SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10SB/A
Amendment No. 3
General Form For Registration of Securities
Of Small Business Issuers Under Section 12(b) or (g) of
the Securities Exchange Act of 1934
Inter-Con/PC, Inc
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(Exact name of registrant as specified in its charter)
Minnesota 41-1853972
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7667 Equitable Drive
Eden Prairie, Minnesota 55344
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (952) 975-0001
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Securities to be registered pursuant to Section 12(b) of the Act: None
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Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, no par value per share
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(Title of class)
Michael P. Ferderer
7667 Equitable Drive, Suite 101
Eden Prairie, MN 55344
(952) 975-0001
(Agent for Service)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
Inter-Con/PC, Inc. (the "Company") is a development stage company
engaged in the design, development and marketing of a personal computer device
that uses a television monitor and wireless keyboard rather than a traditional
personal computer monitor and keyboard. The Company is in the process of
developing a product it calls the TOTEBOOK (the "Set Top Box"). The Company has
only developed prototype products, and to date, has sold an insignificant number
of these prototype units. The Company also anticipates developing and marketing
complementary and peripheral products in conjunction with the Set Top Box. The
Company has contracted with various third party entities for the design and
development of various components of the Set Top Box, including design, layout
and manufacture of the circuit boards, circuit board components and casing for
the Set Top Box. The Company has developed two prototype versions of the Set Top
Box, the 6000 model which contains a high speed processor, hard drive and a
CD/DVD drive, and the 1000 model which is an internet access only unit equipped
with a slower processor and no drives. In June 1999, Infopac Systems, Inc.
("Infopac") acquired all of the outstanding common stock of the Company. Unless
otherwise indicated, all share amount in this Form 10SB/A reflect a 5-for-1
stock split that occurred pursuant to the merger.
COMPANY HISTORY AND DEVELOPMENT OF THE BUSINESS
The Company was founded in 1996 by two shareholders, SAC Technologies,
Inc. ("SAC") and Michael P. Ferderer, the Company's current Chief Executive
Officer and sole Director. The Company was capitalized with limited cash
investments and transfers of technology from both shareholders.
Since its inception, the Company has out-sourced a significant portion
of the design and development of the Set Top Box. On November 1, 1996, the
Company entered into a technical support and cooperative development agreement
with SAC for further development of the Set Top Box. SAC provided technical
support for the development of the Set Top Box. In exchange for its services,
the Company agreed to pay SAC $15,566 per month for the first six months and
$11,667 per month thereafter, for an additional 30 months. On December 31, 1997,
the agreement was terminated by the parties.
In June 1999, the Company acquired the assets of FutureComm, an
internet services division of MPF, Inc. ("MPF"), a company wholly owned by
Michael P. Ferderer. The Company acquired the name FutureComm and its internet
service provider switches, along with its servers, modems, software,
subscribers, customer lists and its Customer Service Unit/Demark Service Unit
("CSU"). In return, MPF received 50,000 shares of the Company's common stock,
which pursuant to the June 1999 5-for-1 stock split, became 250,000 shares of
common stock and a warrant to purchase 50,000 shares of common stock, which
pursuant to the 5-for-1 stock split, became 250,000 shares of common stock at an
exercise price of $.70 per share. At the time the assets were acquired, it was
contemplated that the Company would provide internet access services in
connection with the sale of its Set Top Box. However, the Company subsequently
decided not to provide these complementary services and is instead focusing its
attention and resources on the development, manufacturing, marketing and sale of
the Set Top Box. The Company is using the assets acquired, including the servers
and modems, to establish and maintain its own internal networks and for testing
the Set Top Box. The Company may offer internet access services to interested
customers, but will do so through third party internet service providers. The
Company has not entered into any agreement with third party providers regarding
such services, but anticipates doing so prior to commencing high volume
production of the Set Top Box.
In June 1999, the Company also agreed to acquire FutureComm, Inc.,
which was owned by Equitable Holdings, Inc. ("Equitable"), a principal
shareholder of the Company, a non-affiliated minority shareholder, and Michael
P. Ferderer. In April 1999, Mr. Ferderer surrendered all of his interests in the
company back to FutureComm, Inc. The Company agreed to issue 500,000 shares of
common stock and a warrant to purchase an additional 500,000 shares of common
stock at an exercise price of $.70 per share to FutureComm, Inc.'s remaining
shareholders, Mr Braegelmann and Equitable. The transaction was designed to give
the Company certain telecommunication related assets, including telephone line
switches, telephone licenses,
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NPA/NXX code 612-468, CSU'S paging terminal and the use of the FutureComm, Inc.
name. However, the Company has not issued any stock or warrants pursuant to the
FutureComm, Inc. acquisition because FutureComm, Inc. has not yet conveyed the
agreed upon telecommunication licenses. The company is currently in discussion
with FutureComm, Inc. and anticipates that the matter will be resolved in the
near future.
