<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 23, 1997
REGISTRATION NO. 333-22811
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ON'VILLAGE COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
CALIFORNIA 7375/7379 95-4556314
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
26135 MUREAU ROAD
SUITE 100
CALABASAS, CALIFORNIA 91302
TEL. (818) 871-2800
FAX (818) 871-2828
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JACK B. TRACHT
CHIEF EXECUTIVE OFFICER
ON'VILLAGE COMMUNICATIONS, INC.
26135 MUREAU ROAD
SUITE 100
CALABASAS, CALIFORNIA 91302
TEL. (818) 871-2800
FAX (818) 871-2828
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
SANFORD J. HILLSBERG, ESQ. SHELDON MISHER, ESQ.
LAWRENCE P. SCHNAPP, ESQ. ALISON S. NEWMAN, ESQ.
TROY & GOULD PROFESSIONAL CORPORATION BACHNER, TALLY, POLEVOY & MISHER LLP
1801 CENTURY PARK EAST, SUITE 1600 380 MADISON AVENUE
LOS ANGELES, CALIFORNIA 90067 NEW YORK, NEW YORK 10017
TEL. (310) 553-4441 TEL. (212) 687-7000
FAX. (310) 201-4746 FAX. (212) 682-5729
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended ("Securities Act"), check the following box. [X]
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 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> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 23, 1997
PROSPECTUS
[LOGO]
1,900,000 UNITS
[LOGO]
CONSISTING OF 1,900,000 SHARES OF CLASS A COMMON STOCK AND
1,900,000 REDEEMABLE CLASS A WARRANTS
Each unit ("Unit") offered by On'Village Communications, Inc. (the
"Company"), a development stage company, consists of one share of Class A Common
Stock (the "Class A Common Stock") and one redeemable Class A Warrant (the
"Warrants"). The components of the Units will be transferable separately 90 days
from the date of this Prospectus or such earlier date (the "Separation Date") as
D.H. Blair Investment Banking Corp. may determine in its sole discretion. Each
Warrant entitles the holder to purchase one share of Class A Common Stock at an
exercise price of $6.50, subject to adjustment from the Separation Date through
the fifth anniversary of the date of this Prospectus. The Warrants are subject
to redemption commencing one year from the date of this Prospectus, by the
Company at $.05 per Warrant on 30 days' written notice if the closing bid price
of the Class A Common Stock for 30 consecutive trading days ending within 15
days of the notice of redemption of the Warrants averages in excess of $9.10 per
share (subject to adjustment). See "Description of Securities."
Prior to this offering (the "Offering") there has been no public market for
the Units, the Class A Common Stock or the Warrants, and there can be no
assurance that such a market will develop after the completion of the Offering.
See "Underwriting" for a discussion of factors considered in determining the
initial public offering price. The Units, the Class A Common Stock and the
Warrants have been approved for quotation on the Nasdaq SmallCap Market under
the symbols "ONVCU," "ONVCA" and "ONVCW," respectively, subject to official
notice of issuance. FOR INFORMATION CONCERNING A SECURITIES AND EXCHANGE
COMMISSION INVESTIGATION RELATING TO THE REPRESENTATIVE (AS DEFINED BELOW), SEE
"RISK FACTORS" AND "UNDERWRITING."
The Company's Class A Common Stock and Class B Common Stock (collectively,
the "Common Stock") are essentially identical in all respects except that the
Class B Common Stock has five votes per share and the Class A Common Stock has
one vote per share. The Class B Common Stock is convertible into Class A Common
Stock on a share for share basis. Immediately following the consummation of the
Offering, the executive officers and directors of the Company will possess
approximately 67% of the combined voting power in respect of matters submitted
for the vote of all holders and, therefore, will be able to elect at least a
majority of the Company's directors and control the Company. See "Principal
Shareholders" and "Description of Securities."
------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SUBSTANTIAL
IMMEDIATE DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 8 AND "DILUTION."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE 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>
<S> <C> <C> <C>
================================================================================================================
UNDERWRITING DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2)
- ----------------------------------------------------------------------------------------------------------------
Per Unit................................ $5.00 $.50 $4.50
- ----------------------------------------------------------------------------------------------------------------
Total(3)................................ $9,500,000 $950,000 $8,550,000
================================================================================================================
</TABLE>
(1) Does not reflect additional compensation to be received by D.H. Blair
Investment Banking Corp., the representative (the "Representative") of the
several underwriters (the "Underwriters") in the form of (i) a
non-accountable expense allowance of $285,000 or $0.15 per Unit ($327,750 if
the over-allotment option is exercised in full); and (ii) an option to
purchase up to 190,000 Units at an exercise price of $8.25 per Unit,
exercisable over a period of two years commencing three years from the date
of this Prospectus (the "Unit Purchase Option"). In addition, the Company
has agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act"). See "Underwriting."
(2) Before deducting estimated expenses of the Offering of $835,000 ($877,750 if
the over-allotment is exercised) payable by the Company, including the
Representative's non-accountable expense allowance.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 285,000 additional Units on the same terms and conditions as set forth
above, solely to cover over-allotments, if any, subject to the right of the
Representative to elect, in its sole discretion, to exercise such option
individually, and not as representative of the several Underwriters. If the
over-allotment option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, and Proceeds to Company will be
increased to $10,925,000, $1,092,500 and $9,832,500, respectively. See
"Underwriting."
The Units are offered by the Underwriters on a "firm commitment" basis
when, as and if delivered to and accepted by the Underwriters, and subject to
withdrawal or cancellation of the offer without notice and to their right to
reject orders in whole or in part and to certain other conditions. It is
expected that delivery of the certificates representing the Units will be made
at the offices of D.H. Blair Investment Banking Corp., New York, New York, on or
about , 1997.
------------------------
D.H. BLAIR INVESTMENT BANKING CORP.
------------------------
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE> 3
[PHOTOGRAPHS]
ON'VILLAGE
YELLOW PAGES+
OUR WORLD VIEW
<TABLE>
<S> <C>
National Local
- - Business Listings Nationwide - Resale arrangements with Independent Yellow Page
publishers nationwide
[Photo of page from [Photo of page from On'Village Website]
On'Village Website]
</TABLE>
ON'VILLAGE COMMUNICATIONS INC
www.onvillage.com. - www.onzine.com. - www.ontour.net - www.onpages.com
info @ onvillage.com
<TABLE>
<S> <C>
[photo of an On'Village street sign and an American flag] [Photo of the NY skyline with "On'Village" written
into sky]
[Photo of several houses with "On'Village" written across] [Photo of a sailboat with "On'Village" written on the
sail.]
</TABLE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE UNITS, CLASS A
COMMON STOCK AND/OR WARRANTS. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF
UNITS, CLASS A COMMON STOCK AND/OR WARRANTS FOLLOWING THE PRICING OF THE
OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE UNITS, CLASS A COMMON STOCK
AND/OR WARRANTS OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE UNITS, COMMON
STOCK AND/OR WARRANTS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
The Company is not currently a reporting company under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Upon completion of the
Offering, the Company intends to register as such and to furnish its
securityholders with annual reports containing audited financial statements and
such interim unaudited reports as it deems appropriate.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is qualified in
its entirety by the more detailed information and financial data (including the
financial statements and the notes thereto) appearing elsewhere in this
Prospectus. Unless otherwise noted, all information in this Prospectus (a)
assumes no exercise of (i) the Underwriters' over-allotment option, (ii) the
Warrants, (iii) the Representative's Unit Purchase Option, (iv) the Public
Bridge Warrants (defined below), or (v) options granted or available for grant
under the Company's 1997 Stock Option Plan (the "Option Plan") and (b) gives
effect to the conversion, which will occur upon the closing of the Offering, of
(x) the 1,200,000 bridge warrants (the "Bridge Warrants") issued in connection
with the Company's private placement completed in January 1997 (the "Bridge
Financing") and (y) the 62,500 bridge warrants (the "Additional Bridge
Warrants") issued in connection with the Company's private placement to one
institutional investor in September 1997 (the "Additional Bridge Financing"),
into an aggregate of 1,262,500 warrants (the "Public Bridge Warrants") with
terms substantially identical to the Warrants offered hereby. All share, per
share and other information contained in this Prospectus has been adjusted to
reflect the recapitalization effected in October 1996 and January 1997. See "--
The Recapitalization," "Capitalization," "Management -- Stock Option Plan" and
"Description of Securities."
THE COMPANY
On'Village Communications, Inc. (the "Company") is a development stage
company engaged in the development, publishing and marketing of World Wide
Web-based services designed to help users access information on the Internet,
while at the same time providing advertisers with an efficient and innovative
means of reaching targeted audiences. The Company's primary service offering is
"On'Village Yellow Pages," an on-line national yellow page directory service
which users can currently access through the Company's Web address,
"http://www.onvillage.com." This service, offered free of charge to the user,
enables the user to access the Company's licensed database of over 15 million
business listings nationwide and to perform a search of desired listings
presently by category, business name and business location. At the same time,
On'Village Yellow Pages offers businesses the ability to advertise on the
Internet in what management believes is a targeted, cost-effective and
interactive manner. To better reach their targeted audiences, businesses are
given the opportunity by the Company to purchase enhanced advertising services
that supplement the basic yellow page listing. These enhanced services include
priority listings, listings on the Company's other sites, graphics and logo
advertisements, enhanced textual advertisements, including detailed display
banners, listings of businesses by additional categories and cities, and
additional URL and e-mail links.
The Company believes that the Internet represents an important new and
growing medium for advertisers to reach consumers. The Company's objective is to
position itself to take advantage of this growth by serving the needs of its
advertising customers. The Company's strategy is to develop a critical mass of
advertising customers who purchase enhanced advertisements on the On'Village
Yellow Pages as well as the Company's other Internet services. The Company
believes that the most effective way to achieve this base of advertisers is
through joint marketing and sales arrangements with independent local yellow
page publishers ("Independent Publishers"), who contract with the Company to
directly market and resell the Company's services to the Individual Publishers'
existing base of customers and who may provide referrals to the Company of
customers that indicate an interest in an expanded Internet presence. The
Company believes there are an estimated 350 Independent Publishers in the United
States. As of September 30, 1997, the Company had entered into arrangements with
70 Independent Publishers. Although the Company has experienced only limited
sales of its enhanced advertising services to date, the Company plans to
continue to offer these services both indirectly through the Independent
Publishers and directly to customers.
To distinguish itself from other on-line yellow page services, the Company
provides and is in the process of refining several additional services developed
by the Company. These offerings include "My Place," a membership service that
offers users various personalized services, products and promotions, and
"On'Zine," an interactive service providing users the ability to communicate and
immediately access relevant and related content and information on designated
third-party Websites. These sites are organized by category and have
3
<PAGE> 5
been selected, reviewed and rated by the Company. The Company also recently
introduced "OnTour," a compilation of information regarding select U.S.
destinations, currently comprised of information regarding five national parks
and several other tourist destinations. The Company believes that these
additional services, in addition to attracting users, will enable advertisers to
reach a more targeted audience. The Company recently has commenced offering
other ancillary services to customers through Independent Publishers and
directly to customers referred by Independent Publishers such as the generation
of custom and semi-custom Websites. In the future, the Company may also attempt
to eventually generate revenue through the hosting of business-to-consumer and
business-to-business electronic commerce on the Internet.
The Company believes that distributing and marketing its services widely is
a key to successfully growing its base of users as well as enhancing its
marketability to its advertising customers. The Company was able to gain access
to a large audience through its agreement with Netscape Communications
Corporation ("Netscape"), which provides that the Company's yellow page
directory is listed as a yellow page service on Netscape's Web page, accessible
via the "Net Search" button, pursuant to the Netscape Distinguished Provider
Program. Although the agreement with Netscape provides for the Company's
inclusion in the program through April 1998, Netscape has the option, upon 90
days' notice, to terminate the agreement at any time. If Netscape were to choose
to terminate the agreement, the Company would likely suffer a significant
decrease in the traffic to its sites, thereby decreasing the marketability of
the Company's services. Therefore, in order to maintain and/or diversify its
channels of distribution, the Company is also currently exploring the creation
of alternate arrangements with Website providers, browser providers and other
distribution channels, to supplement or replace its arrangement with Netscape.
As of the date of this Prospectus, the Company has generated extremely
limited revenue. The Company has incurred operating losses to date and expects
that losses will continue for the foreseeable future. No assurance can be given
that the Company's strategy will be successful or will ever lead to the
generation of significant revenue or operating income. See "Risk Factors."
The principal executive offices of the Company are located at 26135 Mureau
Road, Suite 100, Calabasas, California 91302. The Company's telephone number is
(818) 871-2800.
THE RECAPITALIZATION
The Company was organized as a California corporation in November 1995
under the name "e.ventures, Inc." In October 1996, the Company amended its
Articles of Incorporation to provide for a 6.94975-for-1 split of the then
outstanding shares of its common stock. The Company amended its Articles of
Incorporation again in January 1997 to change the Company's name from
"e.ventures, Inc." to "On'Village Communications, Inc.", to reclassify its
common stock into two classes, consisting of 18,800,000 authorized shares of
Class A Common Stock and 1,400,000 authorized shares of Class B Common Stock and
to convert each then outstanding share of the Company's common stock into one
share of Class B Common Stock. The Class A Common Stock and Class B Common Stock
are essentially identical in all respects except that the Class B Common Stock
has five votes per share and the Class A Common Stock has one vote per share.
See "Description of Securities." The foregoing changes are herein collectively
referred to as the "Recapitalization." All share, per share and other
information contained in this Prospectus has been adjusted to reflect the
Recapitalization.
4
<PAGE> 6
THE OFFERING
Securities Offered...... 1,900,000 Units, each Unit consisting of one share of
Class A Common Stock and one Warrant. Each Warrant
entitles the holder to purchase one share of Class A
Common Stock at an exercise price of $6.50, subject to
adjustment, from and after the Separation Date through
the fifth anniversary of the date of this Prospectus.
The Warrants are subject to redemption in certain
circumstances on 30 days' written notice. See
"Description of Securities."
Common Stock Outstanding
Before the
Offering(1)........... Class A Common Stock........................0 shares(2)
Class B Common Stock................1,199,996 shares(3)
Common Stock Outstanding
After the
Offering(1)........... Class A Common Stock................1,900,000 shares(4)
Class B Common Stock................1,199,996 shares(3)
Use of Proceeds......... The net proceeds of the Offering will be used for the
repayment of $2,154,000 principal amount of 10%
promissory notes (the "Bridge Notes"), including
interest, issued in the Bridge Financing, the repayment
of $645,000 principal amount of 10% promissory notes
(the "Blair Notes"), including interest, issued to the
Representative and a corporation controlled by a family
member of the sole stockholder of the Representative,
the repayment of $253,000 principal amount of a 10%
promissory note (the "Additional Bridge Note"),
including interest, issued in the Additional Bridge
Financing, selling expenses, advertising, promotion and
marketing activities, research and development, license
fees and working capital purposes. See "Use of
Proceeds."
Risk Factors............ The Offering involves a high degree of risk and
immediate substantial dilution. See "Risk Factors" and
"Dilution."
Nasdaq Symbols(5):
Units................. ONVCU
Class A
Common Stock.......... ONVCA
Warrants.............. ONVCW
- ------------------
(1) For a description of the voting and other rights of the Class A Common Stock
and Class B Common Stock, see "Description of Securities -- Common Stock."
(2) Does not include (i) 300,000 shares of Class A Common Stock reserved for
issuance under the Option Plan, under which options to purchase 30,000
shares have been granted to date, (ii) an aggregate of 1,262,500 shares of
Class A Common Stock issuable upon exercise of the Bridge Warrants and the
Additional Bridge Warrants, and (iii) up to 62,500 shares of Class A Common
Stock which may be issuable upon exercise of the Additional Bridge Warrants.
See "Capitalization" and "Management -- Stock Option Plan."
(3) Includes 800,000 shares of Class B Common Stock (the "Escrow Shares") which
have been deposited into escrow by the holders thereof. The Escrow Shares
are subject to cancellation and will be contributed to the capital of the
Company if the Company does not attain certain earnings levels or the market
price of the Company's Class A Common Stock does not achieve certain levels.
If such earnings or market price levels are met, the Company will record a
substantial non-cash charge to earnings, for financial reporting purposes,
as compensation expense relating to the value of the Escrow Shares released
to Company officers, directors, employees and consultants. See
"Capitalization," "Management's Discus-
5
<PAGE> 7
sion and Analysis of Financial Condition and Results of Operations -- Charge
to Income in the Event of Release of Escrow Shares" and "Principal
Shareholders -- Escrow Shares."
(4) Does not include (i) 1,900,000 shares of Class A Common Stock issuable upon
exercise of the Warrants included in the Units offered hereby; (ii) 570,000
shares of Class A Common Stock issuable upon exercise of the Underwriters'
overallotment option, including the shares issuable upon exercise of the
Warrants included in the Units subject to such option; (iii) 380,000 shares
of Class A Common Stock issuable upon exercise of the Representative's Unit
Purchase Option and the Warrants included in the Units issuable upon
exercise of the Representative's Unit Purchase Option; (iv) 1,262,500 shares
of Class A Common Stock issuable upon exercise of the Public Bridge Warrants
and (v) up to 62,500 shares of Class A Common Stock which may be issuable
upon exercise of the Public Bridge Warrants. Also does not include 300,000
shares of Class A Common Stock reserved for issuance under the Option Plan,
under which options to purchase 30,000 shares have been granted to date.
(5) Notwithstanding quotation on Nasdaq, there can be no assurance that an
active trading market for the Company's securities will develop or, if
developed, that it will be sustained.
6
<PAGE> 8
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NOVEMBER 13, 1995
NOVEMBER 13, 1995 SIX MONTHS ENDED (INCEPTION) TO
(INCEPTION) TO YEAR ENDED ----------------------------- JUNE 30, 1997
DECEMBER 31, 1995 DECEMBER 31, 1996 JUNE 30, 1996 JUNE 30, 1997 (CUMULATIVE)
----------------- ----------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $ -- $ 65,548 $ 40,925 $ 23,914 $ 89,462
--------- ----------- ----------- ----------- -----------
Costs and expenses
Cost of revenue....... 6,250 114,052 51,998 63,031 183,333
Research and
development......... -- -- -- 59,249 59,249
General and
administrative...... 12,325 357,552 173,716 961,632 1,331,509
Selling and
marketing........... -- 152,365 24,187 487,651 640,016
--------- ----------- ----------- ----------- -----------
Total costs and
expenses.............. 18,575 623,969 249,901 1,571,563 2,214,107
--------- ----------- ----------- ----------- -----------
Operating loss.......... $ (18,575) $ (558,421) $ (208,976) $ (1,547,649) $(2,124,645)
--------- ----------- ----------- ----------- -----------
Net interest expense.... -- 19,702 -- 383,348 403,050
Net loss................ $ (18,575) $ (578,123) $ (208,976) $ (1,930,997) $(2,527,695)
========= =========== =========== =========== ===========
Net loss per common
share(1).............. $ (0.02) $ (0.67) $ (0.25) $ (2.13)
========= =========== =========== ===========
Weighted average common
shares
outstanding(1)........ 818,344 858,499 850,777 906,378
========= =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(2)(3)
----------- ------------ -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency)..................... $(2,419,152) $ (2,390,402) $ 5,339,187
Total assets..................................... 836,449 1,276,449 5,773,858
Total liabilities................................ 2,735,404 3,146,654 346,104
Deficit accumulated during the development
stage.......................................... (2,527,695) (2,527,695) (2,944,736)
Total shareholders' equity (deficit)............. (1,898,955) (1,870,205) 5,427,754
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the weighted average number of shares of Common Stock used
in computing the net loss per common share. Excludes the Escrow Shares. See
"Principal Shareholders -- Escrow Shares" and Note 9 of Notes to Financial
Statements.
(2) Gives pro forma effect to the issuance of (i) $190,000 principal amount of
Blair Notes and (ii) a $250,000 principal amount Additional Bridge Note, in
each case subsequent to June 30, 1997. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(3) Adjusted to give effect to the sale of the 1,900,000 Units offered hereby at
an offering price of $5.00 per Unit, and the receipt of the net proceeds
therefrom and the use of a portion of the net proceeds to repay the Bridge
Notes, the Blair Notes and the Additional Bridge Note, together with accrued
interest of $180,000 through October 31, 1997, and an estimated charge to
operations of $417,000 representing unamortized debt discount and debt
issuance costs associated with the Bridge Financing and the Additional
Bridge Financing. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
7
<PAGE> 9
RISK FACTORS
The securities offered hereby are highly speculative in nature and involve
a high degree of risk. Prospective investors should carefully consider, along
with the other information contained in this Prospectus, the following
considerations and risks in evaluating an investment in the Company. Certain
statements contained in this Prospectus, including statements concerning the
Company's future cash and financing requirements; the Company's substantial
dependence on Independent Publishers and other strategic arrangements; the
Company's dependence on continued growth in use of the Internet; the Company's
reliance on advertising revenue and the uncertain adoption of the Internet as an
advertising medium; the competitive market for the Company's services; and other
statements contained herein regarding matters that are not historical facts, are
forward looking statements; actual results may differ materially from those set
forth in the forward looking statements, which statements involve risks and
uncertainties.
DEVELOPMENT STAGE COMPANY; LIMITED OPERATING HISTORY. The Company commenced
operations in November 1995, is a development stage company, and has a limited
operating history. Since it commenced operations, the Company has been engaged
principally in the development, design and refinement of its Websites,
market-testing activities, and marketing activities directed towards
establishing relationships with Independent Publishers, in addition to capital
raising activities. Accordingly, the Company has an extremely limited operating
history upon which an evaluation of the Company's prospects can be made. The
Company and its prospects must be considered in light of the risks, expenses and
difficulties frequently encountered in the establishment of a new business in an
emerging industry and the development and commercialization of a new service.
These risks include, but are not limited to, unanticipated problems relating to
product development, product introduction and acceptance, marketing and
competition. There can be no assurance that the Company's efforts will result in
successful commercialization or further development of the Company's services,
that the Company's marketing efforts will be successful or that the Company will
ever achieve significant revenue. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business."
ACCUMULATED DEFICIT; WORKING CAPITAL DEFICIT; HISTORY OF LOSSES;
EXPECTATION OF SUBSTANTIAL FUTURE LOSSES. At June 30, 1997, the Company had a
deficit accumulated during the development stage of approximately $2,528,000 and
a working capital deficit of approximately $2,419,000. During the period
November 13, 1995 (inception) to June 30, 1997, the Company recognized limited
revenue of approximately $89,000 and incurred a cumulative net loss of
approximately $2,528,000, including net losses of approximately $578,000 for the
year ended December 31, 1996 and approximately $1,931,000 for the six months
ended June 30, 1997. Since June 30, 1997, the Company has continued to incur
significant losses. Such losses have resulted principally from limited revenues
from operations and costs associated with the design, development and
implementation of the Company's services, including general and administrative
expenses and marketing activities. The Company plans on significantly increasing
its level of operating expenses and will be required to make significant
additional expenditures following consummation of the Offering to continue to
enhance its services and to attract advertisers to the Company's services. See
"Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." In addition, pursuant to the Company's
agreement with Netscape, the Company is required to make significant payments to
Netscape. Further, the Company is currently exploring the creation of
alternative arrangements with Website providers, browser providers and other
distribution channels, to supplement or replace its arrangement with Netscape.
Any such arrangement may require payments or other consideration for listing the
Company's services. Moreover, the Company is obligated to make minimum annual
royalty payments to Pro-CD, Inc. ("Pro-CD") in order to continue to license its
database. See "-- Dependence on Relationship with Pro CD." The Company
anticipates that it will incur significant losses until such time, if ever, that
the Company attracts and retains a sufficient number of advertisers who purchase
the Company's enhanced services (through relationships with Independent
Publishers or otherwise) to fund the Company's continuing operations. There can
be no assurance that the Company will be able to attract and retain a sufficient
number of such advertising customers to generate significant revenue, that the
Company will generate positive cash flow from its operations, or that the
Company will attain or thereafter sustain profitability in any future period.
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UNCERTAINTY AS TO ABILITY TO CONTINUE AS A GOING CONCERN. The Company's
independent certified public accountants have included an explanatory paragraph
in their report stating that the Company's financial statements have been
prepared assuming that the Company will continue as a going concern and that the
Company's working capital deficiency and shareholders' deficiency raise
substantial doubt as to the Company's ability to continue as a going concern.
See "Financial Statements -- Report of Independent Certified Public
Accountants."
FUTURE ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE CAPITAL WILL BE
AVAILABLE. The Company anticipates, based on currently proposed plans and
assumptions relating to its operations (including assumptions relating to the
generation of revenue through relationships with Independent Publishers or
otherwise), that the net proceeds of the Offering, together with anticipated
revenue from sales of enhanced advertisements and other Internet services,
should be sufficient to fund the Company's contemplated cash requirements for
approximately 12 months following consummation of the Offering. In the event the
Company's plans change, its assumptions change or prove to be inaccurate or the
Company's funds for operations otherwise prove to be insufficient (including due
to anticipated technical or other problems), the Company could be required to
seek additional financing prior to the expiration of such 12-month period. In
addition, following such 12-month period, if the Company does not generate
sufficient revenue from operations, the Company will need to obtain additional
financing. The Company's ability to generate such revenue will depend primarily
upon the ability of the Company to sell enhanced advertising services to
businesses, primarily through the efforts of Independent Publishers as well as
directly to customers. The Company has no commitments from any third parties for
any future funding and there can be no assurance that the Company will be able
to obtain financing in the future on terms acceptable to the Company, if at all.
Any additional equity financing may be dilutive to the Company's shareholders
and debt financing, if available, may involve restrictive covenants with respect
to dividends, raising future capital and other financial and operational
matters. If the Company is not able to obtain additional financing as needed,
the Company may be required to curtail its growth plans, significantly reduce
operating costs or cease operations completely. See "Use of Proceeds."
SUBSTANTIAL DEPENDENCE ON INDEPENDENT PUBLISHERS. The Company does not
currently possess, nor does it believe that it will have the capability in the
near future to develop, a sales force capable of effectively marketing the
Company's services directly to individual advertisers in order to develop a
critical mass of customers who will purchase enhanced advertisements on the
On'Village Yellow Pages. Accordingly, the Company believes that the most
effective method of building this customer base is to enter into arrangements
with Independent Publishers who will market and resell the Company's services to
their existing customer base and who may provide referrals to the Company of
customers that indicate an interest in an expanded Internet presence. As of
September 30, 1997, the Company had entered into 70 such arrangements with
Independent Publishers. The Company's ability to enter into a sufficient number
of arrangements with Independent Publishers, and the Company's ability to renew
any arrangements entered into (which are typically for a term of only one year),
will be dependent upon a number of factors, including the Company's ability to
effectively market the benefits of its services to Independent Publishers. The
Company currently has limited marketing capabilities and needs to hire a
significant number of additional sales and marketing personnel. The Company
intends to use a portion of the proceeds of the Offering to hire certain of such
personnel and outside agents and consultants to market its services, primarily
to Independent Publishers as well as directly to customers. Further, the Company
believes it will face significant competition from existing and future providers
of Internet-related services who attempt to market their services in a similar
manner.
Even if the Company is successful in entering into arrangements with a
sufficient number of Independent Publishers, no assurance can be given that such
Independent Publishers will market the Company's services effectively or that
such arrangements will lead to the generation of a significant amount of
revenue. To date, the Company has experienced only limited sales of its enhanced
advertising services through Independent Publishers. The inability of the
Company to enter into arrangements with a sufficient number of Independent
Publishers, or such Independent Publishers' inability to successfully market and
resell the Company's services, would have a material adverse effect on the
Company's business, results of operations and financial condition. See
"-- Reliance on Advertising Revenue; Uncertain Adoption of the Internet as an
Advertising Medium."
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RELIANCE ON ADVERTISING REVENUE; UNCERTAIN ADOPTION OF THE INTERNET AS AN
ADVERTISING MEDIUM. The Company has derived a significant amount of its limited
revenue to date from the sale of advertisements in a limited geographical area,
and expects to continue to derive a substantial portion of its revenue, if any,
from the sale of advertisements for the foreseeable future. There can be no
assurance that the Company will be able to successfully attract advertisers to
its services, either directly or through Independent Publishers. The Company's
ability to generate significant advertising revenue will depend, among other
things, on advertisers' acceptance of the Internet as an attractive and
sustainable commercial medium, the development of a large base of users of the
Company's services with demographic characteristics attractive to advertisers,
the successful expansion of the Company's advertising capabilities and the
Company's ability to enter into a sufficient number of arrangements with
Independent Publishers. Furthermore, there is intense competition among sellers
of advertising space on the Internet, and a variety of pricing models offered by
different vendors for a range of advertising services. The Company intends to
rely on independent third party sales representatives affiliated with
Independent Publishers for the sale of advertising on the Company's Websites.
Failure of these third party agents to achieve successful advertising sales
could have a material adverse effect on the Company's ability to generate
revenue. See "-- Substantial Dependence on Independent Publishers."
Because the Company expects to derive a substantial portion of its revenue
in the foreseeable future from sales of Web-based advertising, the future
success of the Company is highly dependent on the development of the Internet as
an advertising medium. Most of the Company's advertising customers and potential
advertising customers may have limited or no experience using the Internet as an
advertising medium, have not devoted a significant portion of their advertising
expenditures to Internet-based advertising and may not find such advertising to
be effective for promoting their products and services relative to traditional
print and broadcast media. No standards have yet been widely accepted for the
measurement of the effectiveness of Internet-based advertising, and there can be
no assurance that such standards will develop sufficiently to support
Internet-based advertising as a significant advertising medium. The Internet
industry is young and has few proven products and services. Moreover, critical
issues concerning the commercial use of the Internet (including security,
reliability, cost, ease of use and access, quality of service and acceptance of
advertising) remain unresolved and may negatively affect the growth of Internet
use or the attractiveness of Internet advertising. There can be no assurance
that widespread commercial use of the Internet will develop, or that the
Internet will develop as an effective and measurable medium for advertising. See
"-- Dependence on Continued Growth in Use of the Internet."
DEPENDENCE ON RELATIONSHIP WITH NETSCAPE; ABILITY OF NETSCAPE TO TERMINATE
CONTRACT. The Company is a party to an agreement with Netscape which provides
that the Company's services will be listed on Netscape's Web page, accessible
via the "Net Search" button, through April 1998 pursuant to the Netscape
Distinguished Provider Program. Currently, two competing yellow page services as
well as a number of leading navigational services with yellow page directories,
are also listed. The agreement with Netscape is not exclusive and gives Netscape
the ability to change its services and Web page without the Company's approval.
In addition, the agreement provides that either party can terminate the
agreement at any time, upon 90 days' prior notice. Further, pursuant to its
agreement, the Company is required to make certain payments to Netscape by
October 31, 1997. Failure to make such payments could result in a default by the
Company under the Netscape agreement. As a consequence, Netscape could terminate
the agreement prior to the end of the 90 day notice period. There can be no
assurance that Netscape will not terminate the agreement prior to its expiration
or that it will renew the agreement following the expiration of its current
term, that Netscape will not enter into similar arrangements with other
competing companies (thereby resulting in an increase in the number of
competitive companies listed on Netscape's Web page), or that Netscape will not
develop its own service offerings competitive with those of the Company. If
Netscape were to choose to terminate the agreement, or if it were to develop and
market its own competitive services or promote competing services from other
third parties, the Company would likely suffer a significant decrease in the
traffic to its sites, thereby decreasing the marketability of the Company's
services. The Company is currently exploring the creation of alternate
arrangements with Website providers, browser providers and other distribution
channels, to supplement or replace its arrangement with Netscape. No assurance
can be given that the Company will enter into any such arrangements on terms
acceptable to the Company or at all, or that any such arrangements will generate
significant traffic to the Company's on-line sites.
