.
(c) PLAN NOT FUNDED. Awards payable under this Plan shall be payable in
shares of Common Stock or from the general assets of the Corporation, and
(except as provided in Section 1.5(c)) no special or separate reserve, fund or
deposit shall be made to assure payment of such Awards. No Participant,
beneficiary or other person shall have any right, title or interest in any fund
or in any specific asset (including share of Common Stock, except as expressly
otherwise provided) of the corporation by reason of any Award hereunder. Neither
the provisions of this Plan (or of any related documents), nor the creation or
adoption of this Plan, nor any action taken pursuant to the provisions of this
Plan shall create, or be construed to create, a trust of any kind or a fiduciary
relationship between the Corporation and any Participant, Beneficiary or other
person. To the extent that a Participant, Beneficiary or other person acquires
right to receive payment pursuant to any Award hereunder, such right shall be no
greater than the right of any unsecured general creditor of the Corporation.
3.2 ADJUSTMENTS.
(a) EVENTS REQUIRING ADJUSTMENTS. If any of the following events occur,
the Outside Board or the Board shall make the adjustments described in Section
3.2(b): (i) any extraordinary dividend or other extraordinary distribution in
respect of the Common Stock (whether in the form of cash, Common Stock, other
securities, or other property), (ii) any recapitalization, stock split
(including a stock split in the form of a stock dividend), reverse stock split,
reorganization, merger, combination, consolidation, split-up, spin-off,
combination, repurchase, or exchange of Common Stock or other securities of the
Corporation, (iii) any issuance of warrants or other rights to purchase shares
of Common Stock or other securities of the Corporation (other than to employees)
at less than eighty percent (80%) of fair value on the date of such issuance, or
(iv) any other like corporate transaction or event in respect of the Common
Stock or a sale of substantially all the assets of the Corporation.
8
<PAGE>
(b) ADJUSTMENTS TO AWARDS. If any of the events described in Section
3.2(a) occurs, then the Outside Board or the Board shall, in such manner and to
such extent (if any) as it deems appropriate and equitable, (i) proportionately
adjust any or all of (1) the number and type of shares of Common Stock that
thereafter may be made the subject of Awards (including the specific maximum set
forth in Section 1.5), (2) the number, amount and type of shares of Common Stock
subject to any or all outstanding Awards, (3) the grant, purchase, or exercise
price of any or all outstanding Awards, (4) the Common Stock or cash deliverable
upon exercise of any or all outstanding Awards, or (5) the performance standards
appropriate to any or all outstanding Awards; or (ii) make provision for a cash
payment or for the substitution or exchange of any or all outstanding Awards
based upon the distribution or consideration payable to holders of Common Stock
upon or in respect of the event.
3.3 COMPLIANCE WITH LAWS. This Plan, the granting and vesting of Awards
under this Plan and the issuance and delivery of shares of Common Stock and the
payment of money under this Plan or under Awards granted hereunder are subject
to compliance with all applicable federal and state laws, rules and regulations
(including but not limited to state and federal securities law and federal
margin requirements) and to such approvals by any listing, regulatory or
governmental authority as may, in the opinion of counsel for the Corporation, be
necessary or advisable in connection therewith. Any securities delivered under
this Plan shall be subject to such restrictions, and the person acquiring such
securities shall, if requested by the Corporation, provide such assurances and
representations to the Corporation as the Corporation may deem necessary or
desirable to assure compliance with all applicable legal requirements.
3.4 TAX WITHHOLDING. Upon any exercise, vesting, or payment of any
Award, the Outside Board or the Board may make such provisions and take such
steps as it may deem necessary or appropriate for the withholding by the
Corporation of all federal, state, local and other taxes required by law to be
withheld, including without limitation, the right, at its option, (i) to require
the Participant (or Personal Representative or Beneficiary, as the case may be)
to pay or provide for payment of the amount of any taxes that the Corporation
may be required to withhold with respect to such transaction as a condition to
the release of Common Stock or the making of any payment or distribution, (ii)
to deduct from any amount payable in cash, (iii) to reduce the number of shares
of Common Stock otherwise deliverable (or otherwise reacquire such shares),
based upon their Fair Market Value on the date of delivery, or to grant the
Participant the right to elect such reduction in the number of shares upon such
terms and conditions as it may establish, or (iv) to permit the Corporation to
accept a note for the amount of any taxes that the Corporation may be required
to withhold with respect to such transaction in accordance with Section 1.9.
9
<PAGE>
3.5 PLAN AMENDMENT, TERMINATION AND SUSPENSION.
(a) BOARD AUTHORIZATION. Subject to this Section 3.5, the Board may, at
any time, terminate or, from time to time, amend, modify or suspend this Plan,
in whole or in part. No Awards may be granted during any suspension of this Plan
or after termination of this Plan, but the Outside Board or the Board shall
retain jurisdiction as to Awards then outstanding in accordance with the terms
of this Plan.
(b) STOCKHOLDER APPROVAL. If any amendment would (i) materially
increase the benefits accruing under this Plan, (ii) materially increase the
aggregate number of shares of Common Stock that may be issued under this Plan
(except as provided in Section 3.2), or (iii) materially modify the requirements
as to eligibility for participation in the Plan, such amendment shall be subject
to stockholder approval.