On June 8, 1999, Infopac acquired all of the outstanding common stock
of the Company. For accounting purposes this transaction was treated as an
acquisition by the Company of Infopac, and as a recapitalization of the Company.
Pursuant to a 5-for-1 stock split, the Company exchanged 3,946,667 shares of
common stock and options for 19,733,335 shares of Infopac's common stock. After
the transaction, the former shareholders of the Company owned 19,733,335 shares
out of 24,064,935 shares of outstanding common stock of Infopac. Infopac had no
business, operations, or assets at the time of the acquisition.
In 1996, to help provide guidance to management and further the
research and development process, the Company established an advisory board of
approximately 10 members which helps provide marketing and technical guidance to
management. The advisory board assists management with marketing presentations,
initiating and developing market contacts, market research and development of
its marketing plan. The advisory board also provides technical support such as,
but not limited to, chip or circuit board development, radio frequency emissions
and plastic shielding, heating and case design. The advisory board members are
compensated with options to purchase shares of common stock of the Company.
In 1999, the Company manufactured 270 evaluation units of the Set Top
Box. These evaluation units were prototypes of the Set Top Box to be used for
testing. In January 2000, 100 of these evaluation units were sold, through a
former distributor of the Company, to the Midlothian School in Midlothian,
Illinois for $55,000. The Midlothian School is primarily an evaluation site and
will allow the Company to evaluate the prototypes under normal use. To date, the
Company has serviced and repaired 6 of the units. The units will be replaced by
the Company, without any additional cost to the Midlothian School, with a newer
prototype model for evaluation later this year.
On May 12, 2000, the Company entered into a strategic partnership
agreement with Maxwood Technologies, Ltd. of Hong Kong, China ("Maxwood") and
Nikko Co., Ltd. of Tokyo, Japan ("Nikko"). Pursuant to the agreement, the
Company and Nikko formed a marketing and distribution company, Nikko Multi Media
Company, LLC, ("Nikko Multi Media") on May 25, 2000. The Company and Nikko each
own 50% of Nikko Multi Media. The Company's capital contribution will consist of
a $25,000 investment, and a grant to Nikko Multi Media of an exclusive,
world-wide right to manufacture, use and sell the Set Top Box. Nikko's
contribution will consist of a $25,000 investment, and loans to Nikko Multi
Media for operations, the amount of which will be determined pursuant to a
budget prepared by Nikko Multi Media and approved by Nikko. The loans will bear
interest at 8% per annum, and will be repaid to Nikko from Nikko Multi Media's
net profits as agreed by the parties. In addition to the Set Top Box, Nikko
Multi Media may also market and distribute various other electronic products and
services. Any profits generated by Nikko Multi Media, whether from the sale of
the Set Top Box or other products and services will be shared equally between
the Company and Nikko.
Under the agreement, the Company will be responsible for ongoing
development engineering, and research and development of new products. Maxwood
will be responsible for high volume production design, engineering and
manufacturing. Maxwood, will seek out and recommend qualified third party
manufacturers to Nikko Multi Media. Both Maxwood and the Company will monitor
production and manufacturing. For its services, Nikko Multi Media will pay to
both the Company and Maxwood, a fee equal to 5% of the cost of each Set Top Box
it sells. The Company is still testing and refining the Set Top Box, and can
offer no assurances that it will be able to successfully develop and prepare the
Set Top Box for high volume manufacturing. Further, the Company can offer no
assurances that it, Nikko, Nikko Multi Media or Maxwood will be able to
successfully manufacture the Set Top Box.
The Set Top Box will be sold exclusively by Nikko Multi Media under any
brand names it deems appropriate. However, the Company, Nikko and Maxwood may
purchase the Set Top Box directly from Nikko Multi Media and resell it under any
brand name not used by Nikko Multi Media. This will result in the Company
becoming very dependent upon Nikko Multi Media and Maxwood to manufacture and
distribute the Set Top Box. The agreement may be terminated by any party with at
least 12 months prior notice.
The Company currently does not know when the activities contemplated in
the joint venture strategic partnership agreement will occur since no time line
has been established and will not be established until the next meeting of the
Board of Directors of Nikko Multi Media. The Company anticipates, but can offer
no assurances, that a meeting of the Board of Directors will be convened toward
the end of third quarter or early fourth quarter of this year. The Company
anticipates that a development plan for Nikko Multi Media will be adopted at
such meeting.
Other than to the Midlothian School, the Company has not made any other
sale of its Set Top Box. The Company
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is completing the research and design phase of the development stage and has
commenced pre-production engineering, which includes, among others, detailed
review and examination of production costs and methods to develop a means to
cost-effectively mass produce the Set Top Box. Further testing of the Set Top
Box is required before it enters high volume manufacturing. The Company
anticipates, but can offer no assurances, that it will complete pre-production
engineering by fourth quarter of this year and hopes to be ready to commence
high volume manufacturing by the end of fourth quarter of this year or the
beginning of first quarter of the year 2001.