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DEPENDENCE ON THIRD PARTY TECHNOLOGY SUPPLIER. The Company is currently
dependent on Network Publishing, Inc. ("Network Publishing") for certain
integral components of its current and future technologies. All of the Company's
hardware systems and maintenance activities, including server hosting, are
managed and maintained by Network Publishing. The Company's agreement with
Network Publishing provides that Network Publishing will host and maintain the
Company's computer hardware. Given that Network Publishing may terminate the
agreement upon 120 days' notice, there is no assurance that the services of
Network Publishing will be available in the future, or that if the agreement is
terminated another entity satisfactory to the Company can or will provide the
requisite services on a timely basis or at all. Failure of Network Publishing or
another entity to support and maintain the Company's hardware would have a
material adverse effect on the Company's business, results of operations and
financial condition. Given the technological changes occurring in the industry,
there can be no assurance that the technologies utilized by the Company will
remain competitive in the future.
The Company also relies on Network Publishing to provide the Company with
access to its Internet connection. Although the Company believes that Internet
access through other providers is currently available, any disruption in the
Internet access by Network Publishing or any failure of Network Publishing to
handle a higher volume of queries could have a material adverse effect on the
Company's business, results of operations and financial condition.
The executive officers of the Company have experience in the apparel and
wholesale industries, but prior to forming the Company, had limited technical
experience in the field of computers or the Internet. The Company currently has
only four employees with significant technical experience. Although the Company
plans on hiring additional technical personnel, until the Company does so it
will remain dependent on Network Publishing or other third parties to provide
technical support. See "-- Dependence on Key Personnel."
TECHNOLOGICAL CHANGE AND NEW SERVICES. The market for Internet products and
services is characterized by technological change, changing customer needs,
frequent new product introductions and evolving industry standards. These market
characteristics are exacerbated by the fact that many companies are expected to
introduce new Internet products and services in the near future. The Company's
future success will depend in significant part on its ability to continually and
on a timely basis introduce new services and technologies and to continue to
improve the performance, features and reliability of the Company's services in
response to both evolving demands of the marketplace and competitive product
offerings.
There can be no assurance that the Company will be successful in developing
new services or improving existing services that respond to technological
changes or evolving industry standards, that the Company will not experience
difficulties that could delay or prevent the successful development, licensing,
introduction and marketing of new or improved services, or that its new services
will adequately meet the requirements of the marketplace and achieve market
acceptance. In addition, new or enhanced services introduced by the Company may
contain undetected errors that require significant design modifications. This
could result in a loss of customer confidence and user support, thus adversely
affecting the use of the Company's services. See "-- Intense Competition; No
Substantial Barriers to Entry."
DEPENDENCE ON RELATIONSHIP WITH PRO-CD. The Company's On'Village Yellow
Pages directory consists of a database of business listings licensed from
Pro-CD, pursuant to a five-year licensing agreement entered into in December
1995. Pro-CD has the right to terminate the agreement on or after January 1,
1998, upon six months notice, if it is unable, or if it becomes impractical for
Pro-CD, to continue to supply the data. In addition, the terms of the license
are subject to a number of restrictions, the violation of which may result in
the cancellation by Pro-CD of the agreement. Pro-CD's unwillingness to continue
to license its database to the Company, whether before or after the expiration
of the existing agreement, would force the Company to secure an alternative
source of data and could require the Company to delete all directory listings
derived from the Pro-CD database. Although the Company believes that there exist
at least two alternative sources of data, no assurance can be given that the
Company would be able to enter into an agreement to license such data on a
timely basis, or at all, or on terms which the Company views as satisfactory.
Failure of the Company to enter into an agreement on a timely basis could cause
an interruption in the Company's business which would have a material adverse
effect on the Company's business, results of operations and financial condition.
In addition,
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the agreement does not prohibit Pro-CD from licensing its database to others,
including existing and potential competitors of the Company.
INTENSE COMPETITION; NO SUBSTANTIAL BARRIERS TO ENTRY. The market for
Internet products and services is highly competitive, with no substantial
barriers to entry, and the Company expects that competition will continue to
intensify. The market for the Company's services has only recently begun to
develop, is rapidly evolving and is characterized by an increasing number of
market entrants with competing products and services. Although the Company
believes that the diverse segments of the Internet market may provide
opportunities for more than one supplier of services similar to those of the
Company, it is possible that a single or few suppliers may dominate one or more
market segments. There can be no assurance that the Company's competitors will
not develop Internet services that are superior to those of the Company or that
achieve greater market acceptance than the Company's offerings. Any failure of
the Company to provide service offerings that achieve success in the short-term
could result in an insurmountable loss in market share and brand acceptance, and
could, therefore, have a material adverse effect upon the Company's business in
the long term.
A number of companies offer competitive services addressing certain of the
Company's target markets. Most of the Company's competitors have significantly
greater financial, technical and marketing resources than the Company. These
companies include America Online, Inc., Excite, Inc., Lycos, Inc., The McKinley
Group, CompuServe Corporation, Prodigy Services Company, Infoseek Corporation
and Yahoo! Corporation. Specifically, the Company's On'Village Yellow Page
directory service competes with other Internet Yellow Page directory services,
including BigYellow, BigBook, YellowNet, GTE SuperPages, Yellow Pages Online,
Switchboard, InfoSpace, ZIP2, American Business Information's Lookup USA and a
Netscape Guide by Yahoo! Corporation featuring the Yellow Page services of the
five regional Bell operating companies (the "Regional Bells"). In addition, the
Company competes with metasearch services that allow a user to search the
databases of several catalogs and directories simultaneously. The Company also
competes indirectly with database vendors that offer information search and
retrieval capabilities with their core database products. In the future, the
Company may encounter competition from providers of Web browser software,
including Netscape and Microsoft Corporation, on-line services and other
providers of other Internet services who elect to incorporate their own search
and retrieval features into their product and service offerings. A number of the
Company's Internet yellow pages competitors as well as many other companies
offer custom and semi-custom Website services that compete with the Website
services being offered by the Company.
Netscape and Pro-CD, as well as a number of the Company's current
advertising customers, have established relationships with certain of the
Company's competitors, and future advertising customers, licensees and licensors
may establish similar relationships. For example, the Netscape Guide by Yahoo!
Corporation features a yellow page service provided by the Regional Bells,
accessible through Netscape's "Destinations" toolbar. In addition, the Company
competes with on-line services and other Website operators as well as
traditional offline media such as print (including print yellow page
directories) and television for a share of advertisers' total advertising
budgets. Competition among current and future suppliers of Internet navigational
and directory services, as well as competition with other media for advertising
placements, could result in significant price competition and reductions in
advertising revenue. There can be no assurance that the Company will be able to
compete successfully against its current or future competitors.
MANAGEMENT OF POTENTIAL GROWTH; NEED TO ESTABLISH INFRASTRUCTURE. The
Company plans to significantly expand its operations following the Offering,
which could place a significant strain on the Company's limited managerial,
operational and financial resources. The Company's ability to manage this
expansion will require significant expansion of its service development,
marketing and sales, and technical and financial capability, and its personnel.
In particular, the Company intends to increase its dependence and reliance on
computer generated information. This will necessitate continuous reassessment of
the appropriateness of the Company's computerized data and systems. In addition,
the Company plans to add an additional approximately 30 employees in the
approximately 12 months following the consummation of the Offering. See
"Business -- Employees."
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There can be no assurance that the Company will be able to effectively
manage the expansion of its operations, that the Company's employees will work
together effectively, that the Company will be able to attract and retain
qualified personnel, that the Company's systems, procedures or controls will be
adequate to support the Company's operations or that Company's management will
be able to achieve the rapid execution necessary to fully exploit any potential
market opportunity for the Company's services. Any inability to effectively
manage growth could have a material adverse effect on the Company's business,
results of operations and financial condition.
DEVELOPING MARKET; UNPROVEN ACCEPTANCE OF THE COMPANY'S SERVICES. The
markets for the Company's services have only recently begun to develop, are
rapidly evolving and are characterized by an increasing number of market
entrants who have introduced or developed services similar to the services
offered by the Company for use on the Internet. As is typical in the case of a
new and rapidly evolving industry, demand and market acceptance for recently
introduced services are subject to a high level of uncertainty and risk. Because
the market for the Company's services is new and evolving, it is difficult to
predict the future growth rate, if any, and size of this market. There can be no
assurance that either the market for the Company's services will develop or that
demand for the Company's services will emerge or become sustainable.
In the future, the Company may attempt to develop a Web-based service that
is focused on information and resources relating to the purchase of consumer
products and services over the Internet. On-line purchasing of goods and
services by consumers is in an early stage of development, and has been hindered
to date by, among other factors, a lack of widely accepted secure payment
mechanisms. In addition, a significant number of well-capitalized and
established companies have developed or are currently developing online commerce
applications and technologies, many of which may compete with or eliminate or
reduce the need for, services that the Company may attempt to introduce. No
assurance can be given that the Company will successfully develop such a
service, or that if developed, such service will be profitable. See
"Business -- The Company's Services -- Proposed Services."
DEPENDENCE ON CONTINUED GROWTH IN USE OF THE INTERNET. The Company's future
success is substantially dependent upon continued growth in the use of the
Internet and the Web for information publication, distribution and commerce.
Rapid growth in the use of and interest in the Internet and the Web is a recent
phenomenon. There can be no assurance that information publication, advertising,
communication or commerce over the Internet will become widespread or that
extensive content (such as Web pages) will continue to be provided over the
Internet. The Internet may not prove to be a viable medium for information
publication, advertising, communication or commerce for a number of reasons,
including potentially inadequate development of the necessary infrastructure to
support the widespread use of the Internet, including a reliable network
backbone, or the timely development of performance improvements such as high
speed modems. In addition, to the extent that the Internet continues to
experience significant growth in the number of users and level of use, as
recently experienced by other on-line services, there can be no assurance that
the Internet infrastructure will continue to be able to support the demands
placed upon it by such potential growth. Further, the Internet could lose its
viability due to delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet activity, or due to
increased governmental regulation. Changes in or insufficient availability of
telecommunications services to support the Internet also could result in slower
response times and adversely affect usage of the Internet and therefore, the
Company's services.
CAPACITY CONSTRAINTS AND SYSTEM FAILURE. The performance of the Company's
services is critical to the Company's reputation and its ability to attract
advertisers to the Company's services and market acceptance of these services.
Any system failure that causes interruptions or that increases response time of
the Company's services would result in less traffic to the Company's sites and,
if sustained or repeated, would reduce the attractiveness of the Company's
services to advertisers, users and Independent Publishers. Recent increases in
the volume of searches conducted through the Company's services have strained
the capacity of the operating system, hardware and telecommunications lines
deployed by the Company, and has led to slower response times and operating
system failures. To respond to these problems, the Company has recently leased a
new hardware system and has commenced identifying new operating systems to
replace its existing operating system. Although the Company believes it will be
able to identify and purchase such new operating system, no
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assurance can be given that the Company will be able to integrate such operating
system with its hardware system in a timely and cost effective manner. In
addition, there can be no assurance that the Company's services and systems will
be able to scale appropriately to any further increases in users and services
offered. The Company is also dependent upon Web browser companies and Internet
and online service providers for access to its services, and users have
experienced and may in the future experience difficulties due to system or
software failures or incompatibilities not within the Company's control. The
Company is also dependent on Network Publishing for prompt delivery,
installation and service of servers and other equipment and services used to
provide the Company's services. Any disruption in the Internet access and
service provided by the Company or Network Publishing could have a material
adverse effect upon the Company's business, results of operations and financial
condition. See "-- Technological Change and New Services" and "-- Dependence on
Third Party Technology Supplier."
In addition, the Company's operations depend upon the Company's ability to
maintain and protect its computer systems located in Provo, Utah. These systems
are vulnerable to damage from fire, floods, earthquakes, power loss,
telecommunications failures, break-ins and similar events. The Company does not
currently have a disaster recovery plan in effect with respect to its computer
hardware system. Despite the implementation of network security measures by the
Company, its servers are also vulnerable to computer viruses, break-ins and
similar disruptive problems. Computer viruses, break-ins or other problems
caused by third parties could lead to interruptions, delays in or cessation of
service to users of the Company's services.
LIABILITY FOR INFORMATION RETRIEVED FROM THE INTERNET. The Company's
services link users to information which is downloaded, indexed and distributed
from Web pages published by third-party Internet Websites and content providers.
In addition, although the Company has certain monitoring safeguards in place,
certain of the Company's customers have the ability to enter and revise
advertising content directly on the Company's sites, and participants in the
Company's On'Zine "chat-areas" have the ability to directly enter content.
Accordingly, there is potential that claims will be made against the Company on
theories such as defamation, negligence, copyright or trademark infringement,
distribution of obscene, lascivious or indecent communications or other theories
of liability based on the nature and content of such materials. Such claims have
been brought, sometimes successfully, against on-line services in the past.
Although the Company carries general liability insurance, the Company's
insurance may not cover potential claims of this type, or may not be adequate to
indemnify the Company for all liability that may be imposed. Any imposition of
liability that is not covered by insurance or is in excess of insurance coverage
could have a material adverse effect on the Company's business, results of
operations and financial condition.
DEPENDENCE ON KEY PERSONNEL. The Company's future performance depends in
significant part upon the continued contributions of its senior management and
key technical personnel, including Mr. Jack B. Tracht, the Company's Chief
Executive Officer, Mr. Robert D. Tracht, the Company's President and Chief
Operating Officer, Mr. Jeff W. Walden, the Company's Senior Vice President of
Marketing, Mr. James E. Austin, the Company's Senior Vice President of Sales and
Secretary and Mr. Kent Hinkson, the Company's Director of Technology. Although
the Company has entered into employment agreements with each of the foregoing,
and has obtained key-man life insurance coverage on the lives of each of the
foregoing (other than Mr. Hinkson) in the amount of $2,000,000, the loss of
services of any of them could have a material adverse effect on the Company's
business, operating results and financial condition. Further, although Messrs.
R. Tracht and Walden's employment contracts provide that they will devote
substantially all of their time to the Company, they both will remain as
principals of Robert Tracht Enterprises, Inc. See "Management."
The Company's future success also depends on its continuing ability to
attract and retain highly qualified technical, sales and management personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company can retain its key technical, sales and management employees or that
it can attract, assimilate or retain other highly qualified technical, sales and
management personnel in the future. The Company plans to add an additional
approximately 30 employees in the approximately 12 months following the
consummation of the Offering in the areas of marketing, product development and
administration (including a total of approximately 10 to 15 national and
regional sales managers and sales support staff). See "Business -- Employees."
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GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES. The Company may be subject
to Sections 5 and 12 of the Federal Trade Commission Act (the "FTC Act"), which
regulate advertising in all media, including the Internet, and require
advertisers to have substantiation for advertising claims before disseminating
advertisements. The FTC Act prohibits the dissemination of false, deceptive,
misleading and unfair advertising, and grants the Federal Trade Commission
("FTC") enforcement powers to impose and seek civil and criminal penalties,
consumer redress, injunctive relief and other remedies upon persons who
disseminate prohibited advertisements. The Company could be subject to liability
under the FTC Act if it were found to have participated in creating and/or
disseminating a prohibited advertisement with knowledge, or reason to know that
the advertising was false or deceptive. The FTC has recently brought several
actions charging deceptive advertising via the Internet, and is actively seeking
new cases involving advertising via the Internet.
The Company may also be subject to the provisions of the recently enacted
Communications Decency Act (the "CDA"), which, among other things, imposes
substantial monetary fines and/or criminal penalties on anyone that distributes
or displays certain prohibited material over the Internet or knowingly permits a
telecommunications device under its control to be used for such purposes.
Although the manner in which the CDA will be interpreted and enforced and its
effect on the Company's operations cannot yet be fully determined, the CDA could
subject the Company to substantial liability. The CDA could also dampen the
growth of the Internet generally and decrease the acceptance of the Internet as
an advertising medium.
Other federal, state or local laws, regulations and policies, either now
existing or that may be adopted in the future, may apply to the business of the
Company and may subject the Company to significant liabilities, significantly
dampen growth in Internet usage, prevent the Company from offering certain
Internet content or services, or otherwise cause a material adverse effect on
the Company's business, results of operations and financial condition. These
laws, regulations and policies may apply to matters such as, but not limited to,
copyright, trademark, unfair competition, antitrust, property ownership,
negligence, defamation, indecency, obscenity, personal privacy, trade secrecy,
encryption, taxation and patents.
RELIANCE ON INTELLECTUAL PROPERTY RIGHTS; NO ASSURANCE OF OBTAINING SERVICE
MARK REGISTRATION. The Company relies on a combination of copyright and
trademark laws and contractual provisions to protect its intellectual property
rights. Despite the Company's efforts to protect its intellectual property
rights, unauthorized parties may attempt to copy aspects of the Company's
services, such as all or portions of the Company's directory listings. In
addition, there are few barriers to entry into the market for the Company's
services. There can be no assurance, therefore, that any of the Company's
competitors, most of whom have far greater resources than the Company, will not
independently develop technologies that are substantially equivalent or superior
to the Company's technologies. See "-- Intense Competition; No Substantial
Barriers to Entry."
The Company has applied for a service mark registration for "On'Village."
Although this application was initially denied, the Company has responded to the
denial, arguing that the registration should be granted. There can be no
assurance, however, that the Company's application will be approved. The Company
intends to focus its efforts on achieving brand recognition for its products;
therefore, failure of the Company to obtain the "On'Village" service mark
registration and the use of the name by third parties, could have a material
adverse effect on the Company's business, results of operations and financial
condition. The Company will continue to evaluate the registration of additional
service marks and trademarks, as appropriate.
There has been substantial litigation in the computer industry regarding
intellectual property rights. There can be no assurance that the Company will
not commence litigation to protect its position or third parties will not in the
future claim infringement by the Company with respect to current or future
services, trademarks or other rights (including the use of the "On'Village"
name), or that the Company will not counterclaim against any such parties in
such actions. Any such claims or counterclaims could be time-consuming, result
in costly litigation, or require the Company to redesign its services, any of
which could have a material adverse effect on the Company's business, operating
results and financial condition. Although the Company will take steps that it
considers appropriate to protect its intellectual property rights, the Company
believes its future success will depend primarily on its ability to rapidly
introduce new services and enhancements to its existing services, rather than
upon legal protections afforded existing intellectual property.
CONTROL BY INSIDERS; OWNERSHIP OF SHARES HAVING DISPROPORTIONATE VOTING
RIGHTS. Upon consummation of the Offering, Messrs. J. Tracht, R. Tracht, Walden
and Austin, the co-founders and executive officers
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<PAGE> 17
and directors of the Company, will own, in the aggregate, shares of the
Company's capital stock representing approximately 67% of the total voting power
of the Company. Accordingly, the foregoing individuals will be able to continue
to elect at least a majority of the Company's directors and thereby direct the
policies of the Company after consummation of the Offering. Furthermore, the
disproportionate vote afforded the shares of Class B Common Stock could also
serve to impede or prevent a change of control of the Company. As a result,
potential acquirors may be discouraged from seeking to acquire control of the
Company through the purchase of Class A Common Stock, which could have a
depressive effect on the market price of the Company's securities. See
"Principal Shareholders."
CHARGE TO INCOME IN THE EVENT OF RELEASE OF ESCROW SHARES. In the event any
Escrow Shares owned by securityholders of the Company who are officers,
directors, employees or consultants of the Company are released from escrow,
compensation expense will be recorded for financial reporting purposes.
Therefore, in the event the Company attains any of the earnings thresholds or
the Company's Class A Common Stock meets certain minimum bid prices required for
the release of the Escrow Shares, the Company will recognize during the period
in which the earnings thresholds are probable of being met or such stock levels
achieved, what could be a substantial non-cash charge to earnings, as
compensation expense to the Company. The amount of this charge would be equal to
the fair market value of such shares on the date of their release, and would
have the effect of increasing the Company's loss or reducing or eliminating
earnings, if any, at such time. Although the amount of compensation expense
recognized by the Company will not affect the Company's total shareholders'
equity (due to a corresponding increase in additional paid-in capital), it may
have a depressive effect on the market price of the Company's securities. Such
charge will not be deductible for income tax purposes. Notwithstanding the
foregoing discussion, there can be no assurance that the Company will attain the
targets which would enable the Escrow Shares to be released from escrow. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Charge to Income in the Event of Release of Escrow Shares."
SUBSTANTIAL PORTION OF NET PROCEEDS TO BE USED TO REPAY BRIDGE NOTES, BLAIR
NOTES AND ADDITIONAL BRIDGE NOTE; CHARGES ARISING FROM DEBT ISSUANCE
COSTS. Approximately $3,052,000 of the net proceeds of the Offering will be used
to repay in full interest and principal on the Bridge Notes, Blair Notes and
Additional Bridge Note. As a result, the proceeds from the Offering available
for the Company to meet its ongoing operating needs and expansion plans will be
correspondingly reduced. See "Use of Proceeds." Upon completion of the Offering
and repayment of the Bridge Notes and the Additional Bridge Note, a non-
recurring charge representing the unamortized debt discount and debt issuance
costs incurred in connection with the Bridge Financing and the Additional Bridge
Financing in the amount of $417,000 will be charged to operations. The aggregate
debt discount and debt issuance costs associated with the Bridge Financing and
Additional Bridge Financing are approximately $713,000. In addition, the Company
incurred a non-recurring charge representing unamortized debt discount and
interest relating to the Interim Notes through the date of repayment of
approximately $24,200, $14,200 of which was recorded in the fiscal quarter ended
December 31, 1996 and $10,000 of which was recorded in the fiscal quarter ended
March 31, 1997. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
BROAD DISCRETION AS TO USE OF PROCEEDS; CERTAIN PROCEEDS TO BENEFIT
INSIDERS. Of the net proceeds of the Offering, approximately $2,317,000 or 30.0%
has been allocated to working capital and will be used for such purposes as
management may determine in its sole discretion, without the need for
shareholder approval with respect to any such allocation. In particular, the
Company may use a portion of the proceeds to acquire other businesses or
technologies or products which are compatible with the Company's business for
the purpose of expanding its business or the Company may enter into strategic
alliances with other such companies. The Company does not currently have any
agreements, commitments or arrangements with respect to any proposed
acquisition, joint venture or strategic alliance, and no assurance can be given
that any acquisitions, joint ventures or strategic alliances will be made in the
future. See "Use of Proceeds."
Certain proceeds of the Offering will directly or indirectly benefit the
executive officers of the Company. Approximately $548,000 of the proceeds of the
Offering will be used to pay compensation to the Company's executive officers
during the 12 months following consummation of the Offering (including amounts
which will be paid to such officers upon consummation of the Offering with
respect to accrued salaries, which
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<PAGE> 18
amounts aggregated approximately $100,000 at September 30, 1997). In addition,
approximately $102,000 of the proceeds of the Bridge Notes (which Bridge Notes
will be repaid from the proceeds of the Offering) were used to make payments
with respect to accrued salaries to the Company's executive officers.
SHARES AVAILABLE FOR FUTURE SALE; REGISTRATION RIGHTS. Future sales of
Common Stock by existing shareholders pursuant to Rule 144 under the Securities
Act or otherwise, could have an adverse effect on the price of the Company's
securities. Upon the sale of the 1,900,000 Units offered hereby, the Company
will have outstanding 1,900,000 shares of Class A Common Stock, 1,199,996 shares
of Class B Common Stock, 1,900,000 Warrants and 1,262,500 Public Bridge Warrants
(2,185,000 shares of Class A Common Stock, 1,199,996 shares of Class B Common
Stock, 2,185,000 Warrants and 1,262,500 Public Bridge Warrants if the
Underwriters' over-allotment option is exercised in full). The shares of Class A
Common Stock and the Warrants sold in the Offering will be freely tradeable
without restriction under the Securities Act, unless acquired by "affiliates" of
the Company as that term is defined in the Securities Act. The 1,199,996
outstanding shares of Class B Common Stock are "restricted securities" within
the meaning of Rule 144 under the Securities Act. Pursuant to Rule 144,
substantially all of these restricted shares will be eligible for resale
commencing 90 days after consummation of the Offering (upon which resale they
will automatically convert into shares of Class A Common Stock). However, all
the holders of the shares of Class B Common Stock outstanding prior to the
Offering have agreed not to sell or otherwise dispose of any securities of the
Company for a period of 13 months from the date of this Prospectus without the
prior written consent of the Representative. Holders of 1,262,500 Public Bridge
Warrants have agreed not to sell any of the Public Bridge Warrants for at least
one year from the closing of the Offering. The Company has agreed to register
the Public Bridge Warrants and the shares of Common Stock underlying such Public
Bridge Warrants for resale upon termination of the lock-up period. In addition,
the holders of shares of Class B Common Stock have placed an aggregate of
800,000 of such shares in escrow. See "Principal Shareholders -- Escrow Shares."
The holders of the Unit Purchase Option have certain demand and "piggy-back"
registration rights covering their securities. The exercise of such rights could
involve substantial expense to the Company. Sales of Class A Common Stock, or
the possibility of such sales, in the public market may adversely affect the
market price of the securities offered hereby. See "Description of Securities,"
"Shares Eligible for Future Sale" and "Underwriting."
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS. Upon sale of the 1,900,000
Units offered hereby, the Company will have outstanding 1,900,000 Warrants to
purchase 1,900,000 shares of Class A Common Stock (or 2,185,000 Warrants to
purchase 2,185,000 shares of Class A Common Stock if the Underwriters' over-
allotment option is exercised in full). In addition, the Company will have
outstanding 1,262,500 Public Bridge Warrants to purchase 1,262,500 shares of
Class A Common Stock, the Unit Purchase Option to purchase an aggregate of
380,000 shares of Class A Common Stock assuming exercise of the underlying
Warrants, and 300,000 shares of Class A Common Stock reserved for issuance under
the Option Plan, under which options to purchase 30,000 shares are outstanding
at an exercise price of $4.00 per share. Holders of such options and warrants
may exercise them at a time when the Company would otherwise be able to obtain
additional equity capital on terms more favorable to the Company. Moreover,
while these warrants and options are outstanding, the Company's ability to
obtain financing on favorable terms may be adversely affected. See "Management,"
"Principal Shareholders -- Escrow Shares" and "Description of Securities."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of the Units offered hereby
will incur immediate and substantial dilution in the pro forma net tangible book
value of the Class A Common Stock included in the Units, estimated to be
approximately $3.27 per share or approximately 65% of the public offering price
per share (allocating no value to the Warrants). Additional dilution to public
investors, if any, may result to the extent that the Warrants, the Unit Purchase
Option or outstanding options and warrants are exercised at a time when the net
tangible book value per share of Class A Common Stock exceeds the exercise price
of any such securities. See "Dilution."
POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION OF PREFERRED STOCK; POTENTIAL
ANTI-TAKEOVER PROVISIONS. The Company's Restated Articles of Incorporation
authorizes the issuance of a maximum of 5,000,000 shares of Preferred Stock on
terms which may be fixed by the Company's Board of Directors without further
shareholder action. The terms of any series of preferred stock, which may
include priority claims to assets and dividends and special voting rights, could
adversely affect the rights of holders of the Class A Common Stock
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<PAGE> 19
and thereby reduce the value of the Class A Common Stock. The issuance of
preferred stock could make the possible takeover of the Company or the removal
of management of the Company more difficult, discourage hostile bids for control
of the Company in which shareholders may receive premiums for their shares of
Class A Common Stock or otherwise dilute the rights of holders of Class A Common
Stock.
ARBITRARY DETERMINATION OF OFFERING PRICE; ABSENCE OF PUBLIC MARKET AND
POSSIBLE VOLATILITY OF STOCK PRICE. The initial public offering price of the
Units and the exercise prices and other terms of the Warrants have been
arbitrarily determined by negotiation between the Company and the Representative
and do not necessarily bear any relationship to the Company's assets, net worth
or other established criteria of value. The exercise and redemption prices of
the Warrants should not be construed to imply or predict any increase in the
market price of the Class A Common Stock. See "Underwriting." No public market
for the securities has existed prior to the Offering. No assurance can be given
that an active trading market in the Company's securities will develop after
completion of the Offering or, if developed, that it will be sustained. No
assurance can be given that the market price of the Company's securities will
not fall below the initial public offering price. The Company believes factors
such as quarterly fluctuations in financial results, announcements of
technological innovations or new products and services, product and service
enhancements by the Company or its competitors, changes in financial estimates
by securities analysts and other events may cause the market price of the
Company's securities to fluctuate, perhaps substantially. These fluctuations, as
well as general economic conditions, such as recessions or high interest rates,
may adversely affect the market price of the securities.
POSSIBLE DELISTING OF SECURITIES FROM THE NASDAQ SMALLCAP MARKET. Although
the Company's Units, Class A Common Stock and Warrants meet the current Nasdaq
listing requirements and will be initially included on The Nasdaq SmallCap
Market, the Company will have to maintain certain minimum financial and
corporate governance requirements for continued inclusion on Nasdaq. Continued
inclusion on Nasdaq generally requires that (i) the Company maintain either at
least $2,000,000 in net tangible assets ("net tangible assets" equals total
assets less total liabilities and goodwill) or a $35,000,000 market
capitalization, or the Company has generated net income of at least $500,000 in
two of the three prior years; (ii) there be at least 500,000 shares in the
public float valued at $1,000,000 or more; (iii) the minimum bid price of the
Class A Common Stock be $1.00 per share; (iv) the Class A Common Stock have at
least two active market makers; (v) the Class A Common Stock be held by at least
300 holders; and (vi) the Company have at least two independent directors.
If the Company is unable to satisfy Nasdaq's maintenance requirements, the
Company's securities may be delisted from Nasdaq. In such event, trading, if
any, in the Units, Class A Common Stock and Warrants would thereafter be
conducted in the over-the-counter markets in the so-called "pink sheets" or the
NASD's "Electronic Bulletin Board." Consequently, the liquidity of the Company's
securities could be impaired, not only in the number of securities which could
be bought and sold, but also through delays in the timing of the transactions
and lower prices for the Company's securities than might otherwise be attained.
RISK OF LOW-PRICE STOCKS; PENNY STOCK RESTRICTIONS. If the Company's
securities were to be delisted from Nasdaq, they could become subject to Rule
15g-9 under the Exchange Act, which imposes additional sales practice
requirements on broker-dealers which sell such securities to persons other than
established customers and "accredited investors" (generally, individuals with
net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or
$300,000 together with their spouses). For transactions covered by this rule, a
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. Consequently, the rule may adversely affect the ability of broker-dealers
to sell the Company's securities and may adversely affect the ability of
purchasers in the Offering to sell any of the securities acquired hereby in the
secondary market.
Securities and Exchange Commission (the "Commission") regulations define a
"penny stock" to be any non-Nasdaq equity security that has a market price (as
therein defined) of less than $5.00 per share or with an exercise price of less
than $5.00 per share, subject to certain exceptions. For any transaction
involving a penny stock, unless exempt, the rules require delivery, prior to any
transaction in a penny stock, of a disclosure schedule prepared by the
Commission relating to the penny stock market. Disclosure is also required to be
made about commissions payable to both the broker-dealer and the registered
representative and current
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<PAGE> 20
quotations for the securities. Finally, monthly statements are required to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
The foregoing required penny stock restrictions will not apply to the
Company's securities if such securities are listed on Nasdaq and have certain
price and volume information provided on a current and continuing basis or meet
certain minimum net tangible assets or average revenue criteria. There can be no
assurance that the Company's securities will qualify for exemption from these
restrictions. In any event, even if the Company's securities were exempt from
such restrictions, the Company would remain subject to Section 15(b)(6) of the
Exchange Act, which gives the Commission the authority to prohibit any person
that is engaged in unlawful conduct while participating in a distribution of a
penny stock from associating with a broker-dealer or participating in a
distribution of a penny stock, if the Commission finds that such a restriction
would be in the public interest. If the Company's securities were subject to the
rules on penny stocks, the market liquidity for the Company's securities could
be severely adversely affected.