(c) AMENDMENTS TO AWARDS. Without limiting any other express authority
granted under this Plan, but subject to its express limits, the Outside Board or
the Board by agreement or resolution may waive conditions of or limitations on
Awards to Eligible Participants or Nonmanagement Directors that the Outside
Board or the Board in the prior exercise of its discretion has imposed, without
the consent of the Participant, and may make other changes to the terms and
conditions of Awards that do not affect the Participant's rights and benefits
under an Award in any materially adverse manner.
(d) LIMITATIONS ON AMENDMENTS TO PLAN AND AWARDS. No amendment,
suspension or termination of the Plan or any change affecting any outstanding
Award shall, without the written consent of the Participant, Beneficiary or
Personal Representative, as applicable, affect in any manner materially adverse
to such person any rights or benefits of any such person or any obligations of
the Corporation under any Award granted under this Plan prior to the effective
date of such change; however, any changes made pursuant to Section 3.2 shall not
be deemed to constitute changes or amendments for purposes of this Section 3.5.
3.6 PRIVILEGES OF STOCK OWNERSHIP. Except as otherwise expressly
authorized by the Outside Board or the Board or this Plan and expressly stated
in an Award Document, a Participant shall not be entitled to any privilege of
stock ownership as to any shares of Common Stock not actually delivered to and
held of record by the Participant. No adjustment shall be made for dividends or
other stockholder rights for which a record date is prior to the date of
delivery of such shares.
3.7 EFFECTIVE DATE OF THE PLAN. This Plan shall be effective as of the
date the Plan is approved by the Board, subject to approval by a vote of the
holders of a majority of the outstanding shares of Common Stock at a meeting of
stockholders of the Corporation held within twelve (12) months before or after
the date the Plan is approved by the Board. Awards may be granted hereunder on
or after the effective date and prior to the termination of the Plan.
3.8 TERM OF THE PLAN. No Award shall be granted after the Plan
Termination Date. Unless otherwise expressly provided in this Plan or in an
applicable Award Document, any Award may extend beyond such date, and all
authority of the Outside Board or the Board with respect to Awards hereunder
shall continue during any suspension of this Plan and in respect of Awards
outstanding on the Plan Termination Date.
3.9 GOVERNING LAW/SEVERABILITY.
(a) CHOICE OF LAW. This Plan, the Awards, all documents evidencing
Awards, and all other related documents shall be governed by, and construed in
accordance with the laws of the State of Delaware, without reference to any
otherwise applicable principles of conflicts of law.
(b) SEVERABILITY. If any provision shall be held by a court of
competent jurisdiction to be valid and unenforceable, the remaining provisions
of this Plan shall continue in effect.
10
<PAGE>
3.10 CAPTIONS. Captions and headings are given to the sections and
subsections of this Plan solely as a convenience to facilitate reference. Such
headings shall not be deemed in any way material or relevant to the construction
or interpretation of the Plan or any provision thereof.
3.11 EFFECT OF CHANGE OF SUBSIDIARY STATUS. For purposes of this Plan
and any Award hereunder, if any entity ceases to be a Subsidiary, the
employment, service or contract of all Participants who are employed by, in the
service of or under contract with such entity shall be deemed to have
terminated, except any such Participant who continues as an employee, servant or
contractor of the Corporation or another Subsidiary.
3.12 NONEXCLUSIVITY OF PLAN. Nothing in this Plan shall limit or be
deemed to limit the authority of the Board to grant awards or authorize any
other compensation, with or without reference to the Common Stock, under any
other plan or authority.
3.13 PLAN BINDING ON SUCCESSORS. The obligations of the corporation
under the Plan shall be binding upon any successor corporation or organization
resulting from the merger, consolidation or other reorganization of the
corporation, or upon any successor corporation or organization succeeding to
substantially all of the assets and business of the Corporation. The Corporation
agrees that it will make appropriate provisions for the preservation of all
Participants' rights under the Plan in any agreement or plan that it may enter
into or adopt to effect any such merger, consolidation, reorganization or
transfer of assets.
3.14 COMPETITION BY PARTICIPANTS.
(a) In the event that the Outside Board or the Board determines that a
Participant, within such period of time as shall be specified in the related
Award Document, 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 twelve (12) months was, an employee of the
Corporation or any Subsidiary or any prospective or former Subsidiary; (ii)
competes with the Corporation or any Subsidiary in such segments of the business
of the Corporation and within such territory as shall be specified in such
related Award Documents; (iii) uses in competition with the Corporation or any
Subsidiary, customer, prospective customer or former customer, within such
segments and specified territory, any of the methods, information or systems
developed by the Corporation or any Subsidiary for its customers, prospective
customers or former customers where the Corporation or Subsidiary 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 Corporations or any Subsidiary; the following provision
shall apply with respect to any shares of Common Stock received and Awards
granted under this Plans as of the date of the first occurrence prohibited under
this provision:
(i) Such Participant: (x) shall immediately sell and deliver
to the Corporation, upon demand, all shares of Common 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 (y) shall pay to the
Corporation an amount in cash with respect to each share of Common
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 the Participant for such share.
(ii) Any Award outstanding under the Plan shall automatically
terminate and shall no longer be exercisable and all Shares of
Restricted Stock then held shall automatically terminate.
11
<PAGE>
(b) The provisions of this Section 3.14 shall not limit or restrict in any
manner any rights or remedies which the Corporation and its Subsidiaries may
have under any separate employment agreement with a Participant and or otherwise
with respect to competition by a Participant.
(c) If any provisions of this Section 3.14 should be found by any court of
competent jurisdiction to be unreasonable by reason of 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 or 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.
12
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