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE
WARRANTS. The Warrants included in the Units offered hereby will be detachable
and separately tradeable from and after the Separation Date. Although the Units
will not knowingly be sold to purchasers in jurisdictions in which the Units are
not registered or otherwise qualified for sale, purchasers who reside in or move
to jurisdictions in which the securities underlying the Warrants are not so
registered or qualified during the period that the Warrants are exercisable may
buy Units (or the Warrants included therein) in the aftermarket. In this event,
the Company would be unable to issue shares to those persons desiring to
exercise their Warrants unless and until the underlying shares could be
qualified for sale in the jurisdictions in which such purchasers reside, or
unless an exemption from such qualification exists in such jurisdictions. No
assurance can be given that the Company will be able to effect any such required
registration or qualification.
Additionally, purchasers of the Units will be able to exercise the Warrants
included therein only if a current prospectus relating to the shares underlying
the Warrants is then in effect under the Securities Act and such shares are
qualified for sale or exempt from qualification under the applicable securities
or "blue sky" laws of the states in which the various holders of the Warrants
then reside. Although the Company has undertaken to use reasonable efforts to
maintain the effectiveness of a current prospectus covering the shares
underlying the Warrants, no assurance can be given that the Company will be able
to do so. The value of the Warrants may be greatly reduced if a current
prospectus covering the shares issuable upon the exercise of the Warrants is not
kept effective or if such shares are not qualified or exempt from qualification
in the states in which the holders of the Warrants then reside.
ADVERSE EFFECT OF POSSIBLE REDEMPTION OF WARRANTS. The Warrants are subject
to redemption one year from the date of this Prospectus, on at least 30 days'
prior written notice, if the average of the closing bid prices of the Class A
Common Stock for 30 consecutive trading days ending within 15 days of the date
on which the notice of redemption is given exceeds $9.10 per share. If the
Warrants are redeemed, holders of Warrants will lose their right to exercise the
Warrants, except during such 30-day notice of redemption period. Upon the
receipt of a notice of redemption of the Warrants, the holders thereof would be
required to: (i) exercise the Warrants and pay the exercise price at a time when
it may be disadvantageous for them to do so; (ii) sell the Warrants at the then
current market price (if any) when they might otherwise wish to hold the
Warrants; or (iii) accept the redemption price, which is likely to be
substantially less than the market value of the Warrants at the time of
redemption. See "Description of Securities -- Redeemable Warrants."
NO DIVIDENDS. The Company has paid no dividends to its shareholders since
its inception and does not plan to pay dividends in the foreseeable future. The
Company intends to reinvest earnings, if any, in the development and expansion
of its business. See "Dividend Policy."
LIMITATION ON OFFICERS' AND DIRECTORS' LIABILITIES UNDER CALIFORNIA
LAW. Pursuant to the Company's Restated Articles of Incorporation, and as
authorized under applicable California law, directors of the Company are not
liable for monetary damages for breach of fiduciary duty, except (i) in
connection with a breach of the duty of loyalty; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) for dividend payments or stock repurchases illegal under California
law; or (iv) for any transaction in which a director has derived an improper
personal benefit. See "Management -- Limitation of Liability and Indemnification
Matters."
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POSSIBLE ADVERSE EFFECT ON LIQUIDITY OF THE COMPANY'S SECURITIES DUE TO
INVESTIGATION BY THE SECURITIES AND EXCHANGE COMMISSION OF THE REPRESENTATIVE
AND BLAIR & CO. AND RECENT SETTLEMENT BY BLAIR & CO. WITH NASD. The Commission
is conducting an investigation concerning various business activities of the
Representative and D.H. Blair & Co., Inc. ("Blair & Co."), a selling group
member that will distribute a substantial portion (not to exceed approximately
52%, including the Underwriters' over-allotment option) of the Units offered
hereby. The Company has been advised by the Representative that the
investigation has been ongoing since at least 1989 and that it is cooperating
with the investigation. The Representative cannot predict whether this
investigation will ever result in any type of formal enforcement action against
the Representative or Blair & Co.
In July 1997, Blair & Co., its Chief Executive Officer and its head trader
consented, without admitting or denying any violations, to a settlement with the
NASDR District Business Conduct Committee for District No. 10 to resolve
allegations of NASD rule and securities law violations in connection with
mark-up and pricing practices and adequacy of disclosures to customers regarding
market-making activities of Blair & Co. in connection with certain securities
issues during the period from June 1993 through May 1995 where Blair & Co. was
the primary selling group member. NASDR alleged the firm failed to accurately
calculate the contemporaneous cost of securities in instances where the firm
dominated and controlled after-market trading, thereby causing the firm to
charge its customers excessive mark-ups. NASDR also alleged the firm did not
make adequate disclosure to customers about its market-making activities in two
issues. As part of the settlement, Blair & Co. has consented to a censure and
has agreed to pay a $2.0 million fine, make $2.4 million in restitution to
retail customers, employ an independent consultant for two years to review and
make recommendations to strengthen the firm's compliance procedures, and has
undertaken for 12 months not to sell to its retail customers (excluding banks
and other institutional investors) more than 60% of the total securities sold in
any securities offering in which it participates as an underwriter or selling
group member. The Chief Executive Officer of Blair & Co. has agreed to settle
failure to supervise charges by consenting to a censure, the imposition of a
$225,000 fine and a 60-day suspension from associating with any NASD member firm
and to take a requalification examination. The firm's head trader has agreed to
settle charges against him by consenting to a censure, the imposition of a
$300,000 fine and a 90-day suspension from associating with any member firm and
has undertaken to take certain requalification examinations. The settlement with
NASDR does not involve or relate to the Representative, its chief executive
officer or any of its other officers or directors. See "Underwriting."
The Company has been advised that Blair & Co. intends to make a market in
the Company's securities after the Offering. The Company is unable to predict
whether Blair & Co.'s settlement with the NASDR or any unfavorable resolution of
the Commission's investigation will have any effect on such firm's ability to
make a market in the Company's securities and, if so, whether the liquidity or
price of the Company's securities would be adversely affected.
POSSIBLE RESTRICTIONS ON MARKET MAKING ACTIVITIES IN THE COMPANY'S
SECURITIES. The Representative has advised the Company that Blair & Co. intends
to make a market in the Company's securities. Regulation M under the Exchange
Act may prohibit Blair & Co. from engaging in any market-making activities with
regard to the Company's securities for the period from five business days (or
such other applicable period as Regulation M may provide) prior to any
solicitation by the Representative of the exercise of Warrants until the later
of the termination of such solicitation activity or the termination (by waiver
or otherwise) of any right that the Representative may have to receive a fee for
the exercise of Warrants following such solicitation. As a result, Blair & Co.
may be unable to provide a market for the Company's securities during certain
periods while the Warrants are exercisable. In addition, the Company has agreed
to register for resale the Public Bridge Warrants and the underlying Class A
Common Stock one year from the closing of the Offering. Under applicable rules
and regulations under the Exchange Act, any person engaged in the distribution
in the future of the Public Bridge Warrants may not simultaneously engage in
market-making activities with respect to any securities of the Company for the
applicable "cooling off" period (which is likely to be five business days) prior
to the commencement of such distribution. Accordingly, in the event the
Representative or Blair & Co. is engaged in a distribution of the Public Bridge
Warrants, neither of such firms will be able to make a market in the Company's
securities during the applicable restrictive period. Any temporary cessation of
such market-making activities could have an adverse effect on the market prices
of the Company's securities. See "Underwriting."
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<PAGE> 22
USE OF PROCEEDS
The net proceeds from the sale of 1,900,000 Units offered hereby, after
deducting the underwriting discounts and commissions and other estimated
expenses of the Offering, are estimated to be approximately $7,715,000
($8,954,750 if the Underwriters' over-allotment option is exercised in full).
The Company expects
the net proceeds to be utilized approximately as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENTAGE
---------- ----------
<S> <C> <C>
Repayment of Bridge Notes(1)......................... $2,154,000 27.9%
Repayment of Blair Notes(2).......................... 645,000 8.4
Repayment of Additional Bridge Note(3)............... 253,000 3.3
Selling expenses(4).................................. 1,138,000 14.8
Advertising, promotion and marketing(5).............. 913,000 11.8
Research and development(6).......................... 163,000 2.1
License fees(7)...................................... 132,000 1.7
Working capital(8)................................... 2,317,000 30.0
---------- ------
Total...................................... $7,715,000 100.0%
========== ======
</TABLE>
- ---------------
(1) Represents principal amount of the Bridge Notes issued in the Bridge
Financing completed by the Company in January 1997, together with estimated
accrued interest through October 31, 1997. The Bridge Notes bear interest at
the rate of 10% per annum and mature on the closing of the Offering. In
October and November 1996, the Company sold in a private placement the
Interim Notes in the aggregate principal amount of $200,000. The proceeds of
the Interim Notes were used for working capital purposes. Approximately
$204,000 of the proceeds from the issuance of the Bridge Notes were used to
repay in full principal and interest on the Interim Notes. The remaining
proceeds of the Bridge Notes were used for selling expenses, advertising,
promotion and marketing, and for working capital purposes, including general
and administrative expenses and payment of compensation to the Company's
executive officers (approximately $102,000 of which relates to payments made
with respect to accrued salaries).
(2) Represents principal amount of the Blair Notes issued in May, June and July
1997, together with estimated accrued interest through October 31, 1997. The
Blair Notes bear interest at the rate of 10% per annum and mature on the
closing of the Offering. The proceeds of the Blair Notes were used for
working capital purposes, including general and administrative expenses. The
Blair Notes were issued to the Representative and a corporation controlled
by a family member of the sole stockholder of the Representative.
(3) Represents principal amount of the Additional Bridge Note issued in
September 1997, together with estimated accrued interest through October 31,
1997. The Additional Bridge Note bears interest at the rate of 10% per annum
and matures on the closing of the Offering. The proceeds of the Additional
Bridge Note were used for working capital purposes, including the repayment
of past due payables.
(4) Includes expenses associated with developing the Company's sales force,
including salaries, commissions and travel expenses for an estimated total
of 10 to 15 national and regional sales managers and sales support staff
anticipated to be hired following the consummation of the Offering to sell
the Company's services and other sales support costs. See
"Business -- Sales, Marketing and Distribution."
(5) Includes amounts which are expected to be paid to Netscape (approximately
$180,000 of which relates to amounts due by October 31, 1997) and amounts
which may be paid to other Website providers, browser providers and
distribution channels to market the Company's services, expenses associated
with print advertising and the development of printed promotional materials,
trade show expenses, and the salary of one marketing manager.
(6) Includes payment of compensation to the Company's technical personnel
comprised of the Company's Director of Technology, Web Master and staff of
an estimated two to three additional employees.
(7) Represents royalties payable to Pro-CD for the Company's licensed database.
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<PAGE> 23
(8) Working capital will be used for general corporate purposes, including
approximately $548,000 in aggregate annual base compensation to the
Company's executive officers (approximately $100,000 of which relates to the
payment of accrued salaries), the payment of past due payables
(approximately $200,000 past due as of September 30, 1997), payments for
insurance, corporate headquarter lease payments, administrative salaries and
other business support costs. In addition, an estimated approximately
$280,000 will be used for computer hardware system lease payments during the
12 months following the consummation of the Offering and the purchase of a
new operating system and related consulting support. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Management."
The Company anticipates, based on the Company's currently proposed plans
and assumptions relating to its operations (including assumptions relating to
the generation of revenue through relationships with Independent Publishers or
otherwise), that the proceeds of the Offering, together with anticipated revenue
from sales of enhanced advertisements and other Internet services, should be
sufficient to fund the Company's contemplated cash requirements for
approximately 12 months following the consummation of the Offering. In the event
the Company's plans change, its assumptions change or prove to be inaccurate or
if the Company's funds for operations otherwise prove to be insufficient
(including due to unanticipated technical or other problems), the Company could
be required to seek additional financing prior to the expiration of such 12-
month period. In addition, following such 12-month period, if the Company does
not generate significant revenue from operations, the Company will need to
obtain additional financing. The Company's ability to generate such revenue will
depend primarily upon the ability of the Company to sell enhanced advertising
services to businesses, primarily through the efforts of Independent Publishers
as well as directly to customers. There can be no assurance that the Company
will be successful in selling such advertising services or will ever generate
sufficient revenue to fund its operations. The Company has no current
arrangements with respect to, or sources of, additional financing. There can be
no assurance that any additional financing will be available to the Company on
acceptable terms, or at all. The inability to obtain additional financing could
have a material adverse effect on the Company, including possibly requiring the
Company to curtail its growth plans, significantly reduce operating costs or
cease operations completely. See "Risk Factors -- Future Additional Capital
Requirements; No Assurance Capital Will be Available."
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of the Offering. This estimate is based upon the current status
of the Company's business operations and upon certain assumptions regarding
future operations, including assumptions relating to the ability of the Company
to generate revenue through relationships with Independent Publishers or
otherwise. The amounts actually expended for each purpose set forth in "Use of
Proceeds," other than the repayment of the Bridge Notes, the Blair Notes and the
Additional Bridge Note, may vary significantly in the event any of these
assumptions prove inaccurate. Future events, including changes in economic or
competitive conditions or the Company's business and the results of the
Company's sales and marketing activities, may make shifts in the allocation of
funds necessary or desirable. Specifically, in the event the Company does not
generate sufficient revenue within the first six months following the
consummation of the Offering, the Company will be required to curtail its growth
plan through reductions in the Company's sales force and administrative
personnel. The Company reserves the right to change its use of proceeds as
unanticipated events or opportunities may cause the Company to redirect its
priorities and reallocate the proceeds accordingly. The Company may use a
portion of the proceeds to acquire other businesses or technologies or products
which are compatible with the Company's business for the purpose of expanding
its businesses or the Company may enter into strategic alliances with other such
companies. The Company does not currently have any agreements, commitments or
arrangements with respect to any proposed acquisition, joint venture or
strategic alliance, and no assurance can be given that any acquisitions, joint
ventures or strategic alliances will be made in the future.
22
<PAGE> 24
Prior to their use, the net proceeds of the Offering will be invested in
short-term, high-grade, interest-bearing investments or accounts. The Company
anticipates that any proceeds received upon exercise of the Underwriters'
over-allotment option, the Warrants or the Public Bridge Warrants, will be added
to working capital.
DIVIDEND POLICY
The Company has not, to date, paid any cash dividends on its Common Stock.
The Company has no current plans to pay dividends on its Common Stock and
intends to retain earnings, if any, for working capital purposes. Any future
determination as to the payment of dividends on the Common Stock will depend
upon the results of operations, capital requirements and financial condition of
the Company and other factors deemed relevant by the Company's Board of
Directors.
23
<PAGE> 25
DILUTION
The following discussion and tables allocate no value to the Warrants
contained in the Units.
Dilution represents the difference between the initial public offering
price per share paid by the purchasers in the Offering and the net tangible book
value per share immediately after completion of the Offering. Pro forma net
tangible book value per share represents the net tangible assets of the Company
(total assets less total liabilities and intangible assets), divided by the
number of shares of Common Stock outstanding upon the closing of the Offering.
At June 30, 1997, the Company had a pro forma net tangible deficit of
approximately $(2,360,000), or approximately $(1.97) per share ($(5.90) per
share if the Escrow Shares are excluded). After giving effect to the issuance of
the 1,900,000 Units offered hereby at an initial public offering price of $5.00
per Unit, and the Company's receipt of the estimated net proceeds therefrom and
the use of a portion of the net proceeds to repay the Bridge Notes, the Blair
Notes and the Additional Bridge Note (in each case including interest), the net
tangible book value of the Company, as adjusted at June 30, 1997 would have been
approximately $5,370,000, or approximately $1.73 per share ($2.25 per share if
the Escrow Shares were excluded). This would result in an immediate dilution to
investors in the Offering of $3.27, or 65%, per share ($2.75, or 55%, per share
if the Escrow Shares were excluded), and the aggregate increase in the pro forma
net tangible book value to present shareholders would be $3.70 per share ($8.15
per share if the Escrow Shares were excluded), as illustrated by the following
table:
<TABLE>
<S> <C> <C>
Initial public offering price per Unit....................... $5.00
Pro forma net tangible deficit per share before the
Offering................................................ (1.97)
Increase per share attributable to new investors........... 3.70
------ -----
Pro forma net tangible book value per share after the
Offering................................................... 1.73
-----
Dilution per share to new investors(1)....................... $3.27
=====
</TABLE>
- ---------------
(1) If the Underwriters' over-allotment option is exercised in full, the pro
forma net tangible book value per share after the Offering would be
approximately $1.95, resulting in dilution to new investors in the Offering
of $3.05, or 61%, per share.
The following table sets forth, on a pro forma basis, the differences
between existing shareholders and new investors in the Offering with respect to
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by
existing shareholders and by new investors at an initial public offering price
of $5.00 per Unit:
<TABLE>
<CAPTION>
PERCENTAGE
PERCENTAGE OF OF TOTAL AVERAGE
OUTSTANDING CONSIDERATION CONSIDERATION PRICE PER
NUMBER SHARES PAID(1) PAID SHARE
--------- ------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Existing Shareholders.............. 1,199,996(2) 38.7% $ 152,940 1.6% $0.13
New Investors...................... 1,900,000 61.3 9,500,000 98.4 5.00
--------- ----- ---------- -----
Total.............................. 3,099,996 100.0% $ 9,652,940 100.0%
========= ===== ========== =====
</TABLE>
- ---------------
(1) Prior to the deduction of costs of issuance.
(2) Includes the 800,000 shares of Class B Common Stock that are Escrow Shares.
See "Principal Shareholders -- Escrow Shares."
24
<PAGE> 26
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
June 30, 1997, (ii) pro forma as of June 30, 1997 to reflect the $190,000
portion of the Blair Notes and the Additional Bridge Note issued subsequent to
such date and (iii) pro forma as adjusted to give effect to the issuance by the
Company of 1,900,000 Units pursuant to the Offering at an initial offering price
of $5.00 per Unit and the receipt of the net proceeds thereof and the
application of the net proceeds to repay the Bridge Notes, the Blair Notes and
the Additional Bridge Note and related interest. See "Use of Proceeds." This
table should be read in conjunction with the financial statements of the Company
and the notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT JUNE 30, 1997
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -----------
<S> <C> <C> <C>
Bridge Notes, Blair Notes and Additional Bridge
Note payable, net of discount.................... $2,222,300 $ 2,633,550 $ 0
=========== =========== ===========
Shareholders' equity (deficit):
Preferred Stock, 5,000,000 shares authorized; no
shares issued and outstanding, actual, pro
forma and pro forma as adjusted............... 0 0 0
Class A Common Stock, 18,800,000 shares
authorized; no shares issued and outstanding,
actual and pro forma, 1,900,000 shares issued
and outstanding, pro forma as adjusted(1)..... 0 0 7,715,000
Class B Common Stock, 1,400,000 shares
authorized; 1,199,996 shares issued and
outstanding(2)................................ 152,940 152,940 152,940
Additional paid in capital....................... 475,800 504,550 504,550
Deficit accumulated during the development
stage......................................... (2,527,695) (2,527,695) (2,944,736)(3)
----------- ----------- -----------
Total shareholders' equity (deficit)..... (1,898,955) (1,870,205) 5,427,754
----------- ----------- -----------
Total capitalization............................... $ 323,345 $ 763,345 $ 5,427,754
=========== =========== ===========
</TABLE>
- ---------------
(1) Does not include (i) 1,900,000 shares of Class A Common Stock issuable upon
exercise of the Warrants included in the Units offered hereby; (ii) 570,000
shares of Class A Common Stock issuable upon exercise of the Underwriters'
over-allotment option, including the shares issuable upon exercise of the
Warrants included in the Units subject to such option; (iii) 380,000 shares
of Class A Common Stock issuable upon exercise of the Unit Purchase Option
and the Warrants included in the Units issuable upon exercise of the Unit
Purchase Option; (iv) 1,262,500 shares of Class A Common Stock issuable upon
exercise of the Public Bridge Warrants; and (v) up to 62,500 shares of Class
A Common Stock which may be issuable upon exercise of the Public Bridge
Warrants. Also does not give effect to 300,000 shares of Class A Common
Stock reserved for issuance under the Option Plan, under which options to
purchase 30,000 shares have been granted to date. See "Management -- Stock
Option Plan."
(2) Includes 800,000 Escrow Shares. See "Principal Shareholders -- Escrow
Shares."
(3) As adjusted to give effect to the recognition of approximately $417,000 of
expense upon the repayment of the Bridge Notes and the Additional Bridge
Note. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
BRIDGE FINANCINGS
In October and November 1996, the Company issued an aggregate of $200,000
principal amount of Interim Notes and warrants to purchase an aggregate of
200,000 shares of Class B Common Stock ("Interim Warrants") to a total of three
individual investors, pursuant to which the Company received net proceeds of
$200,000. In January 1997, the Company completed the Bridge Financing of an
aggregate of $2,000,000 principal amount of Bridge Notes and 1,000,000 Bridge
Warrants to a total of 42 individual and institutional investors, in which the
Company received net proceeds of approximately $1,680,000 (after expenses of
such offering). A portion of the proceeds of the Bridge Financing were used to
repay principal and interest on the
25
<PAGE> 27
Interim Notes. On the closing of the Bridge Financing, the Interim Warrants
automatically converted into 200,000 Bridge Warrants.
The Representative, which acted as placement agent in connection with the
Bridge Financing, has advised the Company that there are no relationships
between any of the foregoing investors and the Representative except that
virtually all of such investors are existing high net worth clients of Blair &
Co. (a corporation that is substantially owned by family members of the sole
stockholder of the Representative). See "Underwriting." As used herein, the term
"Bridge Warrants" refers to, collectively, the 1,000,000 Bridge Warrants issued
in the Bridge Financing and the 200,000 Interim Warrants which were converted
into Bridge Warrants.
The Bridge Notes are payable, together with interest at the rate of 10% per
annum, on the earlier of one year from the issuance of the Bridge Notes and the
closing of the Offering. See "Use of Proceeds." The Bridge Warrants entitle the
holders thereof to purchase one share of Class A Common Stock commencing one
year from the date of their issuance but will be exchanged automatically on the
closing of the Offering for Public Bridge Warrants, each of which will be
identical to the Warrants included in the Units offered hereby. The Bridge
Financing investors have agreed not to exercise, sell, transfer, or otherwise
dispose of their Public Bridge Warrants for a period of one year from the
closing of the Offering. The Company has agreed to use its best efforts to
register such Public Bridge Warrants for resale upon expiration of such lockup
period.
In May, June and July 1997, the Company issued an aggregate of $622,000
principal amount of promissory notes (the "Blair Notes") to the Representative
and a corporation controlled by a family member of the sole stockholder of the
Representative. See "Underwriting." The Blair Notes are payable, together with
interest, at the rate of 10% per annum, on the earlier of six months from their
issuance, the closing of the Offering and the closing of any private financing
providing gross proceeds to the Company of at least $1,000,000.
In September 1997, the Company issued a $250,000 principal amount
Additional Bridge Note and 62,500 Additional Bridge Warrants to one
institutional investor. The Additional Bridge Note is payable, together with
interest at the rate of 10% per annum, on the earlier of March 15, 1998 and the
closing of the Offering. See "Use of Proceeds." In the event the Additional
Bridge Note is not repaid in full by October 27, 1997, the holder shall be
entitled to receive warrants to purchase an additional 10,000 shares of Class A
Common Stock for each seven-day period that the Additional Bridge Note remains
unpaid (up to a maximum of 62,500 additional warrants). The Additional Bridge
Warrants (including any additional warrants which may be issued) entitle the
holder thereof to purchase one share of Class A Common Stock commencing one year
from the date of their issuance but will be exchanged automatically on the
closing of the Offering for Public Bridge Warrants, each of which will be
identical to the Warrants included in the Units offered hereby. The Additional
Bridge Financing investor has agreed not to exercise, sell, transfer, or
otherwise dispose of its Public Bridge Warrants for a period of one year from
the closing of the Offering. The Company has agreed to use its best efforts to
register such Public Bridge Warrants for resale upon expiration of such lockup
period.
26
<PAGE> 28
SELECTED FINANCIAL DATA
The following statement of operations data for the period from November 13,
1995 (inception) to December 31, 1995 and for the year ended December 31, 1996,
are derived from the audited financial statements of the Company included
elsewhere in this Prospectus. The report of BDO Seidman LLP which also appears
herein contains an explanatory paragraph relating to uncertainty as to the
ability of the Company to continue as a going concern. The statement of
operations data for the six months ended June 30, 1996 and 1997 and the period
from November 13, 1995 (inception) to June 30, 1997 and the balance sheet data
at June 30, 1997 are derived from the unaudited financial statements of the
Company included elsewhere in this Prospectus and include, in the opinion of the
Company, all adjustments consisting of all normal recurring adjustments
necessary for a fair presentation of the Company's results of operations for
those periods and financial position at that date. The results of operations for
the six months ended June 30, 1997 are not necessarily indicative of the results
to be expected for the entire year. The following selected financial data should
be read in conjunction with the financial statements and related notes thereto
and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NOVEMBER 13, 1995
NOVEMBER 13, 1995 SIX MONTHS ENDED (INCEPTION) TO
(INCEPTION) TO YEAR ENDED ----------------------------- JUNE 30, 1997
DECEMBER 31, 1995 DECEMBER 31, 1996 JUNE 30, 1996 JUNE 30, 1997 (CUMULATIVE)
----------------- ----------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................... $ -- $ 65,548 $ 40,925 $ 23,914 $ 89,462
--------- --------- --------- ----------- -----------
Costs and expenses
Cost of revenue..................... 6,250 114,052 51,998 63,031 183,333
Research and development............ -- -- -- 59,249 59,249
General and administrative.......... 12,325 357,552 173,716 961,632 1,331,509
Selling and marketing............... -- 152,365 24,187 487,651 640,016
--------- --------- --------- ----------- -----------
Total costs and expenses.............. 18,575 623,969 249,901 1,571,563 2,214,107
--------- --------- --------- ----------- -----------
Operating loss........................ $ (18,575) $(558,421) $(208,976) $(1,547,649) $(2,124,645)
--------- --------- --------- ----------- -----------
Net interest expense.................. -- 19,702 -- 383,348 403,050
Net loss.............................. $ (18,575) $(578,123) $(208,976) $(1,930,997) $(2,527,695)
========= ========= ========= =========== ===========
Net loss per common share(1).......... $ (0.02) $ (0.67) $ (0.25) $ (2.13)
========= ========= ========= ===========
Weighted average common shares
outstanding(1)...................... 818,344 858,499 850,777 906,378
========= ========= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------------
ACTUAL PRO FORMA(2)
----------- ------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency).......................................................... $(2,419,152) $(2,390,402)
Total assets.......................................................................... 836,449 1,276,449
Total liabilities..................................................................... 2,735,404 3,146,654
Deficit accumulated during the development stage...................................... (2,527,695) (2,527,695)
Total shareholders' equity (deficit).................................................. (1,898,955) (1,870,205)
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the weighted average number of shares of Common Stock used
in computing the net loss per common share. Excludes the Escrow Shares. See
"Principal Shareholders -- Escrow Shares" and Note 9 of Notes to Financial
Statements.
(2) Gives pro forma effect to the issuance of (i) $190,000 principal amount of
Blair Notes and (ii) a $250,000 principal amount Additional Bridge Note, in
each case subsequent to June 30, 1997. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
27
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this
Prospectus.
OVERVIEW
The Company is a development stage company which did not commence
operations until November 1995. Since it commenced operations, the Company has
been engaged principally in the development, design and refinement of its sites,
market-testing activities, and marketing activities directed towards
establishing relationships with Independent Publishers, in addition to capital
raising activities.
The Company believes that the Internet represents an important new means
for advertisers to reach consumers through a targeted, interactive and highly
measurable medium. The Company has derived substantially all of its limited
revenue to date from the sale of enhanced advertisements on its On'Village
Yellow Pages and intends to continue to derive a substantial portion of its
revenue, if any, from sales of such advertisements for the foreseeable future.
As of September 30, 1997, the Company had entered into 70 arrangements with
Independent Publishers. The Company's initial arrangements with Independent
Publishers provided that the Company receive limited cash payments up-front from
the Independent Publishers and a commitment by the Independent Publisher to
market and resell a specified number of the Company's "QuickStart"
advertisements (the "QuickStart Ad"). The Company's more recent agreements with
Independent Publishers entered into since early 1997, which represent the
Company's current business strategy and cover approximately 60 of the Company's
agreements, provide that, for a period of one year, the Independent Publisher
will offer its advertising customers the opportunity to advertise on the
Company's yellow page directory for one year through the Company's "QuickStart
Ads," at no charge to the Independent Publisher. In exchange for affording the
Independent Publishers' advertising customers the opportunity to advertise on
the Company's yellow page site, the Independent Publisher is required to print
the Company's name and Internet address in its print yellow page directories
(including at least one full page display advertisement in each published
directory) and to use its best efforts to resell the Company's enhanced
advertising services. Revenue, if any, under these agreements will initially be
derived only to the extent the Company's enhanced advertising services are sold
and revenue, if any, derived under the agreements will be recognized by the
Company ratably over the term of the advertisement. Any cash received prior to
the completion of the earning process is recorded as deferred revenue. To date,
the Company has experienced only limited sales of its enhanced advertising
services. Advertising revenue is also anticipated to be derived to a lesser
extent from direct sales by the Company to advertising customers (including
customers obtained through referrals from Independent Publishers). See
"Business -- Strategy."
The Company's operating results may fluctuate significantly in the future
as a result of a variety of factors, many of which are outside the Company's
control. These factors include the level of usage of the Internet, demand for
Internet advertising, seasonal trends in Internet usage, the advertising
budgeting cycles of individual advertisers, the amount and timing of capital
expenditures and other costs relating to the expansion of the Company's
operations, the introduction of new services by the Company or its competitors,
pricing changes in the industry, general economic conditions and economic
conditions specific to the Internet and on-line media. As a strategic response
to changes in the competitive environment, the Company may from time to time
make certain pricing, service or marketing decisions that could have a material
adverse effect on the Company's business, results of operations and financial
condition.
RESULTS OF OPERATIONS
To date, the Company has generated extremely limited revenue. During the
period November 13, 1995 (inception) to June 30, 1997 (cumulative) (the "Initial
Period"), the Company incurred a cumulative net loss of approximately
$2,528,000, including net losses of approximately $578,000 and $1,931,000 for
the year ended December 31, 1996 and for the six months ended June 30, 1997,
respectively. Since June 30, 1997, the Company has continued to incur
significant losses. These losses have resulted primarily from limited revenue
from operations and costs associated with the design and development of the
Company's services, including royalty and licensing payments, general and
administrative expenses and marketing activities.
28
<PAGE> 30
REVENUE
During the Initial Period, the Company generated revenue of approximately
$89,000, a substantial portion of which was derived from the direct sale of
advertisements to businesses located in Southern Utah in connection with the
Company's test marketing activities. The Company also recorded approximately
$66,000 of deferred revenue as of June 30, 1997 under agreements with
Independent Publishers. The Company's business strategy is to generate
advertising revenue through arrangements with Independent Publishers who will
market and attempt to resell the Company's enhanced advertising services to
their existing customers. As of September 30, 1997, the Company had entered into
70 of such arrangements and has generated extremely limited revenue from such
arrangements.
COST AND EXPENSES
Costs and expenses are comprised of cost of revenue, research and
development, general and administrative expenses and selling and marketing
expenses. For the Initial Period, the Company's cost of revenue was
approximately $183,000, and was comprised primarily of royalty payments made to
Pro-CD for use of Pro-CD's nationwide database. Subsequent to the Initial
Period, cost of revenue may also include royalty payments to Network Publishing
and payments to Mr. Kent Hinkson, the Company's Director of Technology, equal to
a total of 2% of the Company's annual net revenue, if any. See "-- Liquidity and
Capital Resources."
During the periods from November 13, 1995 (inception) to December 31, 1995
and for the year ended December 31, 1996, all of the Company's research and
development activities were conducted by Network Publishing and accordingly, the
Company did not have any research and development expenditures during such
periods. During the six months ended June 30, 1997, the Company incurred
approximately $59,000 of research and development expenses relating to salaries
for technical personnel, and expects to incur significant further increases in
research and development expenses throughout 1997. These increases are expected
to include significant increases in spending on salaries and benefits (including
salaries for a director of technology, a systems engineer, an operations manager
and a programmer).
General and administrative expenses during the Initial Period totalled
approximately $1,331,000, and were comprised primarily of salaries for
administrative personnel and executive officers, legal and professional fees,
and other business support costs. Upon consummation of the Bridge Financing, the
Company began to incur increased general and administrative expenses, and
expects to incur significant further increases throughout 1997. These increases
are expected to include significant increases in spending on salaries and
benefits (including salaries for a chief financial officer, a customer service
staff, an editorial creative staff and other administrative personnel), rent
relating to a new corporate headquarters and other business support costs.
Selling and marketing expenses during the Initial Period were approximately
$640,000, and were comprised of costs incurred to support the Company's test
marketing activities, the commencement of the establishment of a sales force and
relationships with Independent Publishers and expenses relating to the
amortization of the agreement with Netscape of approximately $257,000. Upon
consummation of the Bridge Financing, the Company began to incur increased
selling and marketing expenses relating to the foregoing activities and expects
to incur significant further increases throughout 1997. The Company believes
that a significant component of these expenses will include increased salaries
and benefits for sales and marketing personnel, including an estimated 10 to 15
national and regional sales managers and sales support staff. The Company
believes that the addition of the foregoing personnel is a necessary component
of the Company's business strategy. No assurance can be given, however, that the
Company will be able to attract, retain or assimilate such personnel in a timely
manner, or at all. Further increases in selling and marketing expenses are
expected to include additional payments to Netscape, as well as payments to
other Website providers, browser providers and distribution channels that the
Company may in the future enter into arrangements with to supplement or replace
its arrangement with Netscape.
Net interest expense during the Initial Period was approximately $403,000,
consisting primarily of the amortization of debt discount and debt issuance
costs and interest associated with the Bridge Financing.
NET LOSS
The Company incurred a net loss during the Initial Period of approximately
$2,528,000. Inasmuch as the Company plans on significantly increasing its level
of operating expenses and will be required to make
29
<PAGE> 31
significant additional expenditures upon consummation of the Offering to
continue to enhance its services and to attract advertisers to the Company's
services, the Company anticipates that it will incur significant losses until
such time, if ever, that the Company attracts and retains a sufficient number of
advertisers (through relationships with Independent Publishers or otherwise) to
generate enough revenue to support the Company's operating costs. There can be
no assurance that the Company will be able to attract and retain a sufficient
number of advertising customers to generate significant revenue, that the
Company will generate positive cash flow from its operations, or that the
Company will attain or thereafter sustain profitability in any future period.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had a deficit accumulated during the
development stage of approximately $2,528,000 and a working capital deficit of
approximately $2,419,000. Since inception, the Company has had continuing
negative cash flow from operations and has funded its operations primarily
through the private sales of equity securities and borrowings from investors.
To date, the activities of the Company have been financed primarily by (i)
equity contributions from Messrs. J. Tracht, R. Tracht, Walden and Austin
(collectively, the "Founders"), officers, directors and the principal
shareholders of the Company, in the aggregate amount of $32,000, (ii) loans in
the aggregate amount of $80,000 from the Founders (which loans, together with
accrued interest of $5,800, were contributed to the capital of the Company in
December 1996), (iii) an equity contribution from an unaffiliated third party in
the amount of $100,000, (iv) the issuance in October and November 1996 of the
Interim Notes and the Interim Warrants, (v) the issuance in January 1997 of the
Bridge Notes and Bridge Warrants, (vi) the issuance in May, June and July 1997
of the Blair Notes and (vii) the issuance in September 1997 of the Additional
Bridge Note. See "Certain Transactions."
In October and November 1996, the Company received a total of $200,000 from
the issuance of the Interim Notes and the Interim Warrants. These proceeds were
used for working capital purposes. In January 1997, the Company received
approximately $1,686,000 from the issuance of the Bridge Notes and Bridge
Warrants, net of issuance costs. A portion of these proceeds were used to repay
principal and interest on the Interim Notes, and were used for selling expenses,
advertising, promotion and marketing expenses and working capital purposes,
including general and administrative expenses and payment of compensation to the
Company's executive officers (approximately $102,000 of which relates to
payments made with respect to accrued salaries). The Company recognized a
non-recurring charge to operations relating to the Interim Notes through the
date of repayment of approximately $24,000, $14,000 of which was recorded in the
fiscal quarter ended December 31, 1996 and $10,000 of which was recorded in the
fiscal quarter ended March 31, 1997. On the closing of the Bridge Financing, the
Interim Warrants automatically converted into 200,000 Bridge Warrants. In May,
June and July 1997, the Company received a total of $622,000 from the issuance
of the Blair Notes. These proceeds were used for working capital purposes. In
September 1997, the Company received $250,000 from the issuance of the
Additional Bridge Note. These proceeds will be used for working capital
purposes, including the repayment of past due payables. The Company has
allocated a portion of the proceeds of the Offering to repay principal and
accrued interest on the Bridge Notes, the Blair Notes and the Additional Bridge
Note. The Company will recognize a charge to operations of approximately
$417,000 in connection with the repayment of the Bridge Notes and the Additional
Bridge Note. See "Use of Proceeds" and "Capitalization -- Bridge Financing."
Pursuant to the Company's original agreement with Netscape, the Company was
required to make an initial payment of $21,666, followed by monthly payments of
$25,000, for total payments to Netscape of $196,666 through March 1997. Pursuant
to the Company's current agreement with Netscape, the Company is obligated to
pay Netscape $180,000 by October 31, 1997, and thereafter, make monthly payments
of $30,000. In the event the required payments are not made by October 31, 1997,
the Company could be in default under its agreement. The Company is also
currently exploring the creation of alternate arrangements with other Website
providers, browser providers or distribution channels to supplement or replace
its arrangement with Netscape, which may require payments or other consideration
for listing the Company's services. In addition, the Company is a party to an
agreement with Pro-CD pursuant to which the Company licenses its database of
business listings. Pursuant to this agreement, the Company is obligated to pay
an annual royalty based on net advertising revenue, subject to minimum annual
royalty payments to Pro-CD in order to continue to license its database.
Further, the Company is obligated to pay Network Publishing 1% of the Company's
net advertising
30
<PAGE> 32
revenue derived from the On'Village Yellow Pages and a service fee of $2,000 per
month. In addition, the Company is obligated to pay Kent Hinkson, the Company's
Director of Technology (and a former consultant to Network Publishing), 1% of
the Company's net revenue generated during the term of Mr. Hinkson's employment
agreement (and, in certain instances, for a period of up to three years
following the termination of such agreement). See "Business,"
"Management-Employment Agreements" and Notes 1, 6 and 7 of Notes to Financial
Statements.
Pursuant to an equipment lease dated April 21, 1997, the Company has
financed the acquisition of approximately $300,000 of equipment, consisting
primarily of a computer hardware system. The Company plans to finance an
additional $100,000 of equipment pursuant to this lease during the remainder of
1997. In addition, the Company plans to purchase an estimated $150,000 of
operating system software and related consulting support during the remainder of
1997. As of the date of the Prospectus, the Company had no other material
commitments for capital expenditures. Following the Offering, the Company
intends to hire a number of additional employees, which will require substantial
capital resources. The Company plans to add an additional approximately 30
employees (including a total of approximately 10 to 15 national and regional
sales managers and sales support staff located nationwide) in the approximately
12 months following the consummation of the Offering in the areas of marketing,
product development and administration. In addition, the Company has entered
into employment agreements with each of the Founders, effective on the closing
of the Offering, providing for aggregate salaries of $370,000 in the first year
of each agreement. The Company began accruing salaries to the Founders based on
the salaries in their employment agreements in October 1996. See
"Management -- Employment Agreements." During the second quarter of 1997, the
Company relocated its headquarters, which will result in monthly rent expense of
approximately $8,800 during the first 12 months of the lease (which lease term
commenced in June 1997), increasing to $11,000 per month during the remaining 48
months of the lease term. See "Business -- Facilities."
The Company's independent certified public accountants have included an
explanatory paragraph in their report stating that the Company's financial
statements have been prepared assuming that the Company will continue as a going
concern and that the Company's working capital deficiency and shareholders'
deficit raises substantial doubt as to the Company's ability to continue as a
going concern. The Company is dependent upon the proceeds of the Offering or
other financing in order to continue in business.
The Company expects its cash requirements to increase in the future due to
higher expenses associated with the hiring of additional personnel, advertising,
promotion and marketing activities and other anticipated operating activities.
The Company also anticipates that it will incur significant losses until such
time, if ever, that the Company attracts and retains a sufficient number of
advertisers (through relationships with Independent Publishers or otherwise) to
generate enough revenue to support the Company's operating costs. There can be
no assurance that the Company will be able to attract and retain a sufficient
number of advertising customers to generate significant revenue, that the
Company will generate positive cash flow from its operations, or that the
Company will attain or thereafter sustain profitability in any future period.
The Company anticipates, based on the Company's currently proposed plans
and assumptions relating to its operations (including assumptions relating to
the generation of revenue through relationships with Independent Publishers),
that the proceeds of the Offering, together with anticipated revenue from sales
of enhanced advertisements, should be sufficient to fund the Company's
contemplated cash requirements for approximately 12 months following the
consummation of the Offering. In the event the Company's plans change, its
assumptions change or prove to be inaccurate or if the Company's funds for
operations otherwise prove to be insufficient (including due to unanticipated
technical or other problems), the Company could be required to seek additional
financing prior to the expiration of such 12-month period. In addition,
following such 12-month period, if the Company does not generate significant
revenue from operations, the Company will need to obtain additional financing.
The Company's ability to generate such revenue will depend primarily upon the
ability of the Company to sell enhanced advertising services to businesses,
primarily through the efforts of Independent Publishers as well as directly to
customers. There can be no assurance that the Company will be successful in
selling such advertising services or will ever generate sufficient revenue to
fund its operations. The Company has no current arrangements with respect to, or
sources of, additional financing. There can be no assurance that any additional
financing will be available to the Company on acceptable terms, or at all. The
inability to obtain additional financing could have a material adverse effect on
the Company, including possibly requiring the Company to curtail its growth
plans, significantly reduce operating costs or
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cease operations completely. See "Risk Factors -- Future Additional Capital
Requirements; No Assurance Capital Will Be Available."
CHARGE TO INCOME IN THE EVENT OF RELEASE OF ESCROW SHARES
In the event the Company attains any of the earnings or stock price
thresholds required for the release of all or a portion of the Escrow Shares,
the release of the Escrow Shares to Company officers, directors, employees or
consultants will be treated, for financial reporting purposes, as compensation
expense of the Company. Accordingly, the Company will, in the event of the
release of any or all of the Escrow Shares, recognize during the period that the
earnings or stock price thresholds are met a substantial non-cash charge to
earnings that would increase the Company's loss or reduce or eliminate the
Company's net income, if any, for financial reporting purposes for the period or
periods during which such securities are, or become probable of being, released
from escrow. The amount of this charge will be equal to the fair market value of
such securities on the date of release from escrow. Although the amount of
compensation expense recognized by the Company will not affect the Company's
total shareholders' equity (due to a corresponding increase in additional
paid-in capital), it may have a depressive effect on the market price of the
Company's securities.
NEW ACCOUNTING PRONOUNCEMENTS
Statements of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
(SFAS No. 125) issued by the Financial Accounting Standards Board ("FASB") is
effective for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted. The new
standard provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishment of liabilities. Because the Company is
not currently engaging in any transactions within the scope of this
pronouncement, the Company does not expect adoption of SFAS No. 125 to have a
material effect on its financial position or results of operations.
Statements of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS No. 128) issued by the FASB is effective for financial statements for both
interim and annual periods ending after December 15, 1997. Earlier application
is not permitted. SFAS 128 requires dual presentation of basic and diluted
earnings per share ("EPS") on the face of the income statement. It also requires
a reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. This statement
also requires restatement of all prior period EPS data presented. The Company
does not expect adoption of SFAS No. 128 to have a material effect on its
results of operations.
Statements of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" (SFAS No. 129) issued by the FASB is
effective for financial statements ending after December 15, 1997. The new
standard reinstates various securities disclosure requirements previously in
effect under Accounting Principles Board Opinion No. 15, which has been
superseded by SFAS No. 128. The Company does not expect adoption of SFAS No. 129
to have a material effect on its financial position or results of operations.
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) issued by the FASB is effective for
financial statements with fiscal years beginning after December 15, 1997.
Earlier application is permitted. SFAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. The Company has not determined the effect
on its financial position or results of operations from the adoption of this
statement.
Statements of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS No. 131) issued by the
FASB is effective for financial statements beginning after December 15, 1997.
The new standard requires that public business enterprises report certain
information about operating segments in complete sets of financial statements of
the enterprise and in condensed financial statements of interim periods issued
to shareholders. It also requires that public business enterprises report
certain information about their products and services, the geographic areas in
which they operate and their major customers. The Company has not determined the
effect on its financial position or results of operations from the adoption of
this statement.
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BUSINESS
OVERVIEW
The Company is a development stage company engaged in the development,
publishing and marketing of World Wide Web-based services designed to help users
access information on the Internet, while at the same time providing advertisers
with an efficient and innovative means of reaching targeted audiences. The
Company's primary service offering is "On'Village Yellow Pages," an on-line
national yellow page directory service which users can currently access through
the Company's Web address, "http://www.onvillage.com." This service, offered
free of charge to the user, enables the user to access the Company's licensed
database of over 15 million business listings nationwide and to perform a search
of desired listings presently by category, business name and business location.
At the same time, On'Village Yellow Pages offers businesses the ability to
advertise on the Internet in what management believes is a targeted,
cost-effective and interactive manner. To better reach their targeted audiences,
businesses are given the opportunity by the Company to purchase enhanced
advertising services that supplement the basic yellow page listing. These
enhanced services include priority listings, listings on the Company's other
sites, graphics and logo advertisements, enhanced textual advertisements,
including detailed display banners, listings of businesses by additional
categories and cities, and additional URL and e-mail links.
The Company believes that the Internet represents an important new and
growing medium for advertisers to reach consumers. The Company's objective is to
position itself to take advantage of this growth by serving the needs of its
advertising customers. The Company's strategy is to develop a critical mass of
advertising customers who purchase enhanced advertisements on the On'Village
Yellow Pages as well as the Company's other Internet services. The Company
believes that the most effective way to achieve this base of advertisers is
through joint marketing and sales arrangements with independent local yellow
page publishers ("Independent Publishers"), who contract with the Company to
directly market and resell the Company's services to the Individual Publisher's
existing base of customers and who may provide referrals to the Company of
customers that indicate an interest in an expanded Internet presence. The
Company believes there are an estimated 350 Independent Publishers in the United
States. As of September 30, 1997, the Company had entered into arrangements with
70 Independent Publishers. Although the Company has experienced only limited
sales of its enhanced advertising services to date, the Company plans to
continue to offer these services, both indirectly through the Independent
Publishers and directly to customers.
To distinguish itself from other on-line yellow page services, the Company
provides and is in the process of refining several additional services developed
by the Company. These offerings include "My Place," a membership service that
offers users various personalized services, products and promotions, and
"On'Zine," an interactive service providing users the ability to communicate and
immediately access relevant and related content and information on designated
third-party Websites. These sites are organized by category and have been
selected, reviewed and rated by the Company. The Company also recently
introduced "OnTour," a compilation of information regarding select U.S.
destinations, currently comprised of information regarding five national parks
and several other tourist destinations. The Company believes that these
additional services, in addition to attracting users, will enable advertisers to
reach a more targeted audience. The Company recently has commenced offering
other ancillary services to customers through Independent Publishers and
directly to customers referred by Independent Publishers. In the future, the
Company may also attempt to generate revenue through the sale of customized
Websites and, eventually, the hosting of business-to-consumer and
business-to-business electronic commerce on the Internet.
INDUSTRY BACKGROUND
GENERAL
The Internet was originally created by the United States government to
facilitate the exchange of information and electronic mail ("e-mail") between a
limited number of academic institutions, defense contractors and government
agencies. The Internet was commercialized in the late 1980s and 1990s and
technological enhancements have since extended the Internet's reach to consumers
and businesses. The most important technological enhancement to the Internet was
the creation of the World Wide Web in the early
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1990s. The Web is a client/server system of hyperlinked, multimedia databases.
The Web enables non-technical users to easily access information on the Internet
and enables individuals or organizations to offer textual, graphical and other
information directly to end-users. The Web is an interactive environment which
facilitates the exchange of multimedia-rich information and entertainment
resources among users worldwide. In addition, recent technological developments
have enabled consumers and businesses to use the Web for buying and selling
products and services. As a result, the Web has changed, and will continue to
change the way in which people exchange information, communicate with each other
and distribute products worldwide.
A number of factors have contributed to the recent growth in popularity of
the Web. The open nature of the Web enables any individual or organization to
publish a Website. New software-based authoring tools have lowered the cost of
publishing content on the Web relative to conventional publishing methods and
enabled new, exciting forms of multimedia content. The Company believes that the
cost of delivering content to a large audience can often be lower than that of
conventional media, consisting primarily of the cost of maintaining and
operating computer equipment and inputting data. In addition, the interactive
nature of the Internet provides an environment in which content providers can
track the appeal of their content by measuring the number of visits to a Website
and can respond quickly to consumers' changing tastes and needs.
The dramatic increase in Web-based information and entertainment has
increased the appeal of the Web to consumers and has driven the high growth in
traffic on the Web. Continued enhancement to the Internet, such as support for
secured transactions, multimedia offering technology and new compression
technologies, is expected to continue to attract new content providers and users
to this medium.
ADVERTISING ON THE WEB
With the growth in the number of Internet users and content providers, the
Internet has begun to develop the attributes of a conventional mass medium,
where advertising subsidizes content delivered to users. The 1995
CommerceNet/Nielsen Internet Demographics Survey indicates that on average, Web
users are upscale, professional and educated, providing an attractive
demographic profile for advertisers.
The Company believes that advertisers have begun to recognize that the
interactive nature of the Internet can provide an environment where advertising
may become more effective than it is in traditional broadcast and print media.
The interactive and global nature of the Internet has the potential to enable
advertisers to target specific audiences, measure the popularity of advertising
content and make timely changes in response, reach worldwide audiences
cost-effectively, and create innovative and interactive advertisements. The
Company believes that increases in transmission bandwidth through higher speed
Internet connections, and wider multimedia enabling technologies for the Web
could also increase the appeal and effectiveness of advertisements and make the
Web an even more attractive platform for advertising.
Advertisers currently face difficulties, however, in placing their
advertisements strategically on the Web. There are few companies that provide
inexpensive convenient turnkey packages that allow advertisers to make their
introduction onto the Web. In addition, it is difficult for advertisers to
understand the volume and demographics of traffic patterns on Websites. As a
result, advertisers can find it difficult to make the existence and location of
their advertisements widely known and target their audiences effectively. The
Company believes that, in the near term, advertisers will migrate to sites which
can offer a high number of impressions per day. The Company also believes that,
over time, advertisers will be attracted to those services that experience a
high volume of traffic, track consumers carefully and deliver advertisers
audiences that fit specific buying profiles. In order to provide such audiences
to advertisers, services and sites must develop technologies to enable them to
conduct complex demographic and psychographic profiling of their consumers. By
understanding their audiences, services and sites will be able to match
advertisements with buyers, resulting in targeted, high-impact advertising,
referred to as "narrowcasting." In addition, the ability to interact with such
targeted groups of consumers by providing enhanced benefits such as savings,
coupons, incentives and contests is expected to enable advertisers to customize
the consumers' needs and eventually, to build a long-term relationship with
customers. The Company believes that those sites and services which both garner
a high volume of traffic and offer advertisers the ability to target specific
audiences effectively will be in the best position to take advantage of the
advertising and commercial opportunities on the Web.
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THE YELLOW PAGE ADVERTISING MARKET
Yellow page directories have been published in the United States since at
least the 1890s and, traditionally, have been published almost exclusively by
telephone utilities. In the early 1980s, due in part to telephone deregulation,
independent companies began publishing an increasing number of directories.
There are currently an estimated 350 Independent Publishers. The Company
believes that yellow page directories have proved to be a successful advertising
medium.
THE COMPANY'S SERVICES
The Company's primary service offering is "On'Village Yellow Pages," a
national yellow page directory service targeted towards individuals and
businesses. To complement its yellow page directory, the Company also offers (i)
"My Place," a membership service designed to enable registered users to take
advantage of various personalized services, products and promotions, including
savings, coupons and other incentives offered by the Company's advertisers and
other listed businesses, (ii) "On'Zine," an interactive service designed to
enable users to communicate and access relevant and related content and
information on outside Websites, and (iii) "OnTour," a compilation of
information regarding select U.S. destinations, currently comprised of
information regarding five national parks and several other tourist
destinations. All of these services are offered to users free of charge.
Users can access the Company's sites through the Company's Web address,
"http://www.onvillage.com." In addition, the Company's sites can currently be
accessed directly through Netscape's Web page via the "Net Search" button, as
well as through numerous other links throughout the Web. The Company's agreement
with Netscape, pursuant to which the Company participates in the Netscape
Distinguished Provider Program, expires on April 30, 1998. The agreement
provides, however, that either party can terminate the agreement at any time
upon 90 days' prior notice. If Netscape were to terminate the agreement, the
Company would likely suffer a significant decrease in the traffic to its sites,
thereby decreasing the marketability of the Company's services. Therefore, the
Company is currently exploring the creation of alternate arrangements with
Website providers, browser providers and other distribution channels, to
supplement or replace its arrangement with Netscape. See "-- Sales, Marketing
and Distribution."
ON'VILLAGE YELLOW PAGES
The Company's primary service offering is "On'Village Yellow Pages," an
on-line yellow page directory service containing a licensed database of over 15
million business listings nationwide. The Company believes that its yellow page
directory offers users many advantages over print yellow page directories,
including (i) enabling users to obtain more timely content; (ii) enabling
regional users to search neighboring cities or counties not otherwise available
in their local print yellow page directory; (iii) enabling travelers to obtain
information from other parts of the country; and (iv) enabling businesses to
locate other businesses locally, regionally or nationally.
The directory is formatted and categorized in a manner similar to that of
most print yellow page directories. Users have the option of performing searches
by either business listings or by categories. To perform a search, the user
enters the name of the desired business listing or category, together with the
state and, if desired, the city in which the search is to be conducted. If the
user is performing a category search, the user will be presented with a series
of sub-categories from which to choose. For example, if the category entered is
"Restaurants," the user will be presented with a list of types of restaurants
from which to choose, in order to narrow the scope of the search. Shortly after
entering the search, the user is presented with a list of each business in the
database which fits within the specified search criteria. The listings include
businesses which have chosen to use the Company's services (including businesses
which have paid for the use of the Company's services), as well as those that
have not. Businesses that have purchased the Company's priority listing service
are listed first, followed by an alphabetical listing of the remaining entries.
By clicking on the desired business listing, the user will access the "page
behind" the listing, which provides the phone number, and, in most cases, the
address, of the business. In addition, each business with a yellow page listing
may add to the page-behind, free of charge, a brief (ten words or less) textual
advertisement, as well as a reference to
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an outside Website and e-mail address. Users can link to these Websites by
clicking on them. The page behind most business listings are linked to a
zoomable map prepared by a third party and currently available free of charge to
the Company, which provides users with a convenient method of viewing the
location of desired business listings. Expanded listings, including enhanced
textual enhancements and graphics customized by the Company, as well as other
related services, are available to businesses for a fee. See "-- Advertising
Services and Pricing."
The Company's On'Village Yellow Pages directory consists of a database of
business listings licensed from Pro-CD, Inc. ("Pro-CD"), a leading CD-ROM
electronic directory publisher, pursuant to a five-year licensing agreement
entered into in December 1995. The database is comprised of telephone directory
information derived from print yellow page listings and includes the business
name, address (when available), and phone number of at least 15 million
businesses nationwide. Pro-CD is required to provide the Company with quarterly
updates of the database during the term of the agreement. Pursuant to the
agreement, the Company is obligated to pay annual royalty amounts based on net
advertising revenue, make certain minimum annual royalty payments to Pro-CD,
provide Pro-CD with 50 electronic advertising bill boards free of charge, and
include a reference to Pro-CD on each of the Company's search screens. In
addition, the agreement specifies certain limits regarding the number of
business listings which can be displayed by the Company per screen. So long as
Pro-CD is in compliance with its obligations regarding updating the database,
the Company is prohibited from utilizing any other yellow page database. The
agreement does not prohibit Pro-CD from licensing its database to others,
including existing and potential competitors of the Company. Pro-CD has the
right to terminate the agreement on or after January 1, 1998, upon six months'
notice, if it is unable, or if it becomes impractical for Pro-CD to continue to
supply the data. If the agreement is terminated for any reason, the Company
could be required to delete all directory listings derived from the Pro-CD
database. The Company believes that its national database gives it a competitive
advantage over publishers of most print yellow pages, which contain only local
listings and generally are published annually.
In the future, the Company plans to introduce enhanced search tools which
will enable a user to narrow his search of the Company's yellow page database,
based on such categories as area code, zip code, key words, brand names,
available discounts and other sub-categories. These refinements are expected to
be designed to enable businesses to narrowcast advertisements to specific
audiences by placing advertisements only where the user's query contains a
specific word that has been designated as a key word for that particular
advertiser. The Company believes that this type of advertising provides
advertisers the opportunity to engage in high-response, product-specific
advertising. Although the Company plans to introduce searches by area code by
the end of the first quarter of 1998, no assurance can be given as to when, if
ever, additional enhancements will be introduced, or if such enhancements will
lead to increased traffic on the Company's sites.
The Company's On'Village Yellow Pages currently generates only a very
limited amount of traffic per day. Additionally, a substantial portion of the
Company's revenue generated to date (which has been extremely limited) has been
derived from sales of enhanced advertisements to businesses in Southern Utah,
the location of the Company's test-market site, and from contracts entered into
with a limited number of Independent Publishers. No assurance can be given that
the Company's yellow page directory will ever generate a significant amount of
traffic or that the Company will be able to generate a significant amount of
advertising revenue. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
MY PLACE
The Company's "My Place" service is an interactive, on-line service
designed to provide personalized services to registered users, referred to as
"residents." By providing certain personal or demographic information, such as
name, area code and, at the user's option, interests, an end user is assigned a
personal password through which he can access My Place. My Place offers end
users services such as: (i) access to discounts and promotions offered by
advertisers in their geographic area or areas of interest; (ii) an e-mail
forwarding service; (iii) a reminder service consisting of an automatic e-mail
message sent on a specified date; (iv) a personal notebook, consisting of
telephonic numbers selected by the end-user; and (v) links to other
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Internet services such as a weather forecasting service. In addition, each
resident is given his own personalized e-mail address: "@onvillage.net."
Membership in My Place is currently available, free of charge, to any user
who accesses the Company's site. First time users can register as a resident by
inputting their name, address and telephone number, a secret password, and
optional information regarding their personal interests. Each time a resident
enters My Place, he is greeted with the following personalized message:
"ON'VILLAGE SAYS WELCOME BACK [NAME OF RESIDENT] OF [CITY OF RESIDENCE]."
Residents are then presented with notices, discounts, coupons and special offers
made available by businesses within the resident's area code. Residents also
have the ability to search for offerings made by businesses with different area
codes. Although businesses can currently post offerings on My Place free of
charge, in the future, the Company intends to limit participation to advertisers
who have purchased enhanced listings on the Company's On'Village Yellow Pages
directory or who otherwise pay a specified fee. See "-- Advertising Services and
Pricing."
The Company believes that My Place provides advertisers with an efficient
method of reaching a targeted audience. Advertisers can currently narrowcast
their promotional campaigns to users within a specified area code. Within the 12
months following consummation of the Offering, the Company expects to be able to
furnish further refinements to its My Place service based on a user's city,
state and zip code. Ultimately, the Company's goal is to utilize the information
it gathers regarding its users to provide advertisers with the ability to
narrowcast their advertisements based on such "psychographic" information as
hobbies and areas of interest. No assurance can be given that the Company will
ever implement such refinements, that My Place will ever attract a significant
number of users, will be an effective platform for advertisers, or that My Place
will ever generate significant revenue.
ON'ZINE
The Company's "On'Zine" service provides an interactive service for users
to communicate and immediately access relevant and related content and
information on designated third-party Websites. These Websites are organized by
category, and have been selected, reviewed and rated by the Company. On'Zine
currently lists over 400 Websites in a total of 22 different categories (or
"Zines"), including On'Travel, On'Computers, On'Cars and On'Gossip. Users
receive a direct and immediate link to outside Websites by simply clicking on
the desired Website within a Zine. On'Zine also offers a "chat area" within each
Zine where users can interactively discuss topics of common interest. These
"chat areas" are not currently monitored by the Company, although the Company
anticipates it will do so in the future.
The Company believes that On'Zine will provide advertisers with an
efficient method of reaching targeted audiences. The Company also views On'Zine
as an effective pathway for users to access third-party Websites. Accordingly,
the Company plans to offer advertisers (in particular, businesses purchasing
enhanced advertisements on the On'Village Yellow Pages, either through
Independent Publishers or directly) and third-party Website hosts the
opportunity to purchase advertising banners and other forms of advertising
within the various 'Zines. See "-- Advertising Services and Pricing."
The Company may, in the future, expand On'Zine, and may offer users a
limited amount of Company-prepared content. To date, On'Zine has generated a
limited amount of traffic, and, due to, among other things, the Company's
limited marketing resources, the Company has not sold any advertising on its
On'Zine service. No assurance can be given that On'Zine will ever attract a
significant number of users, will be an effective platform for advertisers or
that On'Zine will ever generate significant revenue.
ONTOUR
The Company's recently introduced "OnTour" service provides users with a
compilation of information regarding select U.S. destinations. Currently, users
can access information regarding five national parks (Zion, Bryce Canyon, Canyon
Lands, Arches and the Grand Canyon), and several other tourist destinations
including Sonoma, California, Daytona Beach, Florida and Sun Valley, Idaho. By
clicking on the desired destination, users can locate listings of restaurants,
retail shops, hotels and other information regarding surrounding areas at such
destination. The Company plans to offer advertisers (in particular, businesses
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purchasing enhanced advertisement on the On'Village Yellow Pages, either
directly or through Independent Publishers) and third-party Website hosts the
opportunity to purchase advertising banners and other forms of advertising on
the Company's OnTour site.
To date, sales of advertisements on OnTour have been limited to businesses
located in Utah in conjunction with the Company's test-marketing activities and
OnTour has generated a limited amount of traffic. No assurance can be given that
OnTour will ever generate a significant number of users, will be an effective
platform for advertisers or that OnTour will ever generate significant revenue.
OTHER ANCILLARY SERVICES
The Company recently began offering for sale semi-custom and custom
Websites. Semi-custom Websites are multi-page, pre-formatted Internet Websites
that provide businesses with an opportunity to advertise products and services
in a more comprehensive manner than is available through a single Yellow Pages
Webpage. Full custom Websites may include custom designed graphics, forms,
navigational aids and databases. The Company expects to derive revenue from
businesses seeking these services through referrals provided by the Independent
Publishers and, to a lesser extent, through sales generated by the Independent
Publishers' sales forces.
PROPOSED SERVICES
The Company may also develop and market services that enable customers to
engage in business-to-consumer and business-to-business electronic commerce on
the Internet. These services would include hosting of transactions and could
include order taking, authorization, payment processing, security and customer
service. The Company anticipates that it would receive a fee for hosting these
services as well as a transaction fee based on the dollar amount of each sale.
Online purchasing of goods and services by consumers is in an early stage of
development, and has been hindered to date by, among other factors, a lack of
widely accepted secure payment mechanisms. See "Risk Factors -- Developing
Market; Unproven Acceptance of the Company's Services." No assurance can be
given that the Company will successfully develop such services, or that if
developed, such services will ever generate significant revenue.
STRATEGY
The Company believes that the Internet represents an important new growing
medium for advertisers to reach consumers. The Company's objective is to
position itself to take advantage of this growth by serving the needs of its
advertising customers. The Company designed its initial service offering, the
On'Village Yellow Pages, to provide businesses with the ability to undertake
measurable, targeted, cost-effective and interactive advertising on the
Internet. In an effort to differentiate its yellow page directory service from
other Internet-based yellow page directories, the Company introduced My Place,
On'Zine and OnTour. The Company has continued to address the requirements of its
advertising customers, and will seek to provide other ancillary services to such
customers, such as its custom and semi-custom Website services. The Company also
plans in the future to invest resources in the enhancement of its existing
offerings and the possible development of additional services (such as the
hosting of electronic commerce).
The Company's strategy for revenue generation is to develop a critical mass
of advertising customers who purchase enhanced advertisements on the On'Village
Yellow Pages as well as the Company's other Internet services. The Company
believes that the most effective way to achieve this base of advertisers is
through joint marketing and sales arrangements with Independent Publishers. The
Company's strategy is to initially seek to enter into as many arrangements with
Independent Publishers as possible by providing the Independent Publishers with
the opportunity, free of charge, to offer their advertising customers with a
means of advertising on the Internet through the Company's basic "QuickStart
Ad." In exchange for access to the Company's Internet services, the Independent
Publishers agree to directly market and attempt to resell the Company's enhanced
advertising services to the Independent Publishers' existing base of customers.
The Company believes that this strategy will enable the Company to potentially
leverage the Independent Publishers' existing base of advertising customers and
sales and marketing personnel, to expand the Company's base of advertising
customers. The Company anticipates that once established, this base of
advertising customers may not only purchase enhanced advertising services from
the Company, but may also be willing to pay for basic advertising
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services in the future. The Company believes that the Independent Publishers
could provide an efficient means of promoting and marketing the Company's
services. In addition, the Independent Publishers may be a source of referrals
to the Company for customers that indicate an interest in an expanded Internet
presence. To support this effort, the Company plans to develop a nationwide
sales management force dedicated to establishing relationships with Independent
Publishers. The Company also contemplates seeking advertising customers through
the use of a telemarketing program. See "-- Sales, Marketing and Distribution."
The Company anticipates that its principal source of revenue, if any, in
the future will be fees paid to the Company by advertising customers, both
indirectly through Independent Publishers and, to a lesser extent, directly, to
obtain enhanced advertisements on the On'Village Yellow Pages, to advertise on
On'Zine and OnTour, and to provide promotions and other offerings on My Place.
Additional revenue may also be obtained through the sale of ancillary services
such as custom and semi-custom Website services. To date, the Company's
extremely limited revenue has been derived primarily from sales of enhanced
advertisements to businesses located in Southern Utah, the location of the
Company's test-market site, and from the contracts entered into with a limited
number of Independent Publishers.
The Company believes that distributing and marketing its services widely is
a key to successfully growing its base of users as well as enhancing its
marketability to its advertising customers. Accordingly, the Company is party to
an agreement with Netscape which provides that the Company's yellow page
directory is listed as a yellow page service on Netscape's Web page, accessible
via the "Net Search" button, through April 1998 (subject to either party's
ability to terminate the agreement at any time upon 90 days' prior notice)
pursuant to the Netscape Distinguished Provider Program. The Company is
currently exploring the creation of alternate arrangements with Websites
providers, browser providers and other distribution channels, to replace and/or
supplement its arrangement with Netscape. See "-- Sales, Marketing and
Distribution."
The Company believes that cultivating a distinct brand image will be
critical to differentiating the Company's services. The Company plans to
maximize brand potential by providing consistent higher quality and innovative
services, and by conducting marketing activities that reinforce the Company's
image. The Company also believes that its relationships with Independent
Publishers (who are expected to include the "On'Village" name and address in
participating business listings in the print yellow pages they publish) will be
an important means of generating name recognition. See "Risk Factors -- Reliance
on Intellectual Property Rights; No Assurance of Obtaining Service Mark
Registration."
SALES, MARKETING AND DISTRIBUTION
The Company's sales and marketing efforts, which to date have been
extremely limited, were initially focused on sales by the Company of enhanced
advertisements in the On'Village Yellow Pages directly to businesses located in
Southern Utah, the location of the Company's test-market site. As a result of
these activities, the Company gained valuable information which was applied in
refining the Company's sales techniques, service offerings and technical
systems. As a result, the Company changed its focus to the establishment of
relationships with Independent Publishers as the primary means of selling and
marketing the Company's services. More recently, the Company has begun to market
its services to customers referred to it through Independent Publishers in those
areas supported by the Company's regional sales managers and is contemplating
seeking advertising customers through the use of a telemarketing program.
RELATIONSHIPS WITH INDEPENDENT PUBLISHERS
The Company's current standard agreement with Independent Publishers
provides that, for a period of one year, the Independent Publisher will offer
its advertising customers the opportunity to advertise on the Company's yellow
page directory through the Company's QuickStart Ad, at no charge to the
Independent Publisher. In exchange for affording the Independent Publishers'
advertising customers the opportunity to advertise on the Company's yellow page
site, the Independent Publisher is required to print the Company's name and
Internet address in its print yellow page directories (including at least one
full page display advertisement in each published directory) and to use its best
efforts to resell the Company's enhanced
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<PAGE> 41
advertising services. These enhanced services include priority listings,
listings of the Company's other sites, graphics and logo advertisements,
enhanced textual advertisements, including detailed display banners, listings of
businesses by additional categories and cities, and additional URL and e-mail
links. During the term of the agreement, the Independent Publisher is prohibited
from representing or selling the products of any other on-line or Internet-based
yellow page service. The Company will provide training and consulting services
to the Independent Publishers and will, in some cases, provide the Independent
Publishers with the software necessary to enable the Independent Publishers to
directly input certain enhanced advertisements on the On'Village Yellow Pages.
The Company also plans to sell advertisements on On'Zine, My Place and OnTour
through the Independent Publishers. As of September 30, 1997, the Company had
entered into 70 arrangements with Independent Publishers.
The Company recently has entered into informal arrangements with a limited
number of Independent Publishers to pay such Independent Publishers compensation
based on the sale by the Company of its Internet services to customers referred
to the Company by such Independent Publishers. Based on the preliminary results
of these arrangements, the Company is considering formalizing these arrangements
and expanding them to include additional Independent Publishers.
In the approximately 12 months following the consummation of the Offering,
the Company plans to add a total of an additional approximately 10 to 15
national and regional sales managers and sales support staff to develop contacts
with Independent Publishers. No assurance can be given that the Company will be
able to add such personnel, or that any such personnel will lead to increased
sales of the Company's services. See "-- Employees."
ARRANGEMENT WITH NETSCAPE
In order to provide users with simple and instantaneous access to the
Company's services, the Company entered into an agreement with Netscape which
provides that the Company's services will be listed on Netscape's Web page,
accessible via the "Net Search" button, through April 1998 (subject to each
party's ability to terminate the agreement at any time upon 90 days' prior
notice) pursuant to the Netscape Distinguished Provider Program. Currently, two
competing yellow page services, as well as a number of leading navigational
services with yellow page directories, are also listed. The Company believes
that a significant percentage of the limited traffic to the Company's site is
generated through its Netscape listing. No assurance can be given that Netscape
will not terminate the agreement prior to its expiration date, that Netscape
will not enter into similar arrangements with other competing companies (thereby
resulting in an increase in the number of competitive companies listed on
Netscape's Web page), or that Netscape will not develop its own service
offerings competitive with those of the Company. If Netscape were to choose to
terminate the agreement, or if Netscape were to develop and market its own
competitive services or promote competing services from other third parties, the
Company would likely suffer a significant decrease in the traffic to its sites,
thereby decreasing the marketability of the Company's services. The Company is
currently exploring the creation of alternate arrangements with Website
providers, browser providers and other distribution channels, to supplement or
replace its arrangement with Netscape. No assurance can be given that the
Company will enter into any such arrangements on terms acceptable to the Company
or at all, or that any such arrangements will generate significant traffic to
the Company's on-line sites.
The Company also plans to pursue other means of marketing its services,
including on-line and trade advertising, attendance at Internet trade shows and
advertisements in various print media. The Company may also enter into
cross-marketing strategic arrangements with Internet service providers and
others.
ADVERTISING SERVICES AND PRICING
The Company's services are designed to provide businesses with the ability
to undertake measurable, targeted, cost-effective and interactive advertising on
the Internet. Businesses are afforded the opportunity to target the users of the
Company's yellow page directory in a general fashion, or to narrowcast
advertisements based on the geographic location of the user and by advertising
on the Company's other service offerings, thereby offering the advertiser the
opportunity to engage in high-response, product-specific advertising. For
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<PAGE> 42
example, the Company offers registered users of My Place the opportunity to take
advantage of special offers, discounts, and other benefits provided by the
Company's advertising customers and other listed businesses. Additionally, the
Company believes that, because users initiate the search for information
regarding a particular business, users are particularly receptive to the
advertising information they receive, thereby establishing the Company's
services as an attractive and effective platform for delivering information in
an unobtrusive manner.
The Company offers businesses a number of different advertising options,
ranging from simple text to more complicated graphical images. The Company has
bundled a number of its basic options into the QuickStart Ad. The QuickStart Ad
includes an enhanced textual advertisement appearing on the "page behind" of an
advertiser's yellow page listing, as well as a listing of business hours and
credit cards accepted. The QuickStart Ad also sets forth the URL link to an
advertisers' outside web site and e-mail address (if available). Businesses
which advertise through the QuickStart Ad can list their businesses under three
different categories on the Company's yellow page directory, and receive an
expanded listing icon next to their yellow page listing. Advertisers can change
the text of their advertisement at any time. Initially, the Company intends to
provide each advertising client of participating Independent Publishers with a
QuickStart Ad at no charge to the Independent Publisher, in exchange for, among
other things, a commitment by the Independent Publisher to market and resell the
Company's other product offerings. See "-- Sales, Marketing and Distribution;
Relationships with Independent Publishers."
The Company also offers several enhanced advertising services designed to
increase the visibility and effectiveness of an advertisement, including
priority listings, listings on the Company's My Place and OnTour sites, graphics
and logo advertisements, enhanced textual advertisements, including detailed
display banners, listings of businesses by additional categories and cities, and
additional URL and e-mail links. The suggested retail price of these products
currently range from $20 to $499. In addition, the Company offers advertisers
access to the Company's database of end-users, for the purpose of targeting
advertisements and offering promotional materials. In the future, the Company
also plans to offer businesses the opportunity to purchase advertising space on
the Company's On'Zine sites. These advertisements will be priced on a
case-by-case basis.
TECHNOLOGY
Pursuant to the Company's agreement with Network Publishing, which is
terminable by the Company upon 30 days' notice and by Network Publishing upon
120 days' notice, Network Publishing has agreed to host and maintain the
Company's computer hardware systems. The Company's operating system is developed
and maintained in-house by Mr. Kent Hinkson, the Company's Director of
Technology, a former consultant to Network Publishing. The Company's systems are
currently powered by the Oracle Database software as well as other server
software, and employ multiple T-1 lines from several telephone utilities, with
hardware traffic routing that provides consistent throughput. These T-1 lines
connect the Company's servers to telephone company providers, which employ more
powerful routers and dedicated high speed connection lines. All systems and
maintenance activities, including server hosting, are managed and maintained by
Network Publishing. The Company believes that Network Publishing is capable of
supporting the Company's technological needs for the foreseeable future. Network
Publishing has built and maintained Websites for such major corporations as
Novell, Volkswagen USA, Verifone, The Smithsonian and The Utah Travel Council.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Recent increases in the volume of searches conducted through the Company's
services have strained the capacity of the operating system, hardware and
telecommunications lines deployed by the Company, and has led to slower response
times and operating system failures. To respond to these problems, the Company
has recently leased a new hardware system and has commenced identifying new
operating systems to replace its existing operating system. Although the Company
believes it will be able to identify and purchase such new operating system, no
assurance can be given that the Company will be able to integrate such operating
system with its hardware system in a timely and cost effective manner. In
addition, there can be no assurance that the Company's services and systems will
be able to scale appropriately to any further increases in users and
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<PAGE> 43
services offered. The Company is also dependent upon Web browser companies and
Internet and online service providers for access to its services, and users have
experienced and may in the future experience difficulties due to system or
software failures or incompatibilities not within the Company's control. The
Company is also dependent on Network Publishing for prompt delivery,
installation and service of servers and other equipment and services used to
provide the Company's services. Any disruption in the Internet access and
service provided by the Company or Network Publishing could have a material
adverse effect upon the Company's business, results of operations and financial
condition.
COMPETITION
The market for Internet products and services is highly competitive, with
no substantial barriers to entry, and the Company expects that competition will
continue to intensify. The market for the Company's services has only recently
begun to develop, is rapidly evolving and is characterized by an increasing
number of market entrants with competing products and services. The Company
believes that the principal competitive factors in its market are brand
recognition, ease of use, comprehensiveness, enhancements and value added
benefits, entertainment value, and quality and responsiveness of search results
(i.e., narrowcasting). Although the Company believes that the diverse segments
of the Internet market may provide opportunities for more than one supplier of
services similar to those of the Company, it is possible that a single or few
suppliers may dominate one or more market segments. There can be no assurance
that the Company's competitors will not develop Internet services that are
superior to those of the Company or that achieve greater market acceptance than
the Company's offerings. Any failure of the Company to provide service offerings
that achieve success in the short-term could result in an insurmountable loss in
marketshare and brand acceptance, and could, therefore, have a material adverse
effect upon the Company's business in the long term.
A number of companies offer competitive services addressing certain of the
Company's target markets. Most of the Company's existing and potential
competitors have significantly greater financial, technical and marketing
resources than the Company. These companies include America Online, Inc.,
Excite, Inc., Lycos, Inc., The McKinley Group, CompuServe Corporation, Prodigy
Services Company, Infoseek Corporation and Yahoo! Corporation. Specifically, the
Company's On'Village Yellow Pages product competes with other Internet Yellow
Page directory services, including BigYellow, BigBook, YellowNet, GTE
SuperPages, Yellow Pages Online, Switchboard, InfoSpace, ZIP2, American Business
Information's Lookup USA and a Netscape Guide by Yahoo! Corporation featuring
the Yellow Page services of the five Regional Bells. In addition, the Company
competes with metasearch services that allow a user to search the databases of
several catalogs and directories simultaneously. The Company also competes
indirectly with database vendors that offer information search and retrieval
capabilities with their core database products. In the future, the Company may
encounter competition from providers of Web browser software, including Netscape
and Microsoft Corporation, online services and other providers of other Internet
products and services who elect to incorporate their own search and retrieval
features into their product and service offerings. A number of the Company's
Internet yellow pages competitors as well as many other companies offer custom
and semi-custom Website services that compete with the Website services being
offered by the Company.
Netscape and Pro-CD, as well as a number of the Company's current
advertising customers, have established relationships with certain of the
Company's competitors and future advertising customers, licensees and licensors
may establish similar relationships. For example, the Netscape Guide by Yahoo!
Corporation features a yellow page service provided by the Regional Bells,
accessable through Netscape's "Destinations" toolbar. In addition, the Company
competes with online services and other Website operators as well as traditional
offline media such as print (including print yellow page directories) and
television for a share of advertisers' total advertising budgets. Competition
among current and future suppliers of Internet navigational and directory
services, as well as competition with other media for advertising placements,
could result in significant price competition and reductions in advertising
revenue. There can be no assurance that the Company will be able to compete
successfully against its current or future competitors.
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INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company relies on a combination of copyright and trademark laws and
contractual provisions to protect its proprietary rights. Litigation may be
necessary to protect the Company's proprietary rights. Any such litigation may
be time-consuming and costly. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's services or to obtain and use information that the Company regards as
proprietary. In addition, there are few barriers to entry into the market for
the Company's services. There can be no assurance, therefore, that any of the
Company's competitors, most of whom have far greater resources than the Company,
will not independently develop technologies that are substantially equivalent or
superior to the technologies utilized by the Company. See "-- Competition."
The Company has applied for a service mark registration for "On'Village."
Although this application was initially denied, the Company has responded to the
denial, arguing that the registration should be granted. There can be no
assurance, however, that the Company's application will be approved. The Company
intends to focus its efforts on achieving brand recognition for its products;
therefore, failure of the Company to obtain the "On'Village" service mark
registration and the use of the name by third parties, could have a material
adverse effect on the Company's business, results of operations and financial
condition. The Company will continue to evaluate the registration of additional
service marks and trademarks, as appropriate.
In addition, the Company relies on certain technology and data licensed
from third parties, and may be required to license additional technology and
data in the future, for use in providing services to users and advertising
customers. The Company's ability to generate fees from advertising and,
eventually, Internet commerce, may also depend on data encryption and
authentication technologies that the Company may be required to license from
third parties. There can be no assurance that these third party technology
licenses will be available or will continue to be available to the Company on
acceptable commercial terms, or at all.
There has been substantial litigation in the computer industry regarding
intellectual property rights. There can be no assurance that the Company will
not commence litigation to protect its position or third parties will not in the
future claim infringement by the Company with respect to current or future
services, trademarks or other rights (including the use of the "On'Village"
name), or that the Company will not counterclaim against any such parties in
such actions. Any such claims or counterclaims could be time-consuming, result
in costly litigation, or require the Company to redesign its services, any of
which could have a material adverse effect on the Company's business, operating
results and financial condition. Although the Company will take steps that it
considers appropriate to protect its intellectual property rights, the Company
believes its future success will depend primarily on its ability to rapidly
introduce new services and enhancements to its existing services, rather than
upon legal protections afforded existing intellectual property.
GOVERNMENT REGULATION
The Company may be subject to Sections 5 and 12 of the Federal Trade
Commission Act (the "FTC Act"), which regulate advertising in all media,
including the Internet, and require advertisers to have substantiation for
advertising claims before disseminating advertisements. The FTC Act prohibits
the dissemination of false, deceptive, misleading and unfair advertising, and
grants the Federal Trade Commission ("FTC") enforcement powers to impose and
seek civil and criminal penalties, consumer redress, injunctive relief and other
remedies upon persons who disseminate prohibited advertisements. The Company
could be subject to liability under the FTC Act if it were found to have
participated in creating and/or disseminating a prohibited advertisement with
knowledge, or reason to know that the advertising was false or deceptive. The
FTC has recently brought several actions charging deceptive advertising via the
Internet, and is actively seeking new cases involving advertising via the
Internet.
The Company may also be subject to the provisions of the recently enacted
Communications Decency Act (the "CDA"), which, among other things, imposes
substantial monetary fines and/or criminal penalties on anyone that distributes
or displays certain prohibited material over the Internet or knowingly permits a
telecommunications device under its control to be used for such purposes.
Although the manner in which the CDA will be interpreted and enforced and its
effect on the Company's operations cannot yet be fully
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determined, the CDA could subject the Company to substantial liability. The CDA
could also dampen the growth of the Internet generally and decrease the
acceptance of the Internet as an advertising medium.
Other federal, state or local laws, regulations and policies, either now
existing or that may be adopted in the future, may apply to the business of the
Company and may subject the Company to significant liabilities, significantly
dampen growth in Internet usage, prevent the Company from offering certain
Internet content or services, or otherwise cause a material adverse effect on
the Company's business, results of operations and financial condition. These
laws, regulations, and policies may apply to matters such as, but not limited
to, copyright, trademark, unfair competition, antitrust, property ownership,
negligence, defamation, indecency, obscenity, personal privacy, trade secrecy,
encryption, taxation and patents.
EMPLOYEES
As of September 1, 1997, the Company had 22 full-time and three part-time
employees, including five in research and technology, eight in sales and
marketing and 12 in finance and administration. The Company believes that its
relations with its employees are satisfactory. The Company is not a party to any
collective bargaining agreements. The Company's future success depends on its
continuing ability to attract and retain highly qualified technical and
management personnel. To enable the Company to pursue its business strategy, the
Company plans to add an additional approximately 30 employees in the
approximately 12 months following the Offering in the areas of marketing,
product development and administration (including a total of approximately 10 to
15 national and regional sales managers and sales support staff). Competition
for employees in the Company's industry is intense, and there can be no
assurance that the Company will be able to attract or retain highly qualified
personnel in the future.
FACILITIES
The Company's principal administrative, sales, and marketing facility is
located in an approximately 6,300 square foot facility in Calabasas, California.
The five-year lease, which commenced in June 1997, provides for monthly payments
of approximately $8,800 during the first 12 months of the lease term, with
monthly payments of approximately $11,000 for the remaining 48 months and an
option to extend the lease for an additional three years. The Company believes
that its existing facility will be adequate for the Company's requirements for
the foreseeable future.
LEGAL PROCEEDINGS
The Company is not currently engaged in any material legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following are the directors, director nominees and executive officers
of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------- --- --------------------------------------------
<S> <C> <C>
Jack B. Tracht+ 48 Chief Executive Officer and Director
Robert D. Tracht 43 President, Chief Operating Officer and
Director
Jeff W. Walden 43 Senior Vice President of Marketing and
Director
James E. Austin 58 Senior Vice President of Sales, Secretary
and Director
William A. Rossi 39 Vice President and Chief Financial Officer
Nicholas M. Mitsakos*+ 37 Director Nominee
David A. Searls*+ 49 Director Nominee
</TABLE>
- ---------------
+ Proposed member of the Compensation Committee.
* Proposed member of the Audit Committee.
JACK B. TRACHT is a co-founder of the Company and has served as a Director
since the Company's inception in November 1995 and as the Company's Chief
Executive Officer since May 1996. From November 1995 to May 1996, Mr. Tracht
served as a Vice President of the Company. From 1987 to 1995, Mr. Tracht was
President and a principal of Inland Pacific Edge Inc., a distributor of apparel
and footwear to mass marketers in the U.S. and abroad. Mr. Tracht has over 20
years of experience in marketing, designing and merchandising various product
lines. Mr. Tracht has served in various positions in retail and wholesale
management at Allied Department Store Group, Great American Clothing Company and
Point Sportswear, a division of Alpha Pacific Corporation. Mr. Tracht is the
brother of Robert D. Tracht.
ROBERT D. TRACHT is a co-founder of the Company and has served as its
President and a Director since the Company's inception in November 1995, and has
served as the Company's Chief Operating Office since May 1996. From March 1995
to January 1997 Mr. Tracht served as the Company's Chief Financial Officer. Mr.
Tracht is the founder and a principal of Robert Tracht Enterprises, Inc.
("RTE"), a domestic and international wholesaler and distributor of apparel and
athletic footwear with a European giftware merchandising division, and has
served as that company's President since 1987. Mr. Tracht has over 20 years of
experience in the apparel, merchandising and accessory wholesale industry. Prior
to 1987, Mr. Tracht served as Regional Sales Manager for a division of Jordache
Jeans and Englishtown Sportswear. Mr. Tracht is the brother of Jack B. Tracht.
JEFF W. WALDEN is a co-founder of the Company and has served as a Director
since the Company's inception in November 1995 and as the Company's Senior Vice
President of Marketing since May 1996. From November 1995 to May 1996, Mr.
Walden served as a Vice President of the Company. Mr. Walden's career spans 20
years across the apparel and giftware industries, where he developed, marketed
and merchandised numerous product lines. Mr. Walden is a principal in RTE where,
since 1990, he has managed its wholesale trading division. From 1986 to 1990,
Mr. Walden served as Vice President of American Marketing Works Incorporated's
branded division, which included the Body Glove brand. From 1981 to 1986, Mr.
Walden served as Vice President of PLSA, Inc., a manufacturer of men's and
women's outerwear apparel. Prior thereto, Mr. Walden served as Vice President of
Marketing and Sales of Alpha Pacific Corporation and as Vice President of
Marketing of American Characters International, Inc.
JAMES E. AUSTIN is a co-founder of the Company and has served as a Director
since the Company's inception in November 1995 and as the Company's Senior Vice
President of Sales since May 1996. From November 1995 to May 1996, Mr. Austin
served as a Vice President of the Company. For over 30 years Mr. Austin has been
involved in the selling and merchandising of sportswear lines. For almost 20
years, Mr. Austin headed his own independent sales representative organization,
representing sportswear manufacturers such as Body Glove, Bugle Boy and B.U.M.
Equipment. From 1994 to 1995, Mr. Austin was employed
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by Authentic Image Marketing as National Sales Manager for its surf and
sportswear product line. From 1993 to 1994, he was employed by Inland Pacific
Edge, Inc. as a National Marketing Representative, and from 1991 to 1992 was a
sales representative for Yes Clothing Co. Mr. Austin previously served as
Regional Vice President at Point Sportswear, a division of the Alpha Pacific
Corporation and held various sales and other positions at Sprenger's Men's Wear,
Manhattan Shirt Company and Europa Sport. Mr. Austin was also a partner in
Retail Trends, a developer of retail franchises.
WILLIAM A. ROSSI joined the Company in February 1997 and has served as Vice
President and Chief Financial Officer since March 1997. Previously, Mr. Rossi
was Vice President and General Manager for the SunMed Service division of
Sunrise Medical, Inc., a publicly held manufacturer and distributor of home
medical equipment, from January 1995 to February 1997. From July 1991 to
December 1994, he served as Controller and then Vice President and Controller
for Sunrise Medical, Inc. Mr. Rossi is a certified public accountant in the
State of California.
NICHOLAS M. MITSAKOS will commence service as a member of the Company's
Board of Directors upon consummation of the Offering. Since April 1984, Mr.
Mitsakos has been the Chief Executive Officer of Mitsakos & Co., a private
investment company which focuses on providing venture capital to technology,
media, telecommunications and entertainment companies. Mr. Mitsakos has also
served as Chief Executive Officer of Mitsakos Holdings, LLC, a global investment
fund which focuses on publicly traded equities, since April 1989. Since November
1995, Mr. Mitsakos has been the Chairman of the Board of Capri Entertainment,
Inc., a music and new media venture. He also serves as a Director to InterVU, an
Internet-based services company, as an advisor to Berkeley Networks, Inc., an
Internet software and hardware networking company, and as an advisor to Morgan
Interactive, Inc., a computer animation company. Mr. Mitsakos serves on the
Boards of the UCLA Medical School Center for Cerebral Palsy and the Young
Musician's Foundation. Since 1993, Mr. Mitsakos has also been a part-time
instructor at the UCLA Anderson School of Business. Mr. Mitsakos graduated summa
cum laude from the University of Southern California and earned a Masters in
Business Administration from Harvard University.
DAVID A. SEARLS will commence service as a member of the Company's Board of
Directors upon consummation of the Offering. From 1992 to the present, Mr.
Searls has served as President of Searls, Inc., a computer consulting firm.
Since 1978, Mr. Searls has served as creative director and, most recently, head
of the public relations division and a director of Hodskins Simone & Searls, a
private advertising agency Mr. Searls co-founded in 1978.
Directors serve until the next annual meeting or until their successors are
elected or appointed. Officers are elected by and serve at the discretion of the
Board of Directors. Other than as described above, there are no family
relationships among the officers or directors of the Company.
KEY EMPLOYEES
The following individuals are additional key employees of the Company:
HOWARD M. FITES has served as the Company's Web Master and Senior Editor
since the Company's inception in November 1995. Mr. Fites' responsibilities at
the Company include working with the Company's Director of Technology in
maintaining the Company's computer assisted design program, which includes
Hypertext Markup Language ("HTML") scripting, graphic design, and data
optimization. He also is in charge of implementing the production of the
Company's advertising, marketing and promotional efforts. For the five years
prior to joining the Company, Mr. Fites developed computer generated advertising
programs and Websites for commercial clients through Pinstripe Design, a company
he founded in 1982.
KENT HINKSON has served as the Company's Director of Technology since April
1997. For the seven years prior to joining the Company, Mr. Hinkson acted as an
independent consultant and software engineer, pursuant to which he defined
hardware and support requirements, designed systems, and programmed, tested and
implemented final hardware/software solutions for various corporations. Mr.
Hinkson was a consultant for Network Publishing and, together with the Company,
designed all of the Company's existing systems.
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BOARD COMMITTEES AND DESIGNATED DIRECTORS
The Board of Directors intends to establish an Audit Committee and a
Compensation Committee. The functions of the Audit Committee will be to
recommend annually to the Board of Directors the appointment of the independent
public accountants of the Company, discuss and review the scope and the fees of
the prospective annual audit and review the results thereof with the independent
public accountants, review and approve non-audit services of the independent
public accountants, review compliance with existing major accounting and
financial policies of the Company, review the adequacy of the financial
organization of the Company and review management's procedures and policies
relative to the adequacy of the Company's internal accounting controls.
The functions of the Compensation Committee will be to review and approve
annual salaries and bonuses for all executive officers and review, approve and
recommend to the Board of Directors the terms and conditions of all employee
benefit plans or changes thereto. Messrs. Mitsakos and Searls will serve as
members of the Audit Committee and Messrs. J. Tracht, Mitsakos and Searls will
serve as members of the Compensation Committee.
The Company has agreed for a period of five years from the date of this
Prospectus if requested by the Representative, to nominate a designee of the
Representative who is reasonably acceptable to the Company to the Company's
Board of Directors. The Representative has informed the Company that it does not
intend to make such a request in the near future.
DIRECTOR COMPENSATION
Directors who are employees of the Company receive no compensation for
serving on the Board of Directors. Non-employee directors receive $500 per
meeting plus out-of-pocket expenses for attending such meetings. In addition,
each non-employee director of the Company will be granted options to purchase
2,000 shares of Class A Common Stock, at fair market value on the date of
commencement of service on the Company's Board of Directors, provided that
unvested options shall terminate upon the termination of the non-employee
director's service on the Board of Directors. All options granted to
non-employee directors vest in full 12 months after grant. Non-employee
directors are not precluded from serving the Company in any other capacity and
receiving compensation therefor.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by the Company
for its fiscal year ended December 31, 1996 to Jack B. Tracht, the Chief
Executive Officer of the Company. No executive officer of the Company received
salary and bonus in excess of $100,000 in such fiscal year.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1)
---------------------------------
FISCAL YEAR ENDED
DECEMBER 31, ANNUAL SALARY
----------------- -------------
<S> <C> <C>
Jack B. Tracht, Chief Executive Officer.......... 1996 $17,697
</TABLE>
- ---------------
(1) Mr. Tracht began accruing a salary in October 1996 at an annual rate of
$92,500. No cash payments were made to Mr. Tracht in 1996.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement (the "Employment
Agreement") with each of Jack B. Tracht, the Company's Chief Executive Officer;
Robert D. Tracht, the Company's President and Chief Operating Officer; Jeff W.
Walden, the Company's Senior Vice President of Marketing; and James E. Austin,
the Company's Senior Vice President of Sales, in January 1997. The term of each
Employment Agreement commences on the closing of the Offering and expires at the
end of the 37th month after such date; provided, however, that the term may be
extended by mutual agreement between the Company and the employee. Each
Employment Agreement provides that in consideration for the respective
employee's services, he is to be paid a salary of $92,500 during the first 13
month period of the Employment Agreement. In
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<PAGE> 49
addition, each employee will receive increases in salary and bonuses as deemed
appropriate by the Board of Directors after such 13 month period. Each
Employment Agreement also provides that in the event the employee is terminated
for "good cause," he shall not be entitled to any severance, and in the event
the employee is terminated for any reason other than "good cause", he shall be
entitled to severance pay equal to the lesser of (x) a lump sum amount equal to
one year's salary based on his then-current annual salary (excluding any bonuses
or fringe benefits) or (y) the remaining salary due under the term of the
Employment Agreement plus a continuation of the disability and health insurance
policies provided for in the Employment Agreement. Each Employment Agreement
contains standard non-compete, non-solicitation and confidentiality provisions.
Pursuant to a letter agreement entered into in February 1997, the Company
agreed to provide Mr. William A. Rossi a base annual salary of $78,000 for
serving as the Company Vice President and Chief Financial Officer and agreed to
grant to Mr. Rossi options to purchase an aggregate of 20,000 shares of Class A
Common Stock at an exercise price equal to their fair market value on the date
of grant, under the Company's Option Plan. Options to purchase 7,000 shares of
Class A Common Stock at an exercise price of $4.00 per share were granted to Mr.
Rossi in August 1997 and the letter agreement provides for the grant of options
to purchase 6,000 and 7,000 shares of Class A Common Stock in February 1998 and
1999, respectively. In addition, in August 1997, Mr. Rossi received options to
purchase 500 shares of Class A Common Stock at an exercise price of $4.00 per
share.
The Company entered into an employment agreement with Mr. Kent Hinkson, the
Company's Director of Technology, in April 1997. The agreement provides for a
base annual salary of $70,000, plus bonuses and annual salary increases as
deemed appropriate by the Board of Directors. In addition, Mr. Hinkson is
entitled to additional compensation equal to 1% of the Company's net revenue
(the "Incentive Compensation"). The agreement may be terminated at any time by
the Company for "good cause", and upon 30 days' notice, at any time without
cause. Mr. Hinkson may terminate the agreement at any time upon 120 days'
notice. The agreement provides that in the event Mr. Hinkson is terminated for
"good cause" he shall not be entitled to any severance, and in the event he is
terminated for any reason other than "good cause," he shall be entitled to
severance pay equal to the Incentive Compensation for a period of three years
from the date of termination. In the event Mr. Hinkson terminates the agreement,
he shall be entitled to the Incentive Compensation for a period of (x) one year
following the date of termination, if the termination occurs during the first
year of the agreement, (y) two years following the date of termination, if the
termination occurs during the second year of the agreement, and (z) three years
following the date of termination, if the termination occurs after the second
year of the agreement. Mr. Hinkson's agreement contains standard non-compete,
non-solicitation and confidentiality agreements.
STOCK OPTION PLAN
In January and September 1997, respectively, the Board of Directors and the
Company's shareholders approved the Company's 1997 Stock Option Plan and an
amendment thereto (as amended, the "Option Plan"). The Option Plan provides for
the grant of options to officers, directors and other key employees of the
Company to purchase up to an aggregate of 300,000 shares of Class A Common
Stock. The Option Plan is administered by the Board of Directors or a committee
of the Board of Directors and is currently administered by the entire Board of
Directors, which has complete discretion to select the optionee and to establish
the terms and conditions of each option, subject to the provisions of the Option
Plan. Options granted under the Option Plan may be "incentive stock options" as
defined in Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), or nonqualified options, and will be designated as such.
The exercise price of incentive stock options may not be less than 100% of
the fair market value of the Company's Class A Common Stock as of the date of
grant (110% of the fair market value if the grant is to an employee who owns
more than 10% of the total combined voting power of all classes of capital stock
of the Company). The Code currently limits to $100,000 the aggregate value of
Class A Common Stock that may be acquired in any one year pursuant to incentive
stock options under the Option Plan or any other option plan adopted by the
Company. Nonqualified options may be granted under the Option Plan at an
exercise price less than the fair market value of the Class A Common Stock on
the date of grant. Nonqualified options also may be granted without regard to
any restriction on the amount of Class A Common Stock that may be acquired
pursuant to such options in any one year.
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<PAGE> 50
In general, upon termination of employment of an optionee, all options
granted to such person which were not exercisable on the date of such
termination would immediately terminate, and any options that are exercisable
would terminate 90 days (one year in the case of termination by reason of death
or disability) following termination of employment except in the event of
termination for cause. In the event of termination for cause, all unexercised
options would terminate 30 days after termination.
Options may not be exercised more than ten years after the grant (five
years after the grant if the grant is an incentive stock option to an employee
who owns more than 10% of the total combined voting power of all classes of
capital stock of the Company). Options granted under the Option Plan may be
transferable under certain limited circumstances. Under the Option Plan, shares
subject to cancelled or terminated options are reserved for subsequently granted
options. The number of options outstanding and the exercise price thereof are
subject to adjustment in the case of certain transactions such as mergers,
recapitalizations, stock splits or stock dividends. The Option Plan is effective
for ten years, unless sooner terminated or suspended.
As of the date of this Prospectus, options to purchase 30,000 shares were
outstanding at an exercise price of $4.00 per share, and options to purchase
270,000 shares were available for grant under the Option Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As allowed by the California Corporations Code, the Company's Restated
Articles of Incorporation provide that the liability of the directors of the
Company for monetary damages shall be eliminated to the fullest extent
permissible under California law. This is intended to eliminate the personal
liability of a director for monetary damages in an action brought by or in the
right of the Company for breach of a director's duties to the Company or its
shareholders except for liabilities: (i) for acts or omissions that involve
intentional misconduct or a knowing and culpable violation of law; (ii) for acts
or omissions that a director believes to be contrary to the best interest of the
Company or its shareholders or that involve the absence of good faith on the
part of the director; (iii) for any transaction from which a director derived an
improper personal benefit; (iv) for acts or omissions that show a reckless
disregard for the director's duty to the Company or its shareholders in
circumstances in which the director was aware, or should have been aware, in the
ordinary course of performing a director's duties, of a risk of serious injury
to the Company or its shareholders; (v) for acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the Company or its shareholders; (vi) with respect to certain
transactions or the approval of transactions in which a director has a material
financial interest; and (vii) expressly imposed by statute for approval of
certain improper distributions to shareholders or certain loans or guarantees.
This provision does not limit or eliminate the rights of the Company or any
shareholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. The Company's Amended and
Restated Bylaws require the Company to indemnify its officers and directors to
the full extent permitted by law, including circumstances in which
indemnification would otherwise be discretionary. Among other things, the
Amended and Restated Bylaws require the Company to indemnify directors and
officers against certain liabilities that may arise by reason of their status or
service as directors and officers and to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified.
The Company believes that it is the position of the Securities and Exchange
Commission that insofar as the foregoing provision may be invoked to disclaim
liability for damages arising under the Securities Act, the provision is against
public policy as expressed in the Securities Act and is therefore unenforceable.
Such limitation of liability also does not affect the availability of equitable
remedies such as injunctive relief or rescission.
The Company has entered into indemnification agreements ("Indemnification
Agreement(s)") with each of its directors and officers. Each such
Indemnification Agreement provides that the Company will indemnify the
indemnitee against expenses, including reasonable attorneys' fees, judgements,
penalties, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with any civil or criminal action or administrative
proceeding arising out of his performance of his duties as a director or
officer, other than an action instituted by the director or officer. Such
indemnification is available if the indemnitee acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the
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<PAGE> 51
Company, and, with respect to any criminal action, had no reasonable cause to
believe his conduct was unlawful. The Indemnification Agreements also require
that the Company indemnify the director or other party thereto in all cases to
the fullest extent permitted by applicable law. Each Indemnification Agreement
permits the director or officer that is party thereto to bring suit to seek
recovery of amounts due under the Indemnification Agreement and to recover the
expenses of such a suit if he is successful.
The Company has obtained directors' and officers' liability insurance.
CERTAIN TRANSACTIONS
During the year ended December 31, 1996, the Company incurred approximately
$10,400 of expenses relating to certain bookkeeping services provided to the
Company by RTE. Robert D. Tracht, the Company's President and a director, and
Jeff W. Walden, the Company's Senior Vice President of Marketing and a director,
are each principals of RTE. As of January 31, 1997, RTE ceased providing these
services to the Company.
From the Company's inception in November 1995 through May 1997, the
Company's principal administrative, sales, and marketing facility was leased
from RTE. During the year ended December 31, 1996 and the six months ended June
30, 1997, the Company made total payments with respect to the lease of
approximately $10,700 and $7,400, respectively.
In March 1996, Robert D. Tracht advanced the Company approximately $5,480
to fund the purchase by the Company of two computers. A portion of the proceeds
of the Bridge Financing were used to repay this amount.
From November 1995 through October 1996, Messrs. J. Tracht, R. Tracht,
Walden, and Austin made loans to the Company each in the aggregate principal
amount of $20,000. Such loans bore interest at a rate of 10% per annum and the
principal and accrued interest on each loan was due in January 1999. In December
1996, the principal amount and accrued interest on such loans ($85,800 in the
aggregate) were contributed to the capital of the Company.
The Company believes that each of the foregoing transactions was on terms
at least as favorable to the Company as those that could have been obtained from
nonaffiliated third parties.
All material transactions between the Company and its officers, directors
or principal shareholders or other affiliates are now subject to ratification or
approval in accordance with applicable state corporation law. Under California
law as currently in effect, each contract or transaction between the Company and
a director or officer or an entity in which he or she has a financial interest
generally must be approved or ratified by a majority of the Company's
shareholders who do not have an interest in such transaction; or a majority of
the Board of Directors (or a committee of the Board of Directors) who do not
have a financial interest in such contract or transaction, if such contract or
transaction is just and reasonable as to the Company at the time it is
authorized; or such contract or transaction must be just and reasonable to the
Company at the time it is authorized, approved or ratified.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of the date of this Prospectus, by
(i) each person who is known by the Company to own beneficially more than 5% of
the Company's outstanding Common Stock; (ii) each of the Company's directors,
director nominees and executive officers; and (iii) all officers, directors and
director nominees of the Company as a group (a) prior to the Offering, and (b)
as adjusted to give effect to the sale of the 1,900,000 Units offered hereby.
<TABLE>
<CAPTION>
PERCENT OF
OWNERSHIP AND PERCENT
AMOUNT AND TOTAL OF PERCENT OF
NATURE OF VOTING POWER OWNERSHIP TOTAL VOTING
BENEFICIAL BEFORE THE AFTER THE POWER AFTER THE
NAME AND ADDRESS(1) OWNERSHIP(2) OFFERING OFFERING OFFERING
- -------------------------------------------- ------------ ------------- --------- ---------------
<S> <C> <C> <C> <C>
Jack B. Tracht.............................. 264,091(4) 22.0% 8.5% 16.7%
Robert D. Tracht(3)......................... 264,091(4) 22.0 8.5 16.7
James E. Austin............................. 264,091(4) 22.0 8.5 16.7
Jeff W. Walden.............................. 264,091(4) 22.0 8.5 16.7
William A. Rossi............................ 7,500(5) * * *
Nicholas M. Mitsakos(6)..................... -- -- -- --
David A. Searls(6).......................... -- -- -- --
All executive officers, directors and
director nominees as a group (7
persons).................................. 1,063,364 88.1 34.2 66.9
</TABLE>
- ---------------
* Less than 1%.
(1) The address of each individual is c/o the Company at 26135 Mureau Road,
Suite 100, Calabasas, California 91302.
(2) Except as set forth in footnote (3), the nature of beneficial ownership of
securities is direct and arises from sole voting power and sole investment
power, subject to community property laws where applicable.
(3) Mr. Tracht has entered into an agreement to transfer 30,811 of his shares on
the date which is 13 months from the date of this Prospectus and to transfer
an additional 61,621 of his Escrow Shares if and when such shares are
released from escrow. Pursuant to the foregoing agreement, Mr. Tracht will
receive a proxy to vote all of the transferred shares.
(4) Includes 176,061 Escrow Shares owned by each individual, or a total of
704,244 Escrow Shares for all executive officers, directors and director
nominees, as a group. See "-- Escrow Shares." All shares owned are shares of
Class B Common Stock. Each share of Class B Common Stock entitles the holder
thereof to five votes per share. See "Description of Securities."
(5) Consists of 7,500 shares of Class A Common Stock issuable upon the exercise
of options currently exercisable.
(6) Excludes options to purchase 2,000 shares of Class A Common Stock to be
granted to such individual upon consummation of the Offering, none of which
will be exercisable within 60 days of the date of this Prospectus.
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<PAGE> 53
ESCROW SHARES
In connection with the Offering, the holders of the Company's Class B
Common Stock have placed 800,000 of such shares into escrow pursuant to an
escrow agreement ("Escrow Agreement") with American Stock Transfer and Trust, as
escrow agent. The Escrow Shares are not assignable or transferable; however, the
Escrow Shares may be voted.
(a) Of the Escrow Shares, one-half (representing 400,000 shares of
Class B Common Stock) will be released from escrow, on a pro rata basis,
if, and only if, one or more of the following conditions are met:
(i) the Company's net income before provision for income taxes and
exclusive of any extraordinary earnings or charges as audited and
determined by the Company's independent certified public accountants
(the "Minimum Pretax Income") amounts to at least $3.0 million for the
fiscal year ending December 31, 1998;
(ii) the Minimum Pretax Income amounts to at least $4.5 million for
the fiscal year ending December 31, 1999;
(iii) the Minimum Pretax Income amounts to at least $6.0 million
for the fiscal year ending December 31, 2000;
(iv) the Minimum Pretax Income amounts to at least $7.5 million for
the fiscal year ending December 31, 2001;
(v) commencing on the date of this Prospectus and ending 18 months
after the date of this Prospectus, the bid price of the Company's Class
A Common Stock averages in excess of $11.00 per share (subject to
adjustment in the event of any reverse stock splits or other similar
events) for 30 consecutive business days;
(vi) commencing 18 months after the date of this Prospectus and
ending 36 months after the date of this Prospectus, the bid price of the
Company's Class A Common Stock averages in excess of $15.00 per share
(subject to adjustment in the event of any reverse stock splits or other
similar events) for 30 consecutive business days; or
(vii) during the periods specified in (v) or (vi) above, the
Company is acquired by or merged into another entity in a transaction in
which the value of the per share consideration received by the
shareholders of the Company on the date of such transaction or at any
time during the applicable period set forth in (v) or (vi),
respectively, equals or exceeds the applicable levels set forth in (v)
or (vi), respectively.
(b) The remaining Escrow Shares (representing 400,000 shares of Class
B Common Stock) will be released from escrow, on a pro rata basis, if, and
only if, one or more of the following conditions is met:
(i) the Minimum Pretax Income amounts to at least $3.4 million for
the fiscal year ending on December 31, 1998;
(ii) the Minimum Pretax Income amounts to at least $5.2 million for
the fiscal year ending on December 31, 1999;
(iii) the Minimum Pretax Income amounts to at least $6.9 million
for the fiscal year ending on December 31, 2000;
(iv) the Minimum Pretax Income amounts to at least $8.6 million for
the fiscal year ending on December 31, 2001;
(v) commencing on the date of this Prospectus and ending 18 months
after the date of this Prospectus, the bid price of the Company's Class
A Common Stock averages in excess of $12.50 per share (subject to
adjustment in the event of any reverse stock splits or other similar
events) for 30 consecutive business days;
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(vi) commencing 18 months after the date of this Prospectus and
ending 36 months after the date of this Prospectus, the bid price of the
Company's Class A Common Stock averages in excess of $16.50 per share
(subject to adjustment in the event of any reverse stock splits or other
similar events) for 30 consecutive business days; or
(vii) during the periods specified in (v) or (vi) above, the
Company is acquired by or merged into another entity in a transaction in
which the value of the per share consideration received by the
shareholders of the Company on the date of such transaction or at any
time during the applicable period set forth in (v) or (vi),
respectively, equals or exceeds the applicable levels set forth in (v)
or (vi), respectively.
The Minimum Pretax Income amounts set forth above (i) shall be calculated
exclusively of any extraordinary earnings, including, but not limited to, any
charge to income resulting from release of the Escrow Shares and (ii) shall be
increased proportionately, with certain limitations, in the event additional
shares of Common Stock or securities convertible into, exchangeable for or
exercisable into Common Stock are issued after completion of the Offering. The
bid price amounts set forth above are subject to adjustment in the event of any
stock splits, reverse stock splits or other similar events.
Any money, securities, rights or property distributed in respect of the
Escrow Shares, including any property distributed as dividends or pursuant to
any stock split, merger, recapitalization, dissolution, or total or partial
liquidation of the Company, shall be held in escrow until release of the Escrow
Shares. If none of the applicable Minimum Pretax Income or bid price levels set
forth above have been met by April 15, 2002, the Escrow Shares, as well as any
dividends or other distributions made with respect thereto, will be cancelled
and contributed to the capital of the Company. The Company expects that the
release of the Escrow Shares to officers, directors, employees and consultants
of the Company will be deemed compensatory and, accordingly, will result in a
substantial charge to reportable earnings, which would equal the fair market
value of such shares on the date of release. Such charge could substantially
increase the loss or reduce or eliminate the Company's net income for financial
reporting purposes for the period or periods during which such shares are, or
become probable of being, released from escrow. Although the amount of
compensation expense recognized by the Company will not affect the Company's
total shareholders' equity (due to a corresponding increase in additional
paid-in capital) it may have a negative effect on the market price of the
Company's securities. The Escrow Agreement cannot be terminated or amended in
any material respect without the prior consent of the holders of all of the
Company's Common Stock.
The Minimum Pretax Income and bid price levels set forth above were
determined by negotiation between the Company and the Representative and should
not be construed to imply or predict any future earnings by the Company or any
increase in the market price of its securities.
DESCRIPTION OF SECURITIES
The following description of the capital stock of the Company and certain
provisions of the Company's Restated Articles of Incorporation and Amended and
Restated Bylaws is a summary and is qualified in its entirety by the provisions
of the Restated Articles of Incorporation and Amended and Restated Bylaws, which
have been filed as exhibits to the Company's Registration Statement, of which
this Prospectus is a part.
The authorized capital stock of the Company currently consists of
20,200,000 shares of Common Stock, which consists of 18,800,000 shares of Class
A Common Stock and 1,400,000 shares of Class B Common Stock, and 5,000,000
shares of Preferred Stock. As of the date of this Prospectus, there were
1,199,996 shares of Class B Common Stock outstanding, held of record by eight
shareholders, and no shares of Class A Common Stock or Preferred Stock
outstanding.
UNITS
Each Unit consists of one share of Class A Common Stock and one Warrant.
Each Warrant entitles the holder thereof to purchase one share of Class A Common
Stock. The Class A Common Stock and Warrants included in the Units are
transferable separately from and after the Separation Date.
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<PAGE> 55
COMMON STOCK
The holders of Class A Common Stock and Class B Common Stock vote as a
single class on all matters submitted to a vote of the shareholders, with each
share of Class A Common Stock entitled to one vote and each share of Class B
Common Stock entitled to five votes, except as otherwise provided by law. The
holders of Common Stock are entitled to cumulative voting rights with respect to
the election of directors upon giving notice as required by law. Subject to
preferences that may be applicable to any shares of Preferred Stock issued in
the future, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefore. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of the Company, holders of the Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preference of any then outstanding Preferred Stock. Each
share of Class B Common Stock converts automatically into one share of Class A
Common Stock upon its sale or transfer if, after such sale or transfer, such
share is not beneficially owned by (i) the holder of such share of Class B
Common Stock immediately prior to such sale or transfer or (ii) another holder
of Class B Common Stock. Holders of Common Stock have no preemptive rights and,
other than with respect to conversions of shares of Class B Common Stock into
Class A Common Stock as aforementioned, no right to convert their Common Stock
into any other securities. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are, and
all shares of Common Stock to be outstanding upon completion of the Offering
will be, fully paid and nonassessable.
REDEEMABLE WARRANTS
The following is a brief summary of certain provisions of the Warrants, but
such summary does not purport to be complete and is qualified in all respects by
reference to the actual text of the Warrant Agreement between the Company, the
Representative, and American Stock Transfer and Trust Company (the "Transfer and
Warrant Agent"). A copy of the Warrant Agreement has been filed as an exhibit to
the Registration Statement of which this Prospectus is a part.
The holder of each Warrant is entitled, upon payment of the exercise price
of $6.50, to purchase one share of Class A Common Stock. Unless previously
redeemed, the Warrants are exercisable from and after the Separation Date
through the fifth anniversary of the effective date of this Prospectus, provided
that at such time a current prospectus relating to the underlying Class A Common
Stock is in effect and the underlying Class A Common Stock is qualified for sale
or exempt from qualification under applicable state securities laws. The
Warrants included in the Units offered hereby are transferable separately from
the Class A Common Stock issued with such Warrants as part of the Units from and
after the Separation Date. The Warrants are subject to redemption, as described
below.
REDEMPTION
The Warrants are subject to redemption by the Company commencing one year
from the date of this Prospectus, upon 30 days' written notice, at a price of
$.05 per Warrant, if the average closing bid price of the Class A Common Stock
for any 30 consecutive trading days ending within 15 days of the date on which
the notice of redemption is given shall have exceeded $9.10 per share. Holders
of Warrants will automatically forfeit their rights to purchase the shares of
Class A Common Stock issuable upon exercise of such Warrants unless the Warrants
are exercised before the close of business on the business day immediately prior
to the date set for redemption. All of the outstanding Warrants, except for
those underlying the Unit Purchase Option, must be redeemed if any Warrants are
redeemed. A notice of redemption shall be mailed to each of the registered
holders of the Warrants by first class mail, postage prepaid, upon 30 days'
notice before the date fixed for redemption. The notice of redemption shall
specify the redemption price, the date fixed for redemption, the place where the
Warrant certificates shall be delivered and the redemption price to be paid, and
that the right to exercise the Warrants shall terminate at 5:00 p.m. (New York
City time) on the business day immediately preceding the date fixed for
redemption.
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<PAGE> 56
GENERAL
The Warrants may be exercised upon surrender of the certificate or
certificates therefor on or prior to the expiration or the redemption date (as
explained above) at the offices of the Warrant Agent with the form of "Election
to Purchase" on the reverse side of the certificate or certificates completed
and executed as indicated, accompanied by payment (in the form of a certified or
cashier's check payable to the order of the Company) of the full exercise price
for the number of Warrants being exercised.
The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price per share and the number of shares
issuable upon exercise thereof upon the occurrence of certain events, including
issuances of Common Stock (or securities convertible, exchangeable or
exercisable into Common Stock) at less than market value, stock dividends, stock
splits, mergers, sale of substantially all of the Company's assets, and for
other extraordinary events; provided, however, that no such adjustment shall be
made upon, among other things, (i) the issuance or exercise of options or other
securities under the Company's Stock Option Plan or other employee benefit plans
or (ii) the sale or exercise of outstanding options or warrants or the Warrants
offered hereby.
The Company is not required to issue fractional shares of Class A Common
Stock, and in lieu thereof will make a cash payment based upon the current
market value of such fractional shares. The holder of the Warrants will not
possess any rights as a shareholder of the Company unless and until he exercises
the Warrants.
The Warrants do not confer upon holders any voting or any other rights as
shareholders of the Company.
PREFERRED STOCK
Shares of Preferred Stock may be issued without shareholder approval. The
Board of Directors is authorized to issue such shares in one or more series and
to fix the rights, preferences, privileges, qualifications, limitations and
restrictions thereof, including dividend rights and rates, conversion rights,
voting rights, terms of redemption, redemption prices, liquidation preferences
and the number of shares constituting any series or the designation of such
series, without any vote or action by the shareholders. No shares of Preferred
Stock will be outstanding upon the closing of the Offering and the Company has
no present intention to issue any shares of Preferred Stock. Any Preferred Stock
to be issued could rank prior to the Common Stock with respect to dividend
rights and rights on liquidation. The Board of Directors, without shareholder
approval, may issue Preferred Stock with voting and conversion rights which
could adversely affect the voting power of holders of Common Stock and
discourage, delay or prevent a change in control of the Company.
UNIT PURCHASE OPTION
Upon the closing of the Offering, the Company has agreed to grant to the
Representative and its designees, the Unit Purchase Option to purchase up to
190,000 Units. The Units issuable upon exercise of the Unit Purchase Option
will, when so issued, be identical to the Units offered hereby except that the
Warrants included in the Unit Purchase Option will not be subject to redemption
by the Company until the Unit Purchase Option has been exercised and the
underlying Warrants are outstanding. The Unit Purchase Option cannot be
transferred, sold, assigned or hypothecated for three years, except to any
officer of the Representative or members of the selling group or their officers.
The Unit Purchase Option is exercisable during the two-year period commencing
three years from the date of this Prospectus at an exercise price of $7.50 per
Unit (150% of the initial public offering price) subject to adjustment in
certain events. The holders of the Unit Purchase Option have certain demand and
piggyback registration rights relating to their options and the underlying
securities. See "Underwriting."
TRANSFER AND WARRANT AGENT
American Stock Transfer & Trust Company, New York, New York, serves as
Transfer Agent for the shares of Common Stock and Warrant Agent for the
Warrants.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, assuming the Underwriters' over-allotment
option is not exercised, the Company will have 3,099,996 shares of Common Stock
outstanding. Of these shares, the 1,900,000 shares of Class A Common Stock sold
hereunder will be freely transferable without restriction or registration under
the Securities Act, unless held by persons deemed to be "affiliates" of the
Company (as that term is defined in Rule 144 under the Securities Act ("Rule
144")). The 1,199,996 shares of Class B Common Stock currently outstanding are
"restricted securities" within the meaning of Rule 144 (the "Restricted Shares")
and may not be sold unless they are registered under the Securities Act or sold
pursuant to Rule 144 or another exemption from registration. Pursuant to Rule
144, all of the Restricted Shares will be eligible for resale commencing 90 days
after consummation of the Offering (upon which resale they will automatically
convert into shares of Class A Common Stock). However, all of the existing
shareholders, executive officers, directors and director nominees of the Company
have agreed that they will not sell any of the Company's securities owned by
them for a period of 13 months from the date of this Prospectus without the
consent of the Representative. In addition, the holders of shares of Class B
Common Stock have agreed to place an aggregate of 800,000 of such shares in
escrow.
Holders of Restricted Shares must comply with the requirements of Rule 144
in order to sell their shares in the open market without violating the
Securities Act. In general, under Rule 144 as currently in effect, a person (or
persons whose shares are aggregated), including an affiliate of the Company, who
has beneficially owned shares for at least one year is entitled to sell in the
open market within any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then-outstanding shares of the Company's
Common Stock or (ii) the average weekly public trading volume during the four
calendar weeks preceding such sale. The holding period of shares of a
non-affiliate for this purpose includes the holding period of all prior
non-affiliate holders, provided that if an affiliate has held such shares at any
time, the holding period shall commence upon the sale to a non-affiliate by the
last affiliate to hold the shares. Sales under Rule 144 are also subject to
certain limitations on the manner of sale, notice requirements, and availability
of current public information about the Company. A non-affiliate who holds
restricted securities and who has not been affiliated with the Company during
the three-month period preceding the proposed sale thereof may sell such
securities without regard to the conditions imposed by Rule 144 if at least two
years have elapsed from the sale of such securities by the Company or any
affiliate. As defined in Rule 144, an "affiliate" of an issuer is a person that
directly or indirectly controls, or is controlled by, or is under common control
with the issuer of the securities. The foregoing is a summary of the provisions
of Rule 144 and is not intended to be complete.
The Bridge Financing investors and the Additional Bridge Financing investor
have agreed with the Company not to exercise, sell, transfer, assign,
hypothecate or otherwise dispose of their Public Bridge Warrants for a period of
one year following the closing of the Offering. The Company has agreed to
register for resale on behalf of such investors the 1,262,500 Public Bridge
Warrants and the shares of Common Stock underlying such Public Bridge Warrants
upon expiration of such one-year period.
The Representative has demand and "piggy-back" registration rights with
respect to the securities underlying the Unit Purchase Option. See
"Underwriting."
Prior to the Offering, there has been no market for any securities of the
Company, and no predictions can be made of the effect, if any, that sales of
Common Stock or the availability of Common Stock for sale will have on the
market price of such securities prevailing from time to time. Nevertheless,
sales of substantial amounts of Common Stock in the public market could
adversely affect prevailing market prices.
56
<PAGE> 58
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for whom D.H. Blair Investment Banking Corp. is acting
as Representative, have severally agreed to purchase, and the Company has agreed
to sell to them, severally, the respective number of Units set forth opposite
the name of such Underwriter:
<TABLE>
<CAPTION>
NAME NUMBER OF UNITS
-------------------------------------------------------------- ---------------
<S> <C>
D. H. Blair Investment Banking Corp. .........................
---------------
Total......................................................... 1,900,000
============
</TABLE>
It is expected that Blair & Co. will distribute as a selling group member a
substantial portion (up to approximately 52%, including the Underwriters'
over-allotment option) of the Units offered hereby. Blair & Co. is substantially
owned by family members of J. Morton Davis. Mr. Davis is the sole stockholder of
the Representative.
The Underwriters have advised the Company that they propose to offer the
Units to the public at the public offering price set forth on the cover page of
this Prospectus. The Underwriters may allow to selected dealers who are members
of the National Association of Securities Dealers, Inc. (the "NASD") concessions
not in excess of $. per Unit, of which not in excess of $. per Unit may
be reallowed to other dealers who are members of the NASD. After the initial
offering, the public offering price, concession and the reallowance may be
changed by the Representative.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Representative a non-accountable expense allowance of
3% of the gross proceeds derived from the sale of the Units offered hereby,
including any Units purchased pursuant to the Underwriters' over-allotment
option, $20,000 of which has been paid as of the date of this Prospectus.
The Representative has informed the Company that it does not expect sales
to any discretionary accounts to exceed 5% of the total number of shares of
Class A Common Stock offered hereby.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period commencing on the date of this Prospectus, to purchase from
the Company at the public offering price, less underwriting discounts and
commissions, up to 285,000 additional Units for the purpose of covering over-
allotments, if any, subject to the right of the Representative to elect, in its
sole discretion, to exercise such option individually, and not as Representative
of the several Underwriters.
The Company has agreed to sell to the Representative and its designees, for
nominal consideration, the Unit Purchase Option to purchase up to 190,000 Units
substantially identical to the Units being offered hereby, except that the
Warrants included therein are subject to redemption by the Company at any time
after the Unit Purchase Option has been exercised and the underlying Warrants
are outstanding. The Unit Purchase Option will be exercisable during the
two-year period commencing three years from the date of this Prospectus at an
exercise price of $8.25 per Unit (165% of the initial public offering price),
subject to adjustment in certain events to protect against dilution, and are not
transferable for a period of three years from the date of this Prospectus except
to officers of the Representative or to members of the Representative's selling
group or officers thereof. The Company has agreed to register the securities
issuable upon exercise thereof under the Securities Act on two separate
occasions (the first at the Company's expense and the second
57
<PAGE> 59
at the expense of the holders of the Unit Purchase Option) during the four-year
period commencing one year from the date of this Prospectus. The Unit Purchase
Option includes a provision permitting the holder to elect a cashless exercise
of the Unit Purchase Option pursuant to which the holder may exercise a portion
of the Unit Purchase Option in exchange for a decrease in the total number of
Units underlying the Unit Purchase Option. The Company has also granted certain
piggy-back rights to holders of the Unit Purchase Options.
The Representative has the right to designate one director to the Company's
Board of Directors for a period of five years from the completion of the
Offering, although it has not yet selected any such designee. Such designee may
be a director, officer, partner, employee or affiliate of the Representative.
During the five-year period from the date of this Prospectus, in the event
the Representative originates financing or a merger, acquisition, joint venture,
product or technology licensing arrangement, research and development
sponsorship or similar transaction to which the Company is a party, the
Representative will be entitled to receive a finder's fee in consideration for
origination of such transaction. The fee is based on a percentage of the
consideration paid in the transaction, ranging from 7% of the first $5,000,000
to 2% of any consideration in excess of $14,000,000.
The Representative acted as placement agent in connection with the Bridge
Financing in January 1997 and, in connection therewith, received a placement
agent fee of $200,000 and a non-accountable expense allowance of $60,000. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
In May, June and July 1997, the Representative loaned the Company an
aggregate of $432,000 principal amount and a corporation controlled by a family
member of the sole stockholder of the Representative, loaned the Company
$190,000 principal amount, all of which loans were utilized for working capital
purposes, including general and administrative expenses. All of such loans bear
interest at the rate of 10% per annum and will be paid, along with accrued
interest thereon, from the proceeds of the Offering. See "Use of Proceeds."
The directors, director nominees, executive officers and holders of the
shares of the Company's Common Stock have agreed not to sell or otherwise
dispose of any of their shares of Common Stock for a period of 13 months from
the date of this Prospectus without the prior written consent of the
Representative.
The Company has agreed not to solicit Warrant exercises other than through
the Representative, unless the Representative declines to make such
solicitation. Upon any exercise of the Warrants after one year from the date of
this Prospectus, the Company will pay the Representative a fee of 5% of the
aggregate exercise price for Warrant exercises solicited in writing by the
Representative or its representatives or agents, if (i) the market price of the
Company's Class A Common Stock on the date the Warrant is exercised is greater
than the then exercise price of the Warrants; (ii) the exercise of the Warrant
was solicited in writing by a member of the NASD; (iii) the Warrant is not held
in a discretionary account; (iv) disclosure of compensation arrangements was
made both at the time of the offering and at the time of exercise of the
Warrants; and (v) the solicitation of exercise of the Warrant was not in
violation of Regulation M, which was recently adopted to replace Rule 10b-6 and
certain other rules promulgated under the Exchange Act. The Warrant Agreement
requires that such holder of the Warrant designates in writing that the exercise
of the Warrant was solicited by a member of the NASD.
Regulation M may prohibit Blair & Co. or any other soliciting broker-dealer
from engaging in any market making activities with regard to the Company's
securities for the period from five business days (or such other applicable
period as Regulation M may provide) prior to any solicitation by the
Representative of the exercise of Warrants until the later of the termination of
such solicitation activity or the termination (by waiver or otherwise) of any
right that the Representative may have to receive a fee for the exercise of
Warrants following such solicitation. As a result, Blair & Co. may be unable to
provide a market for the Company's securities during certain periods while the
Warrants are exercisable.
The Commission is conducting an investigation concerning various business
activities of the Representative and Blair & Co., a selling group member which
will distribute a substantial portion of the Units. The Company has been advised
by the Representative that the investigation has been ongoing since at least
1989
58
<PAGE> 60
and that it is cooperating with the investigation. The Representative cannot
predict whether this investigation will ever result in any type of formal
enforcement action against the Representative or Blair & Co.
In July 1997, Blair & Co., its Chief Executive Officer and its head trader
consented, without admitting or denying any violations, to a settlement with the
NASDR District Business Conduct Committee for District No. 10 to resolve
allegations of NASD rule and securities law violations in connection with
mark-up and pricing practices and adequacy of disclosures to customers regarding
market-making activities of Blair & Co. in connection with certain securities
issues during the period from June 1993 through May 1995 where Blair & Co. was
the primary selling group member. NASDR alleged the firm failed to accurately
calculate the contemporaneous cost of securities in instances where the firm
dominated and controlled after-market trading, thereby causing the firm to
charge its customers excessive mark-ups. NASDR also alleged the firm did not
make adequate disclosure to customers about its market-making activities in two
issues. As part of the settlement, Blair & Co. has consented to a censure and
has agreed to pay a $2.0 million fine, make $2.4 million in restitution to
retail customers, employ an independent consultant for two years to review and
make recommendations to strengthen the firm's compliance procedures, and has
undertaken for 12 months not to sell to its retail customers (excluding banks
and other institutional investors) more than 60% of the total securities sold in
any securities offering in which it participates as an underwriter or selling
group member. The Chief Executive Officer of Blair & Co. has agreed to settle
failure to supervise charges by consenting to a censure, the imposition of a
$225,000 fine and a 60-day suspension from associating with any NASD member firm
and to take a requalification examination. The firm's head trader has agreed to
settle charges against him by consenting to a censure, the imposition of a
$300,000 fine and a 90-day suspension from associating with any member firm and
has undertaken to take certain requalification examinations. The settlement with
NASDR does not involve or relate to the Representative, its chief executive
officer or any of its other officers or directors.
The Company has been advised that Blair & Co. intends to make a market in
the Company's securities after the Offering. The Company is unable to predict
whether Blair & Co.'s settlement with the NASDR or any unfavorable resolution of
the Commission's investigation will have any effect on such firm's ability to
make a market in the Company's securities and, if so, whether the liquidity or
price of the Company's securities would be adversely affected.
In connection with the Offering, the Underwriters and certain selling group
members may engage in certain transactions that stabilize, maintain or otherwise
affect the market price of the Units, the Class A Common Stock and the Warrants.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such person may bid for or
purchase the Units, the Class A Common Stock and the Warrants for the purpose of
pegging, fixing or maintaining the market price of such securities. The
Underwriters may also create a short position in the Units by selling more Units
in connection with the Offering than they are committed to purchase from the
Company, and in such case the Representative may reduce all or a portion of that
short position by purchasing the Units, the Class A Common Stock and the
Warrants in the open market. The Representative may also elect to reduce any
short position by exercising all or any portion of the over-allotment option
described herein. In addition, the Representative may impose "penalty bids" on
certain Underwriters and selling group members. This means that if the
Representative purchases Class A Common Stock or Warrants in the open market to
reduce the Underwriters' short position or to stabilize the price of the Class A
Common Stock or the Warrants, it may reclaim the amount of the selling
concession from the Underwriters and selling group members who sold those shares
of Class A Common Stock and Warrants as part of the Offering. Any of the
transactions described in this paragraph may stabilize or maintain the market
price of the Units, the Class A Common Stock and the Warrants at a level above
that which might otherwise prevail in the open market.
Neither the Company nor the Underwriters may make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Units, the Class A Common Stock and
the Warrants. In addition, neither the Company nor the Underwriters make any
representation that the Underwriters or any selling group members will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.
59
<PAGE> 61
Prior to the Offering, there has been no market for any of the securities
offered hereby. Accordingly, the initial public offering price of the Units and
the exercise prices and other terms of the Warrants have been determined by
negotiations between the Company and the Representative and are not necessarily
related to the Company's assets, net worth or other established criteria of
value. Factors considered in determining such prices and terms, in addition to
prevailing market conditions, include the history of, and prospects for, the
industry in which the Company competes, the Company's management, the Company's
financial condition, the Company's capital structure and such other factors as
were deemed relevant.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Troy & Gould Professional Corporation, Los Angeles, California.
Certain legal matters will be passed upon for the Underwriters by Bachner,
Tally, Polevoy & Misher LLP, New York, New York.
EXPERTS
The financial statements included in this Prospectus and in the
Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods as set forth in
their report (which contains an explanatory paragraph regarding uncertainties as
to the Company's ability to continue as a going concern) appearing elsewhere
herein and in the Registration Statement, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act,
with respect to the securities offered by this Prospectus. This Prospectus omits
certain information contained in the Registration Statement, as permitted by the
Rules and Regulations of the Commission. For further information, reference is
made to the Registration Statement and to the other schedules filed therewith,
which may be examined without charge at the Washington, D.C. office of the
Commission and copies of all or any part thereof may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of the fees prescribed by the Commission. The Company is an
electronic filer, and the Commission maintains a Website that will contain
reports, proxy and information statements and other information regarding the
Company at www.sec.gov/edgarhp.htm. Statements contained in this Prospectus as
to the contents of any contract or other document referred to are not
necessarily complete and in each instance such statement is qualified by
reference to each such contract or document.
FOR NEW JERSEY INVESTORS: In order to purchase securities pursuant to this
Prospectus, you must either have (1) an individual net worth (or joint net worth
with your spouse) of not less than $1,000,000; or (2) an individual income in
excess of $200,000 in each of the two most recent years and the expectation of
individual income in excess of $200,000 in the current year, or (3) qualify as
an accredited investor within the meaning of Rule 501(a) of Regulation D under
the Securities Act of 1933, as amended.
60
<PAGE> 62
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.............................. F-2
FINANCIAL STATEMENTS
Balance sheets................................................................ F-3
Statements of operations...................................................... F-4
Statements of shareholders' equity (deficit).................................. F-5
Statements of cash flows...................................................... F-6
NOTES TO FINANCIAL STATEMENTS................................................... F-7-F-15
</TABLE>
F-1
<PAGE> 63
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Shareholders of
On'Village Communications, Inc.
We have audited the accompanying balance sheets of On'Village
Communications, Inc. (a development stage company), as of December 31, 1995 and
1996, and the statements of operations, shareholders' equity (deficit) and cash
flows for the period November 13, 1995 (Inception) to December 31, 1995 and for
the year ended December 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of On'Village Communications,
Inc., as of December 31, 1995 and 1996 and the results of its operations and its
cash flows for the period November 13, 1995 (Inception) to December 31, 1995 and
for the year ended December 31, 1996.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company
had a working capital deficiency of $522,303 and a shareholders' deficit of
$337,958 as of December 31, 1996. These matters raise substantial doubt as to
the Company's ability to continue as a going concern. The Company's future
operations are dependent upon generating funds to finance the marketing and
expansion of its operations and the repayment of notes payable. Management plans
to generate these funds through an initial public offering of common stock and
warrants as more fully discussed in Note 2. There is no assurance that the
initial public offering will be successful. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
BDO SEIDMAN, LLP
Los Angeles, California
February 26, 1997
F-2
<PAGE> 64
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
1995 1996 1997
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets
Cash and cash equivalents.......................... $ 27,526 $ 25,518 $ 207,921
Restricted cash.................................... -- -- 78,000
Accounts receivable, net of allowance for doubtful
accounts of $0, $3,671 and $7,671............... -- 20,335 30,331
Prepaid expenses and other assets.................. 5,000 10,588 --
-------- ---------- -----------
Total current assets................................. $ 32,526 $ 56,441 $ 316,252
-------- ---------- -----------
Property and equipment, net (Note 3)................. -- 11,340 13,906
Other assets
License agreements, net of accumulated amortization
of $6,250, $190,061, and $42,000 (Note 7)....... 93,750 81,605 58,000
Deposit............................................ -- -- 16,661
Deferred loan fees, net of accumulated amortization
of $0, $0 and $135,178.......................... -- 30,554 178,591
Deferred offering costs............................ -- 60,846 253,039
-------- ---------- -----------
Total assets....................................... $126,276 $ 240,786 $ 836,449
======== ========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable................................... $ 915 $ 58,771 $ 24,857
Accrued expenses................................... 2,252 180,701 359,688
Royalties and production costs payable............. -- 17,861 2,653
Deferred revenues.................................. -- 29,744 65,906
Accrued license cost (Note 7)...................... 60,000 100,000 60,000
Notes payable (Note 4)............................. -- 191,667 2,222,300
-------- ---------- -----------
Total current liabilities............................ 63,167 578,744 2,735,404
Long-term liabilities
Notes payable-related parties (Note 5)............. 48,000 -- --
-------- ---------- -----------
Total liabilities.................................... 111,167 578,744 2,735,404
Commitments (Note 6)
Shareholders' equity (deficit) (Notes 2, 10 and 11)
Preferred Stock, 5,000,000 shares authorized;
none issued and outstanding................... -- --
Class A Common Stock, 18,800,000 shares
authorized; none issued and outstanding....... -- --
Class B Common Stock, 1,400,000 shares
authorized; 1,111,962, 1,199,996 and 1,199,996
shares issued and outstanding................. 33,684 152,940 152,940
Additional paid-in capital......................... -- 105,800 475,800
Deficit accumulated during the development stage... (18,575) (596,698) (2,527,695)
-------- ---------- -----------
Total shareholders' equity (deficit)................. 15,109 (337,958) (1,898,955)
-------- ---------- -----------
Total liabilities and shareholders' equity
(deficit).......................................... $126,276 $ 240,786 $ 836,449
======== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 65
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NOVEMBER 13, 1995
SIX MONTHS ENDED (INCEPTION) TO
NOVEMBER 13, 1995 ------------------------------- JUNE 30, 1997
(INCEPTION) TO YEAR ENDED JUNE 30, 1996 JUNE 30, 1997 (CUMULATIVE)
DECEMBER 31, 1995 DECEMBER 31, 1996 -------------- -------------- -----------------
----------------- ----------------- (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue............................. $ -- $ 65,548 $ 40,925 $ 23,914 $ 89,462
--------- --------- ---------- ------------ -----------
Costs and expenses
Cost of revenue................... 6,250 114,052 51,998 63,031 183,333
Research and development.......... -- -- -- 59,249 59,249
General and administrative........ 12,325 357,552 173,716 961,632 1,331,509
Selling and marketing............. -- 152,365 24,187 487,651 640,016
--------- --------- ---------- ------------ -----------
Total costs and expenses............ 18,575 623,969 249,901 1,571,563 2,214,107
--------- --------- ---------- ------------ -----------
Operating loss...................... $ (18,575) $(558,421) $ (208,976) $ (1,547,649) $(2,124,645)
--------- --------- ---------- ------------ -----------
Net interest expense................ -- 19,702 -- 383,348 403,050
Net loss............................ $ (18,575) $(578,123) $ (208,976) $ (1,930,997) $(2,527,695)
========= ========= ========== ============ ===========
Net loss per common share........... $ (0.02) $ (0.67) $ (0.25) $ (2.13)
========= ========= ========== ============
Weighted average common shares
outstanding....................... 818,344 858,499 850,777 906,378
========= ========= ========== ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 66
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD NOVEMBER 13, 1995 (INCEPTION) TO
DECEMBER 31, 1995, FOR THE YEAR
ENDED DECEMBER 31, 1996
AND FOR THE
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
COMMON SHARES ADDITIONAL DURING THE
-------------------- PAID-IN DEVELOPMENT
SHARES AMOUNT CAPITAL STAGE TOTALS
--------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Issuance of common stock for cash from
initial contribution ($.03 per
share), November 1995................ 1,056,364 $ 32,000 -- -- $ 32,000
Issuance of common stock in exchange
for services ($.03 per share),
November 1995........................ 55,598 1,684 -- -- 1,684
Net loss............................... -- -- -- (18,575) (18,575)
--------- -------- -------- --------- ---------
Balance, December 31, 1995............. 1,111,962 33,684 -- (18,575) 15,109
Issuance of common stock in exchange
for services ($.03 per share),
January 1996......................... 27,799 842 -- -- 842
Issuance of common stock in exchange
for services ($.03 per share),
February 1996........................ 13,900 421 -- -- 421
Issuance of common stock for cash
($3.52 per share), June 1996......... 28,342 100,000 -- -- 100,000
Issuance of common stock in exchange
for services ($1.00 per share),
October 1996......................... 17,993 17,993 -- -- 17,993
Issuance of warrants in conjunction
with notes payable (Note 4).......... -- -- 20,000 -- 20,000
Contribution of notes payable and
accrued interest to capital (Note
5)................................... -- -- 85,800 -- 85,800
Net loss............................... -- -- -- (578,123) (578,123)
--------- -------- -------- --------- ---------
Balance, December 31, 1996............. 1,199,996 $152,940 $ 105,800 $ (596,698) $ (337,958)
Issuance of warrants in conjunction
with notes payable (unaudited) (Note
4)................................... 370,000 370,000
Net loss (unaudited)................... (1,930,997) (1,930,997)
--------- -------- -------- --------- ---------
Balance, June 30, 1997 (unaudited)..... 1,199,996 $152,940 $ 475,800 $(2,527,695) $(1,898,955)
========= ======== ======== ========= =========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 67
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NOVEMBER 13, 1995
NOVEMBER 13, 1995 SIX MONTHS ENDED (INCEPTION) TO
(INCEPTION) TO YEAR ENDED ----------------------------- JUNE 30, 1997
DECEMBER 31, 1995 DECEMBER 31, 1996 JUNE 30, 1996 JUNE 30, 1997 (CUMULATIVE)
----------------- ----------------- ------------- ------------- -----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities
Net loss............................ $ (18,575) $(578,123) $(208,976) $(1,930,997) $(2,527,695)
Adjustments to reconcile net loss to
net cash used for operating
activities:
Provision for doubtful
accounts..................... -- 3,671 -- 4,000 7,671
Depreciation and amortization... 6,250 185,216 35,416 125,005 316,471
Amortization of financing costs
and original issue
discount..................... -- 11,667 -- 303,812 315,479
Issuance of common stock for
services..................... 1,684 19,256 1,263 -- 20,940
Increase (decrease) in cash from
changes in:
Restricted cash................... -- -- -- (78,000) (78,000)
Accounts receivable............... -- (24,006) (28,356) (13,996) (38,002)
Prepaid expenses and other
assets.......................... (5,000) (5,588) (95,248) 10,588 --
License agreement................. (100,000) (171,666) -- (100,000) (371,666)
Deposits.......................... -- -- -- (16,661) (16,661)
Accounts payable.................. 915 57,856 12,706 (33,914) 24,857
Accrued expenses.................. 2,252 184,249 126,007 178,987 365,488
Accrued license costs............. 60,000 40,000 -- (40,000) 60,000
Royalties and production costs
payable......................... -- 17,861 9,417 (15,208) 2,653
Deferred revenues................. -- 29,744 -- 36,162 65,906
--------- --------- --------- ----------- -----------
Net cash used for operating
activities.......................... (52,474) (229,863) (147,771) (1,570,222) (1,852,559)
--------- --------- --------- ----------- -----------
Cash flows from investing activities
Purchase of property and
equipment......................... -- (12,745) (5,480) (3,966) (16,711)
--------- --------- --------- ----------- -----------
Net cash used for investing
activities.......................... -- (12,745) (5,480) (3,966) (16,711)
--------- --------- --------- ----------- -----------
Cash flows from financing activities
Net proceeds from issuance of common
stock............................. 32,000 100,000 -- -- 132,000
Net proceeds from private
placements........................ 48,000 232,000 128,000 2,148,785 2,428,785
Repayment of notes payable.......... -- -- -- (200,000) (200,000)
Registration costs.................. -- (91,400) -- (192,194) (283,594)
--------- --------- --------- ----------- -----------
Net cash provided by financing
activities.......................... 80,000 240,600 128,000 1,756,591 2,077,191
--------- --------- --------- ----------- -----------
Increase (decrease) in cash and cash
equivalents......................... 27,526 (2,008) (25,251) 182,403 207,921
Cash and cash equivalents, at
beginning of period................. -- 27,526 27,526 25,518 --
--------- --------- --------- ----------- -----------
Cash and cash equivalents, at end of
period.............................. $ 27,526 $ 25,518 $ 2,275 $ 207,921 $ 207,921
========= ========= ========= =========== ===========
Supplemental disclosure of cash flow
information
Cash paid during the period for:
Interest.......................... $ 148 $ -- $ -- $ 10,469 $ 10,617
Income taxes...................... 800 -- -- 1,600 2,400
========= ========= ========= =========== ===========
Supplemental disclosure of non-cash
activity
Issuance of common stock in exchange
for services...................... 1,684 19,256 1,263 -- 20,940
========= ========= ========= =========== ===========
Contribution of notes payable and
accrued interest to capital (Note
5)................................ -- 85,800 -- -- 85,800
========= ========= ========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 68
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
On'Village Communications, Inc. (the "Company") is engaged in the
development, publishing and marketing of Web-based services designed to help
users access information on the Internet, while at the same time providing
advertisers with an efficient and innovative means of reaching targeted
audiences. The Company's primary service offering is "On'Village Yellow Pages,"
an on-line national yellow page directory service.
The Company is still considered to be in the development stage as revenues
derived from operations have not been significant and the Company is still
primarily involved in raising capital and negotiating agreements with
independent local yellow page publishers.
Basis of Presentation
The unaudited interim financial statements for the six month periods ended
June 30, 1996 and 1997 and for the period November 13, 1995 (Inception) to June
30, 1997 included herein have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
and, in the opinion of the Company, reflect all adjustments (consisting only of
normal recurring adjustments) and disclosures which are necessary for a fair
presentation. The results of operations for the six month period ended June 30,
1997 are not necessarily indicative of the results for the full year.
Accounting Estimates
The 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an initial maturity of three
months or less to be cash equivalents.
Accounts Receivable
Accounts receivable are recorded net of allowances for returns and doubtful
accounts of $3,671 at December 31, 1996 and $7,671 at June 30, 1997.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation on property and equipment is computed using the straight-line
method over the estimated useful lives of the assets, which is generally five
years.
License Agreements
The Company has entered into a licensing agreement pursuant to which the
Company licenses a database of business listings and agrees to market, sell and
promote an Internet-based yellow page directory comprised
F-7
<PAGE> 69
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
of the information derived from the database. The minimum annual royalty has
been capitalized and is being amortized over one year, which is the minimum term
of the agreement (Note 7).
Deferred Offering Costs
Deferred offering costs represent costs incurred in connection with the
Company's proposed public offering. The costs of the public offering will be
offset against the proceeds therefrom if the offering is successfully completed
or will be expensed if the offering is abandoned.
Income Taxes
The Company had elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Under those provisions, the Company does not pay
federal corporate income taxes on its taxable income unless the shareholders
revoke the S Corporation election. Instead, the Company's shareholders are
liable for individual federal income taxes. Accordingly, no provision for income
taxes has been made.
In January 1997, the Company filed an election to revoke its S Corporation
status and to become taxed under the provisions of Subchapter C of the Internal
Revenue Code.
Revenue Recognition
The Company enters into advertising agreements with its customers and
recognizes revenue ratably over the term of the advertisements. Any cash
received prior to the completion of the earnings process is classified as
deferred revenue.
Net Loss per Share
Net loss per common share is computed by dividing the net loss for each
period by the weighted average number of common shares plus the weighted average
of dilutive common share equivalents outstanding during the period as adjusted
for the effect of Securities and Exchange Commission Staff Accounting Bulletin
(SAB) No. 83. Pursuant to SAB No. 83, common stock issued by the Company at a
price less than the anticipated initial public offering price during the twelve
months immediately preceding the initial filing of the offering together with
common stock equivalents issued during such period with an exercise price less
than the anticipated initial public offering price, are treated as outstanding
for all periods presented. Net loss per share is computed using the treasury
stock method. Common share equivalents consist of stock options and warrants.
Common stock equivalents are considered dilutive for earnings per share if the
average stock price exceeds the exercise price during the period. The common
stock equivalents are weighted from the beginning of the earliest quarter in
which they become dilutive. The weighted average number of common shares used in
the net loss per share calculation was reduced by the 800,000 shares of Class B
Common Stock placed in escrow in connection with the proposed initial public
offering.
Stock Split
In October 1996, the Company effected a stock split of its common stock on
a 6.94975 shares for 1 share basis. All share and per share data included herein
have been retroactively adjusted to reflect this event.
New Accounting Pronouncements
Statements of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS No. 125) issued by the Financial Accounting
F-8
<PAGE> 70
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
Standards Board (FASB) is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996, and
is to be applied prospectively. Earlier or retroactive applications is not
permitted. The new standard provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
The Company does not expect adoption of SFAS No. 125 to have a material effect
on its financial position or results of operations.
Statements of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS No. 128) issued by the FASB is effective for financial statements for both
interim and annual periods ending after December 15, 1997. Earlier application
is not permitted. SFAS 128 requires dual presentation of basic and diluted
earnings per share (EPS) on the face of the income statement. It also requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. This statement
also requires restatement of all prior period EPS data presented. The Company
does not expect adoption of SFAS No. 128 to have a material effect on its
Results of Operations.
Statements of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" (SFAS No. 129) issued by the FASB is
effective for financial statements ending after December 15, 1997. The new
standard reinstates various securities disclosure requirements previously in
effect under Accounting Principles Board Opinion No. 15, which has been
superseded by SFAS No. 128. The Company does not expect adoption of SFAS No. 129
to have a material effect on its financial position or results of operations.
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) issued by the FASB is effective for
financial statements with fiscal years beginning after December 15, 1997.
Earlier application is permitted. SFAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
general-purpose financial statements. The Company has not determined the effect
on its financial position or results of operations from the adoption of this
statement.
Statements of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS No. 131) issued by the
FASB is effective for financial statements beginning after December 15, 1997
(although the FASB is encouraging earlier application). The new standard
requires that public business enterprises report certain information about
operating segments in complete sets of financial statements of the enterprise
and in condensed financial statements of interim periods issued to shareholders.
It also requires that public business enterprises report certain information
about their products and services, the geographic areas in which they operate
and their major customers. The Company has not determined the effect on its
financial position or results of operations from the adoption of this statement.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses, royalties
and production costs payable, and notes payable approximate fair value because
of the short maturity of these instruments. It is not practicable to estimate
the fair value of the related party notes payable due to their related party
nature.
NOTE 2 -- GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As of December 31, 1996, the
Company had a working capital deficiency of $522,303 and a shareholders'
deficiency of $337,958. These factors raise substantial doubt about the
Company's ability to continue as a going concern. In
F-9
<PAGE> 71
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
January 1997, the Company raised approximately $1,680,000, after deduction of
all offering related expenses and commissions, in a private placement of notes
and warrants. Management plans to generate additional funds necessary to
continue to operate the Company through an initial public offering of common
stock and warrants. Management currently estimates that the initial public
offering will generate approximately $7,715,000 after the deduction of all
offering related expenses and commissions. There is no assurance that the
initial public offering will be successful. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amount of liabilities that might be necessary
should the Company be unable to continue in existence.
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
DECEMBER 1997
31, ------------
1996
----------- (UNAUDITED)
<S> <C> <C>
Computers and equipment..................... $12,745 $ 16,711
Less accumulated depreciation............... (1,405) (2,805)
------- --------
Totals...................................... $11,340 $ 13,906
======= ========
</TABLE>
NOTE 4 -- NOTES PAYABLE
In October and November 1996, the Company borrowed an aggregate of
$200,000, in the form of three promissory notes, from three individual
investors. The notes were repaid with a portion of the proceeds from the sale of
the Bridge Units (as defined in Note 9). In connection with the issuance of
these notes, the Company also issued to the investors five-year warrants to
purchase a total of 200,000 shares of the Company's Class B Common Stock at
$3.00 per share. The Company allocated $20,000 of the total proceeds of the
notes to an original issue discount, which represents the estimated fair market
value of these warrants at the date of issue. The unamortized original issue
discount was $8,333 at December 31, 1996. Upon consummation of the sale of the
Bridge Units, each of these warrants automatically converted into Bridge
Warrants (as defined in Note 9).
In January 1997, the Company received approximately $1,680,000 from the
issuance of $2,000,000 principal amount of Bridge Notes and 1,000,000 Bridge
Warrants, net of issuance costs. See Note 9. The Company allocated $370,000 of
the total proceeds of the notes to an original issue discount. The unamortized
original issue discount was $209,700 at June 30, 1997.
In May and June 1997, the Company borrowed an aggregate of $432,000 from an
investment banker. The terms of these notes are similar to the terms of the
Bridge Notes.
NOTE 5 -- NOTES PAYABLE -- RELATED PARTIES
Notes payable consist of a total of $48,000 at December 31, 1995 of
advances made by the four executive officers of the Company. These notes are
unsecured, bear interest at 10% per annum, with principal and interest due
January 1, 1999. In December 1996, the noteholders contributed $85,800 to
capital which was comprised of these notes payable together with additional
advances made during 1996 and accrued interest.
F-10
<PAGE> 72
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 6 -- COMMITMENTS
The Company leased its facility on a month-to-month basis until May 31,
1997. As of June 1, 1997, the Company leases its office space under a
non-cancellable lease agreement which expires in May 2002. The Company also
leases certain office equipment under operating lease agreements which terminate
on various dates in 2000. Minimum commitments under these leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
----------------
<S> <C>
1997................................................. $100,373
1998................................................. 188,085
1999................................................. 199,140
2000................................................. 160,661
2001................................................. 132,636
2002................................................. 55,265
--------
$836,160
========
</TABLE>
Total rent expense from November 13, 1995 (Inception) to December 31, 1995
and for the year ended December 31, 1996 was $-0- and $10,738, respectively and
for the six months ended June 30, 1996 (unaudited) and June 30, 1997 (unaudited)
was $4,114 and $19,760, respectively.
In October 1995, the Company entered into an agreement with a company (the
"provider") pursuant to which the Company has agreed to edit, market, sell and
promote Internet yellow pages products. The provider has agreed to build and
maintain the software programs which support the Company's search engine and
other technological components. The Company is committed to pay the provider a
percentage of revenue generated by the Company in exchange for the foregoing
services. Based upon meeting its minimum Web page development requirements, even
if the agreement is cancelled, the Company is committed to pay the provider 1%
of future revenues for these development services. If the agreement is not
cancelled, the Company will be required to pay the provider a stated percentage
of annual revenues as follows:
<TABLE>
<CAPTION>
PERCENT REVENUE
----------------------------------------------- ------------------------
<S> <C>
5%.......................................... $0 - $7,499,999
6%.......................................... $7,500,000 - $9,499,999
7%.......................................... $9,500,000 - 12,499,999
7.5%......................................... 2/3 $12,500,000
</TABLE>
In March 1997, the Company modified the above agreement whereby the Company
will now be required to pay the provider (i) $2,000 per month for hosting,
maintenance and internet usage and (ii) 1% of future advertising revenues.
In June 1997, in connection with its facility lease agreement, the Company
issued a letter of credit to the lessor in the amount of $78,000. The letter of
credit is collateralized by a certificate of deposit in the amount of $78,000.
According to the terms of the lease, the letter of credit may be cancelled upon
the consummation of an initial public offering by the Company.
F-11
<PAGE> 73
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 7 -- LICENSE AGREEMENTS
In December 1995, the Company entered into a five-year license agreement
with a company that generates a nationwide database of business listings from
print yellow pages (the "licensor"). Pursuant to this agreement, the Company has
agreed to market, sell and promote Internet services in the United States. The
Company is committed to pay an annual royalty based on net advertising revenues
(as defined in the agreement), subject to a minimum annual royalty, and provide
50 electronic bill boards to the licensor free of charge.
In December 1996, the Company entered into an agreement, retroactive to
September 4, 1996, with a company (the "Web Page Provider") that provides that
the Company's services will be listed on the Web Page Provider's Web Page,
accessible via a search button, through March 1997. The Company is committed to
make total payments to the Web Page Provider of $171,666 through March 31, 1997.
In April 1997, the Company entered into a new agreement with the Web Page
Provider, which agreement expires in April 1998. The new agreement provides for
the Web Page Provider to continue providing its services substantially as
provided for under the previous agreement in exchange for $30,000 per month. The
new agreement allows either party to terminate the agreement within 90 days
written notice to the other party.
The assets arising from these agreements are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, JUNE 30,
LIFE 1995 1996 1997
--------- ------------ ------------ --------
<S> <C> <C> <C> <C>
Minimum royalty -- database............ 1 Year $100,000 $100,000 $100,000
Web page provider...................... 7 Months $ -- 171,666 --
-------- -------- -------- --------
100,000 271,666 $100,000
Less accumulated amortization.......... 6,250 190,061 42,000
-------- -------- --------
$ 93,750 $ 81,605 $ 58,000
======== ======== ========
</TABLE>
NOTE 8 -- RELATED PARTY TRANSACTIONS
Included in accounts payable at December 31, 1996, is $5,480 due to an
officer of the Company, for a loan to fund the purchase by the Company of two
computers.
Included in general and administrative expenses for the year ended December
31, 1996, is $10,412 for bookkeeping services and $10,738 for office rent paid
to an entity owned by an officer of the Company. Payments for bookkeeping
services were $0 and $1,213 for the six months ended June 30, 1996 (unaudited)
and June 30, 1997 (unaudited), respectively. Office rent payments totalled $0
and $7,388 for the six months ended June 30, 1996 (unaudited) and June 30, 1997
(unaudited), respectively.
NOTE 9 -- AGREEMENT WITH INVESTMENT BANKER
On October 18, 1996, the Company entered into a letter of intent with an
investment banker relating to a private placement of units, consisting of notes
and warrants, and a proposed initial public offering of units, consisting of
shares of common stock and warrants, of the Company. In conjunction with this
letter of intent, the Company also signed a mergers and acquisitions agreement
with the investment banker that provides for the payment of finder's fees to the
investment banker upon the consummation of certain corporate finance, mergers,
acquisitions and other transactions as specified in the agreement.
F-12
<PAGE> 74
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
The private placement, which was completed in January 1997, consisted of
the sale of 40 units ("Bridge Units") at a purchase price of $50,000 per Bridge
Unit. Each Bridge Unit consisted of one $50,000 promissory note, bearing
interest at 10% per annum and due the earlier of one year after the date of
issuance or the completion of the proposed initial public offering, and warrants
(the "Bridge Warrants") to purchase 25,000 shares of the Company's Class A
Common Stock at $3.00 per share. Each outstanding Bridge Warrant which is not
exercised prior to the proposed initial public offering will automatically be
converted into 25,000 warrants (see description of warrants below). In
conjunction with this private placement, the investment banker received a
placement fee of 10% of the gross proceeds of the private placement, a
non-accountable expense allowance of 3% of the gross proceeds of the private
placement and warrants equal to 10% of the shares of Class A Common Stock
underlying the warrants sold in the private placement (which warrants will be
cancelled upon the issuance to the investment banker of the units referred to
below).
The initial public offering is expected to consist of the sale of 1,900,000
units ("Units"), plus an option for the underwriters to sell an additional
285,000 units to cover overallotments, at an initial public offering price of
$5.00 per Unit. Each Unit is expected to consist of one share of the Company's
Class A Common Stock, and one warrant. Each warrant, upon its exercise at $6.50
per warrant, entitles the holder to purchase one share of the Company's Class A
Common Stock. In conjunction with this proposed initial public offering, the
underwriters are expected to receive an underwriting fee of 10% of the gross
proceeds of the initial public offering, and the investment banker is expected
to receive a non-accountable expense allowance of 3% of the gross proceeds of
the initial public offering and an option to purchase units equal to 10% of the
units sold in the initial public offering (excluding any units sold pursuant to
exercise of the overallotment option).
If the Company consummates the proposed initial public offering, 800,000
shares of the Company's Class B Common Stock shall be subject to an escrow and
subsequent transfer to the Company, without consideration, if the Company does
not attain certain earnings or share price levels for its Class A Common Stock.
In the event any of these escrow shares owned by securityholders of the Company
who are officers, directors, employees or consultants of the Company are
released from escrow, compensation expense will be recorded for financial
reporting purposes.
NOTE 10 -- CAPITAL STOCK TRANSACTIONS
In exchange for consulting services rendered during 1996, the Company
issued 17,993 shares of Class B Common Stock to an individual in October 1996.
In October 1996, the Company amended its Articles of Incorporation to
authorize the issuance of 20,200,000 shares of common stock and 5,000,000 shares
of preferred stock. The Board of Directors is authorized to determine and alter
the rights, preferences, privileges, restrictions and the number of shares of
any series of unissued preferred stock. In addition, the Company effected a
stock split of the Company's common stock on a 6.94975 shares for 1 share basis.
All shares and per share data included herein has been retroactively
adjusted to reflect the foregoing amendments.
NOTE 11 -- AMENDMENTS TO ARTICLES OF INCORPORATION
In January 1997, the Company amended its Articles of Incorporation to
create two classes of Common Stock, Class A and Class B. All shares outstanding
as of the date of this amendment were designated as Class B Shares. These Class
B shares will be convertible into Class A shares under certain circumstances
defined within the amended articles of incorporation, and will be identical in
all respects to Class A shares except that on every matter for which one share
of Class A Common Stock is entitled to one vote, each share
F-13
<PAGE> 75
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
of Class B Common Stock will be entitled to five votes. Pursuant to this
amendment, the Company changed its name from "e.ventures, inc." to "On'Village
Communications, Inc."
All shares and per share data included herein has been retroactively
adjusted to reflect the foregoing amendments.
NOTE 12 -- EMPLOYMENT AGREEMENTS
The Company entered into employment agreements (the "Employment Agreement")
with four members of senior management in January 1997. The term of each
Employment Agreement commences on the closing of the initial public offering and
expires at the end of the 37th month after such date; provided, however, that
the term may be extended by mutual agreement between the Company and the
employee. Each Employment Agreement provides that in consideration for the
respective employee's services, he is to be paid a salary of $92,500 during the
first 13 month period of the Employment Agreement. In addition, each employee
will receive increases in salary and bonuses as deemed appropriate by the Board
of Directors after such 13 month period. Each Employment Agreement also provides
that in the event the employee is terminated for "good cause," he shall not be
entitled to any severance, and in the event the employee is terminated for any
reason other than "good cause", he shall be entitled to severance pay equal to
the lesser of (x) a lump sum amount equal to one year's salary based on his
then-current annual salary (excluding any bonuses or fringe benefits) or (y) the
remaining salary due under the term of the Employment Agreement plus a
continuation of the disability and health insurance policies provided for in the
Employment Agreement. Each Employment Agreement contains standard non-compete,
non-solicitation and confidentiality provisions. The four members of senior
management began accruing salaries at a rate based on the above discussed annual
salary as of October 1996.
Pursuant to a letter agreement entered into in February 1997, the Company
agreed to provide Mr. William A. Rossi a base annual salary of $78,000 for
serving as the Company Vice President and Chief Financial Officer and agreed to
grant to Mr. Rossi options to purchase an aggregate of 20,000 shares of Class A
Common Stock at an exercise price equal to their fair market value on the date
of grant, under the Company's Option Plan. Options to purchase 7,000 shares of
Class A Common Stock at an exercise price of $4.00 per share were granted to Mr.
Rossi in August 1997 and the letter agreement provides for the grant of options
to purchase 6,000 and 7,000 shares of Class A Common Stock in February 1998 and
1999, respectively. In addition, in August 1997, Mr. Rossi received options to
purchase 500 shares of Class A Common Stock at an exercise price of $4.00 per
share.
The Company entered into an employment agreement with the Company's
Director of Technology in April 1997. The agreement provides for an annual
salary of $70,000, plus bonuses and annual salary increases as deemed
appropriate by the Board of Directors. In addition, the employee is entitled to
additional compensation equal to 1% of the Company's net revenue (the "Incentive
Compensation"). The agreement may be terminated at any time by the Company for
"good cause", and upon 30 days' notice, at any time without cause. Mr. Hinkson
may terminate the agreement at any time upon 120 days' notice. The agreement
provides that in the event Mr. Hinkson is terminated for "good cause" he shall
not be entitled to any severance, and in the event he is terminated for any
reason other than "good cause," he shall be entitled to severance pay equal to
the Incentive Compensation for a period of three years from the date of
termination. In the event Mr. Hinkson terminates the agreement, he shall be
entitled to the Incentive Compensation for a period of (x) one year following
the date of termination, if the termination occurs during the first year of the
agreement, (y) two years following the date of termination, if the termination
occurs during the second year of the agreement, and (z) three years following
the date of termination, if the termination occurs after the second year of the
agreement. Mr. Hinkson's agreement contains standard non-compete,
non-solicitation and confidentiality agreements.
F-14
<PAGE> 76
ON'VILLAGE COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 13 -- STOCK OPTION PLAN
In January 1997, the Board of Directors and the Company's shareholders
approved the Company's 1997 Stock Option Plan (the "Option Plan"). The Option
Plan provides for the grant of options to officers, directors and other key
employees of the Company to purchase up to an aggregate of 200,000 shares of
Class A Common Stock. The exercise price of incentive stock options may not be
less than 100% of the fair market value of the Company's Class A Common Stock as
of the date of grant (110% of the fair market value if the grant is to an
employee who owns more than 10% of the total combined voting power of all
classes of capital stock of the Company). Nonqualified options may be granted
under the Option Plan at an exercise price less than the fair market value of
the Class A Common Stock on the date of grant. Nonqualified options also may be
granted without regard to any restriction on the amount of Class A Common Stock
that may be acquired pursuant to such options in any one year. Options may not
be exercised more than ten years after the grant (five years after the grant if
the grant is an incentive stock option to an employee who owns more than 10% of
the total combined voting power of all classes of capital stock of the Company).
As of February 26, 1997, options to purchase 200,000 shares were available for
grant under the Option Plan. In September 1997, the Board of Directors and the
Company's shareholders approved an amendment to the Option Plan, increasing the
number of shares issuable to 300,000 shares. The Company issued 30,000 options,
exercisable at $4.00 per share, under the Option Plan in August 1997.
NOTE 14 -- SUBSEQUENT EVENTS
In July 1997, the Company issued a $190,000 principal amount promissory
note to a corporation controlled by a family member of the sole stockholder of
the Company's investment banker. The Note is payable, together with interest, at
a rate of 10% per annum, on the earlier of six months from its issuance, the
closing of an initial public offering and the closing of any private financing
providing gross proceeds to the Company of at least $1,000,000.
In September 1997, the Company issued a $250,000 principal amount
promissory note and 62,500 Bridge Warrants to one institutional investor. The
promissory note is payable, together with interest at the rate of 10% per annum,
on the earlier of March 15, 1998 or the closing of the Company's initial public
offering. In the event the promissory note is not repaid in full by October 27,
1997, the holder shall be entitled to receive Bridge Warrants to purchase an
additional 10,000 shares of Class A Common Stock for each seven-day period that
the promissory note remains unpaid (up to a maximum of 62,500 additional Bridge
Warrants).
F-15
<PAGE> 77
======================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY
SECURITIES IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
Use of Proceeds....................... 21
Dividend Policy....................... 23
Dilution.............................. 24
Capitalization........................ 25
Selected Financial Data............... 27
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 28
Business.............................. 33
Management............................ 45
Certain Transactions.................. 50
Principal Shareholders................ 51
Description of Securities............. 53
Shares Eligible for Future Sale....... 56
Underwriting.......................... 57
Legal Matters......................... 60
Experts............................... 60
Additional Information................ 60
Index to Financial Statements......... F-1
</TABLE>
UNTIL , 1997 (25 DAYS FROM THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
[LOGO]
[LOGO]
1,900,000 UNITS
CONSISTING OF
1,900,000 SHARES OF CLASS A COMMON STOCK AND
1,900,000 REDEEMABLE CLASS A WARRANTS
------------------------
PROSPECTUS
------------------------
D.H. BLAIR
INVESTMENT BANKING CORP.
, 1997
======================================================
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As allowed by the California Corporations Code, the Company's Restated
Articles of Incorporation provide that the liability of the directors of the
Company for monetary damages shall be eliminated to the fullest extent
permissible under California law. This is intended to eliminate the personal
liability of a director for monetary damages in an action brought by or in the
right of the Company for breach of a director's duties to the Company or its
shareholders except for liabilities: (i) for acts or omissions that involve
intentional misconduct or a knowing and culpable violation of law; (ii) for acts
or omissions that a director believes to be contrary to the best interest of the
Company or its shareholders or that involve the absence of good faith on the
part of the director; (iii) for any transaction from which a director derived an
improper personal benefit; (iv) for acts or omissions that show a reckless
disregard for the director's duty to the Company or its shareholders in
circumstances in which the director was aware, or should have been aware, in the
ordinary course of performing a director's duties, of a risk of serious injury
to the Company or its shareholders; (v) for acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to the Company or its shareholders; (vi) with respect to certain
transactions or the approval of transactions in which a director has a material
financial interest; and (vii) expressly imposed by statute for approval of
certain improper distributions to shareholders or certain loans or guarantees.
This provision does not limit or eliminate the rights of the Company or any
shareholder to seek non-monetary relief such as an injunction or rescission in
the event of a breach of a director's duty of care. The Company's Amended and
Restated Bylaws require the Company to indemnify its officers and directors to
the full extent permitted by law, including circumstances in which
indemnification would otherwise be discretionary. Among other things, the
Amended and Restated Bylaws require the Company to indemnify directors and
officers against certain liabilities that may arise by reason of their status or
service as directors and officers and to advance their expenses incurred as a
result of any proceeding against them as to which they could be indemnified.
Section 317 of the California Corporations Code ("Section 317") provides
that the Company may indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action or proceeding,
whether civil, criminal, administrative or investigative (other than action by
or in the right of the corporation) by reason of the fact that he is or was a
director, officer, employee, or agent of the Company or is or was serving at the
request of the Company as a director, officer, employee or agent of another
corporation or enterprise, against expenses, judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action or proceeding if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interest of the Company, and, with
respect to any criminal action or proceeding, had no cause to believe his
conduct was unlawful.
Section 317 also provides that the Company may indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Company to procure a judgment
in its favor by reason of the fact that such person acted in any of the
capacities set forth above, against expenses actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted under similar standards, except that no indemnification may be made in
respect to any claim, issue or matter as to which such persons shall have been
adjudged to be liable to the Company unless and only to the extent that the
court in which such action or suit was brought shall determine that despite the
adjudication of liability, such person is fairly and reasonably entitled to be
indemnified for such expenses which the court shall deem proper.
Section 317 also provides that to the extent a director or officer of the
Company has been successful in the defense of any action, suit or proceeding
referred to in the previous paragraphs or in the defense of any claim, issue or
matter therein, he shall be indemnified against expenses actually and reasonably
incurred by him in connection therewith; that indemnification authorized by
Section 317 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; and that the Company may purchase and
maintain insurance on behalf of a director or officer of the corporation against
any liability asserted against
II-1
<PAGE> 79
him or incurred by him in any such capacity or arising out of his status as such
whether or not the Company would have the power to indemnify him against such
liabilities under Section 317.
The Company has entered into agreements with its directors and executive
officers that require the Company to indemnify such persons against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
(including expenses of a derivative action) in connection with any proceeding,
whether actual or threatened, to which any such person may be made a party by
reason of the fact that such person is or was a director or officer of the
Company or any of its affiliated enterprises, provided such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the Company and, with respect to any criminal proceeding,
had no reasonable cause to believe his or her conduct was unlawful. The
indemnification agreements also set forth certain procedures that will apply in
the event of a claim for indemnification thereunder.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Company and
its officers and directors for certain liabilities arising under the Securities
Act or otherwise.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth an itemized statement of all expenses to be
incurred in connection with the issuance and distribution of the securities that
are the subject of this Registration Statement. All amounts shown, other than
the Securities and Exchange Commission registration fee, the NASD filing fee and
the Nasdaq fee, are estimates only.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 19,890
NASD fee.......................................................... 7,062
Nasdaq fee........................................................ 9,000
Printing and engraving expenses................................... 150,000
Accounting fees and expenses...................................... 65,000
Legal fees and expenses........................................... 175,000
Blue Sky filing fees and expenses................................. 50,000
Transfer agent's fees and expenses................................ 5,000
Representative's nonaccountable expense allowance (3%)............ 327,750*
Miscellaneous expenses............................................ 69,048
--------
Total................................................... $877,750
========
</TABLE>
- ---------------
* Assumes the exercise of the over-allotment option (i.e., $10,925,000 of Units
sold in total).
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following table sets forth all of the unregistered sales of securities
by the Company since the Company's inception in November 1995.
<TABLE>
<CAPTION>
DATE PURCHASER SECURITIES PURCHASED (1) CONSIDERATION
- --------------- ------------------- -------------------------------------------- -------------
<S> <C> <C> <C>
November 1995 Jack B. Tracht 264,091 shares of Class B Common Stock $ 8,000
November 1995 Robert D. Tracht 264,091 shares of Class B Common Stock $ 8,000
November 1995 James E. Austin 264,091 shares of Class B Common Stock $ 8,000
November 1995 Jeff W. Walden 264,091 shares of Class B Common Stock $ 8,000
November 1995 Howard M. Fites 55,598 shares of Class B Common Stock (2)
January 1996 James C. Neil 27,799 shares of Class B Common Stock (3)
February 1996 James C. Neil 13,900 shares of Class B Common Stock (3)
June 1996 Ki T. Lee 28,342 shares of Class B Common Stock $ 100,000
October 1996 James Goldberg 17,993 shares of Class B Common Stock (4)
</TABLE>
II-2
<PAGE> 80
<TABLE>
<CAPTION>
DATE PURCHASER SECURITIES PURCHASED (1) CONSIDERATION
- --------------- ------------------- -------------------------------------------- -------------
<S> <C> <C> <C>
October 1996 Steve Gorlin $100,000 principal amount of 10% Notes and $ 100,000
warrants to purchase 100,000 shares of Class
B Common Stock (which warrants were
subsequently exchanged for Bridge Warrants)
November 1996 Brynde Berkowitz $50,000 principal amount of 10% Notes and $ 50,000
warrants to purchase 50,000 shares of Class
B Common Stock (which warrants were
subsequently exchanged for Bridge Warrants)
November 1996 Marc Roberts $50,000 principal amount of 10% Notes and $ 50,000
warrants to purchase 50,000 shares of Class
B Common Stock (which warrants were
subsequently exchanged for Bridge Warrants)
January 1997 Bridge Financing $2,000,000 principal amount of 10% Notes and $ 2,000,000
warrants to purchase 1,000,000 shares of
Class A Common Stock(5)
September 1997 Beech Glen, Inc. $250,000 principal amount 10% Note and $ 250,000
warrants to purchase up to an aggregate of
125,000 shares of Class A Common Stock(6)
</TABLE>
- ---------------
(1) Reflects the Recapitalization, including an approximately 6.94975-for-1
stock split effected in October 1996.
(2) Shares issued to an employee for services.
(3) Shares issued to the Company's law firm for legal services.
(4) Shares issued for consulting services.
(5) Issued solely to a total of 42 individual and institutional accredited
investors in connection with a private placement pursuant to Rule 506 of
Regulation D of the Securities Act in which D.H. Blair Investment Banking
Corp. acted as placement agent and received $260,000 in fees and expenses.
(6) Issued to one institutional accredited investor in connection with a private
placement pursuant to Rule 506 of Regulation D of the Securities Act.
The Company believes that the issuances of securities pursuant to the
foregoing transactions were exempt from registration under the Securities Act of
1933, as amended, by virtue of Section 4(2) thereof as transactions not
involving public offerings. Except as indicated above, all securities referenced
in the preceding table were sold for cash.
ITEM 27. EXHIBITS
(a) The following exhibits, which are furnished with this Registration
Statement or incorporated herein by reference, are filed as part of this
Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ ------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Restated Articles of Incorporation of the Company.*
3.2 Amended and Restated Bylaws of the Company.*
4.1 Specimen Class A Common Stock Certificate.*
4.2 Form of Warrant Agreement by and among the Company, American Stock Transfer &
Trust Company and the Representative (including the form of Warrant
certificate).*
4.3 Form of Representative's Unit Purchase Option.*
4.4 Warrant Agreement dated January 9, 1997 by and among the Company, American
Stock Transfer & Trust Company and the Representative.*
</TABLE>
II-3
<PAGE> 81
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ ------------------------------------------------------------------------------
<C> <S>
4.5 Escrow Agreement, dated as of January 21, 1997, among the Company, American
Stock Transfer & Trust Company and the shareholders of the Company listed on
the signature page thereto (the "Escrow Agreement).*
4.6 Amended and Restated Escrow Agreement dated as of August 19, 1997.*
4.7 Specimen Form of Unit Certificate.
5.1 Opinion of Troy & Gould Professional Corporation.*
10.1 1997 Stock Option Plan.*
10.2 Employment Agreement, dated as of January 24, 1997, between the Company and
Jack B. Tracht (the "J. Tracht Employment Agreement").*
10.3 Employment Agreement, dated as of January 24, 1997, between the Company and
Robert D. Tracht (the "R. Tracht Employment Agreement").*
10.4 Employment Agreement, dated as of January 24, 1997, between the Company and
James E. Austin (the "Austin Employment Agreement").*
10.5 Employment Agreement, dated as of January 24, 1997, between the Company and
Jeff W. Walden (the "Walden Employment Agreement").*
10.6 Form of Indemnification Agreement.*
10.7 Agreement, executed as of May 1997, between the Company and Netscape
Communications Corporation.**
10.8 Agreement, dated as of October 24, 1996, between the Company and Network
Publishing, Inc.*
10.9 License Agreement, dated December 1, 1995, between the Company and Pro CD,
Inc.**
10.10 Form of Independent Publisher Agreement*
10.11 Amendment to the 1997 Stock Option Plan.*
10.12 Amended Agreement, dated as of March 21, 1997, between the Company and Network
Publishing, Inc.*
10.13 Service Agreement, dated March 21, 1997, between the Company and Network
Publishing, Inc.*
10.14 Employment Agreement, dated April 9, 1997, between the Company and Kent
Hinkson.*
10.15 Standard Office Lease for Calabasas Commerce Center -- Building No. 3, by and
between Arden Realty Limited Partnership and the Company.*
10.16 Equipment Lease, dated April 21, 1997, between the Company and Riviera Finance
East Bay.*
10.17 Letter Agreement, effective as of February 10, 1997, between the Company and
William A. Rossi.*
10.18 Amendment to J. Tracht Employment Agreement, dated September 22, 1997.*
10.19 Amendment to R. Tracht Employment Agreement, dated September 22, 1997.*
10.20 Amendment to Austin Employment Agreement, dated September 22, 1997.*
10.21 Amendment to Walden Employment Agreement, dated September 22, 1997.*
11.1 Statement regarding computation of net loss per share.*
23.1 Consent of BDO Seidman LLP.*
23.2 Consent of Troy & Gould Professional Corporation (contained in Exhibit 5.1).*
24.1 Power of Attorney.*
</TABLE>
II-4
<PAGE> 82
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ ------------------------------------------------------------------------------
<C> <S>
27.1 Financial Data Schedule*
99.1 Consent of Nicholas M. Mitsakos*
99.2 Consent of David A. Searls*
</TABLE>
- ---------------
* Previously filed.
** Incomplete version previously filed; portions for which confidential
treatment have been granted previously filed supplementally.
ITEM 28. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act") 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 Securities 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 of whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the Registrant shall treat the information omitted from the form of
prospectus filed as part of this Registration Statement in reliance upon
Rule 430A and contained in the form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or Rule 497(h) under the Securities Act
as part of this Registration Statement as of the time the Commission
declares it effective.
(2) For the purpose of determining any liability under the Securities
Act, the Registrant shall treat each post-effective amendment that contains
a form of prospectus as a new registration statement relating for the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(d) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made
of the securities registered hereby, a post-effective amendment to this
Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events which,
individually or in the aggregate, represent a fundamental change in the
information set forth in this Registration Statement;
(iii) To include any additional or changed material information
with respect to the plan of distribution.
(2) That, for the purpose of determining any liability under the
Securities Act, 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 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.
II-5
<PAGE> 83
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, 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 Amendment to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Los Angeles, State of California, on October 23,
1997.
ON'VILLAGE COMMUNICATIONS, INC.
By: /s/ JACK B. TRACHT
------------------------------------
Jack B. Tracht
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------------------------- -------------------------- -------------------
<S> <C> <C>
/s/ JACK B. TRACHT Chief Executive Officer October 23, 1997
- --------------------------------------------- and Director (Principal
Jack B. Tracht Executive Officer)
* President, Chief Operating October 23, 1997
- --------------------------------------------- Officer and Director
Robert D. Tracht
* Senior Vice President of October 23, 1997
- --------------------------------------------- Sales and Director
James E. Austin
* Senior Vice President of October 23, 1997
- --------------------------------------------- Marketing and Director
Jeff W. Walden
/s/ WILLIAM ROSSI Vice President and Chief October 23, 1997
- --------------------------------------------- Financial Officer
William Rossi (Principal Financial and
Accounting Officer)
*By: /s/ JACK B. TRACHT
-----------------------------------------
Jack B. Tracht, Attorney-in-Fact
</TABLE>
II-6
<PAGE> 84
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- ----------------------------------------------------------------------- -------------
<C> <S> <C>
1.1 Form of Underwriting Agreement*........................................
3.1 Restated Articles of Incorporation of the Company*.....................
3.2 Amended and Restated Bylaws of the Company*............................
4.1 Specimen Class A Common Stock Certificate*.............................
4.2 Form of Warrant Agreement by and among the Company, American Stock
Transfer & Trust Company and the Representative (including form of
Warrant certificate)*..................................................
4.3 Form of Representative's Unit Purchase Option*.........................
4.4 Warrant Agreement dated January 9, 1997 by and among the Company,
American Stock Transfer & Trust Company and the Representative*........
4.5 Escrow Agreement, dated as of January 21, 1997, among the Company,
American Stock Transfer & Trust Company and the shareholders of the
Company listed on the signature page thereto*..........................
4.6 Amended and Restated Escrow Agreement, dated as of August 19, 1997*....
4.7 Specimen Form of Unit Certificate......................................
5.1 Opinion of Troy & Gould Professional Corporation*......................
10.1 1997 Stock Option Plan*................................................
10.2 Employment Agreement, dated as of January 24, 1997, between the Company
and Jack B. Tracht (the "J. Tracht Employment Agreement")*.............
10.3 Employment Agreement, dated as of January 24, 1997, between the Company
and Robert D. Tracht (the "R. Tracht Employment Agreement")*...........
10.4 Employment Agreement, dated as of January 24, 1997, between the Company
and James E. Austin (the "Austin Employment Agreement")*...............
10.5 Employment Agreement, dated as of January 24, 1997, between the Company
and Jeff W. Walden (the "Walden Employment Agreement")*................
10.6 Form of Indemnification Agreement*.....................................
10.7 Agreement, executed as of May 1997, between the Company and Netscape
Communications Corporation**...........................................
10.8 Agreement, dated as of October 24, 1996, between the Company and
Network Publishing, Inc.*..............................................
10.9 License Agreement, dated December 1, 1995, between the Company and Pro
CD, Inc.**.............................................................
10.10 Form of Independent Publisher Agreement*...............................
10.11 Amendment to the 1997 Stock Option Plan*...............................
10.12 Amended Agreement, dated as of March 21, 1997, between the Company and
Network Publishing, Inc.* .............................................
10.13 Service Agreement, dated March 21, 1997, between the Company and
Network Publishing, Inc.* .............................................
10.14 Employment Agreement, dated April 9, 1997, between the Company and Kent
Hinkson*...............................................................
10.15 Standard Office Lease for Calabasas Commerce Center -- Building No. 3,
by and between Arden Realty Limited Partnership and the Company*.......
</TABLE>
<PAGE> 85
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- -------- ----------------------------------------------------------------------- -------------
<C> <S> <C>
10.16 Equipment Lease, dated April 21, 1997, between the Company and Riviera
Finance East Bay*......................................................
10.17 Letter Agreement, effective as of February 10, 1997, between the
Company and William A. Rossi*..........................................
10.18 Amendment to J. Tracht Employment Agreement, dated September 22,
1997*..................................................................
10.19 Amendment to R. Tracht Employment Agreement, dated September 22,
1997*..................................................................
10.20 Amendment to Austin Employment Agreement, dated September 22, 1997*....
10.21 Amendment to Walden Employment Agreement, dated September 22, 1997*....
11.1 Statement regarding computation of net loss per share*.................
23.1 Consent of BDO Seidman LLP*............................................
23.2 Consent of Troy & Gould Professional Corporation (contained in Exhibit
5.1)*..................................................................
24.1 Power of Attorney*.....................................................
27.1 Financial Data Schedule*...............................................
99.1 Consent of Nicholas M. Mitsakos*.......................................
99.2 Consent of David A. Searls*............................................
</TABLE>
- ---------------
* Previously filed.
** Incomplete version previously filed; portions for which confidential
treatment have been granted previously filed supplementally.
<PAGE> 1
VOID AFTER JANUARY __, 1998
UNIT CERTIFICATE
EACH UNIT CONSISTS OF ONE SHARE OF CLASS A UNITS
COMMON STOCK AND ONE CLASS A WARRANT
No. U
SEE REVERSE FOR
ON'VILLAGE COMMUNICATIONS, INC. CERTAIN DEFINITIONS
CUSIP 682199
THIS IS TO CERTIFY THAT,
or registered assigns (the "Registered Holder") is the owner of the number of
fully-paid and non-assessable Units specified above, transferable only on the
books of ON'VILLAGE COMMUNICATIONS, INC., a California corporation (the
"Company"), by the Registered Holder thereof in person or by his or her duly
authorized attorney, on surrender of this Unit Certificate properly endorsed.
Each Unit consists of one (1) share of the Company's Class A common stock,
par value $.01 per share (the "Class A Common Stock"), and one redeemable Class
A Common Stock purchase warrant (the "Warrants") to purchase one share of Class
A Common Stock for $6.50 per share, subject to certain adjustments, from the
Separation Date (as defined below) through the Expiration Date (as defined in
the Warrant Agreement). The terms of the Warrants are governed by a Warrant
Agreement dated as of October 14, 1997 (the "Warrant Agreement"), among the
Company, D.H. Blair Investment Banking Corp. ("D.H. Blair") and American Stock
Transfer & Trust Co., as Warrant Agent (the "Warrant Agent"), and are subject to
the terms and provisions contained therein. The Registered Holder of this Unit
Certificate consents to all of the terms and provisions contained in the Warrant
Agreement by acceptance hereof. Copies of the Warrant Agreement are on file at
the office of the Warrant Agent at 40 Wall Street, New York, New York 10005 and
are available to any holder on written request and without cost. The Warrant
shall be void unless exercised before the Expiration Date.
This certificate is not valid unless countersigned and registered by the
Transfer Agent, Warrant Agent and Registrar of the Company.
The Warrants and shares of Common Stock of the Company represented by this
Unit Certificate shall not be separately transferable until January __, 1998,
or such earlier date as determined by D.H. Blair (the "Separation Date").
WITNESS the facsimile seal of the Company and the facsimile signatures of
its duly authorized officers.
ON'VILLAGE COMMUNICATIONS, INC.
DATED:
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY CHAIRMAN
As Transfer Agent
Warrant Agent and Registrar
SEAL
ON'VILLAGE COMMUNICATIONS, INC.
INCORPORATED
By NOV. 13, 1995
CALIFORNIA
AUTHORIZED OFFICER SECRETARY
<PAGE> 2
The Company will furnish without charge to each stockholder who so
requests, the designations, powers, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights. Any such request may be made to the Company or to the Transfer Agent.
ADDITIONAL PROVISIONS
This certificate certifies that for value received the Registered Holder
hereby is entitled, at any time on or after January __, 1998 (or such earlier
date as determined by D.H. Blair Investment Banking Corp., that the Warrants and
Class A Common Stock which comprise the Units shall be separately transferable
(the "Separation Date")), to exchange each Unit represented by this Unit
Certificate for a Class A Common Stock Certificate representing one share of
Class A Common Stock and a Warrant Certificate representing one Warrant upon
surrender of this Unit Certificate to the Transfer Agent at the office of the
Transfer Agent together with any documentation required by such Transfer Agent.
At any time on or after the Separation Date and before 5:00 P.M., New York time
on the Expiration Date, upon surrender of the Warrant Certificate at the office
of the Warrant Agent for the Warrants, with the subscription form on the reverse
side thereof completed and duly executed and accompanied by payment in cash or
check payable to the Warrant Agent for the account of the Company, the
Registered Holder of such Warrant Certificate shall be entitled to purchase from
the Company one share of Class A Common Stock of the Company for each Warrant
represented by the Warrant Certificate, which shares shall be fully paid and
non-assessable, at the exercise price of $6.50 per share. The exercise price and
the number of shares purchasable upon exercise of each Warrant are subject to
adjustment and the Warrants are redeemable by the Company, each upon the
occurrence of certain events set forth in the Warrant Agreement.
After October 14, 2002, the Warrant shall become null and void and of no
value.
REFERENCE IS MADE TO THE WARRANT AGREEMENT REFERRED TO ON THE FRONT SIDE
HEREOF AND THE PROVISIONS OF SUCH WARRANT AGREEMENT SHALL FOR ALL PURPOSES HAVE
THE SAME EFFECT AS THOUGH FULLY SET FORTH ON THE FRONT OF THIS CERTIFICATE.
The following abbreviations when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - _____________ Custodian _____________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as ACT _________________________________
tenants in common (State)
COM PROP - as community property UNIF TRF MIN ACT - _________ Custodian (until age ______)
(Cust)
_________ under Uniform Transfers
(Minor)
to Minors Act _______________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
--------------------------------------
--------------------------------------
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
__________________________________________________________________________ Units
represented by the within Certificate, and do hereby irrevocably constitute
and appoint
_______________________________________________________________________ Attorney
to transfer the said Unit(s) on the books of the within named Company
with full power of substitution in the premises.
Dated ____________________________ _____________________________________________
THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON THE
NOTICE: FACE OF THIS CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
IMPORTANT: ALL SIGNATURES MUST BE GUARANTEED IN THE SPACE PROVIDED BELOW BY A
FIRM THAT IS A MEMBER OF THE NATIONAL SECURITIES EXCHANGE OR OF THE
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. OR BY A COMMERCIAL
BANK OR TRUST COMPANY LOCATED IN THE UNITED STATES.
SIGNATURE GUARANTEE:
Name: __________________________________________________________________________
(Please Print)
By: ____________________________________________________________________________
Title: _________________________________________________________________________