BUSINESS DESCRIPTION
PRODUCTS
SET TOP BOX. The Company is developing its prototype Set Top Box as an
alternative to a traditional desktop personal computer ("PC"). The Set Top Box
is intended to provide access to the internet and e-mail through a television
set for both individual and commercial use. It combines the interactivity of the
Internet, the convenience of an ordinary television set, and the functionality
of a personal computer. The Company has developed two prototype models, the 1000
and 6000 model (hereinafter collectively referred to as the "Set Top Box"). The
prototype 1000 model is being designed to allow a user, through a standard or
high definition television set, to:
o Access the internet
o Receive, write and send e-mail
o Access a word processor
o Play internet video games or use learning tools
With a simple connection to a telephone line for communication and a television
set for display, the Set Top Box is expected to provide low-cost home computing
by performing word processing, e-mail, internet games, as well as provide
internet access. At a minimum, however, the Company expects that a basic package
will include DOS, Microsoft Windows(TM), or Linux operating system, a basic word
processing program and a basic spreadsheet program.
The prototype 6000 model will also be equipped with a high speed
processor, a CD/DVD drive and a hard drive. In addition to all the features of
the 1000 model, the user will also be able to:
o Watch DVD movies
o Retrieve software
o Download software and information from the internet into the
hard drive
o Save programs and information into the hard drive
o Open programs stored on the hard drive
The prototype 6000 model is intended to give the user features found on a PC,
but through a much smaller unit and the convenience of a television set. The
Company intends that the Set Top Box will provide users with easy access to
internet and intranet applications. Depending on the limitations of the internet
service provider, users may be able to utilize E-mail, perform search and file
transfer functions, execute financial transactions, participate in open forums
and interactive advertising, play interactive video games and perform a wide
variety of data retrieval and transmission. The model is also expected to
support industry-standard PC peripherals such as printers, monitors, hard disk
drives and CD-Rom drives.
The prototype 6000 model Set Top Box is expected to be capable of
running many different operating systems, including DOS, Unix, Linux or
Windows(TM). However, the DVD system on the prototype 6000 model requires the
Microsoft Windows(TM) operating system. The Company's current development plan
contemplate that each Set Top Box will not have a specific set of software or a
specific operating system. Instead, the Company hopes to permit distributors or
the end user to decide which package of software to incorporate into the Set Top
Box.
KEYBOARD. Unlike traditional desktop personal computers, the Set Top Box
prototypes uses a wireless infra-red keyboard to communicate with the processing
unit ("Box"). The wireless keyboard communicates with the Box from a distance
without
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the need for wires. Accordingly, a user will be able to use the Set Top Box from
the comfort of a sofa or chair without the inconvenience of wires. However, the
prototype also permits a hard-wire connection between the keyboard and the Box
for users who prefer a wired keyboard.
If the Company chooses to purchase Set Top Boxes from Nikko Multi
Media, it may independently market and sell them under the names "NetCTV,"
"Cyber Spider," "INTER-CON/PC," "TOTEBOOK" and "P.I.N.TV." It has submitted
trademark applications for the above names, of which the mark "Inter-Con/PC" and
"TOTEBOOK" has been approved by the United States Patent and Trademark Office.
However, with the establishment of its strategic partnership agreement with
Nikko and Maxwood, the Company does not anticipate actively marketing and
distributing the Set Top Box under its own brand name in the foreseeable future.
LICENSES AND REQUIRED COMPONENTS
To manufacture the Set Top Box, the Company must obtain various
software licenses and hardware components described below. To date, the Company
has been unable to secure such licenses or entered into any agreements with
manufacturers or suppliers of the necessary components to permit the Company to
mass produce the Set Top Box. Failure to obtain such license or secure such
components may have a material adverse impact on the Company's business.
SOFTWARE LICENSES. The Company must obtain licenses from various software
vendors before it can sell the Set Top Box with pre-installed software.
Currently, the Company purchases Microsoft Windows(TM) either from the retail
market or a Microsoft vendor for use of the operating system in the prototype
Set Top Box. To date, the Company has executed a software license agreement with
Websurfer, Inc. ("Websurfer"), for use of their operating system and internet
browser. The agreement gives the Company the option to purchase up to 5,000
licenses of the Websurfer operating system and internet browser. The price per
license will vary in price from $9.99 to $24.99 per license, depending on the
version chosen. The agreement does not obligate the Company to purchase any of
Websurfer's products, but does obligate Websurfer to sell at the specified
price. However, due to the high per license cost, the Company does not
anticipate purchasing software licenses from Websurfer. The Company is currently
in discussion with Lineo, Inc., a software company, for use of its operating
system and internet browser, but has not procured an agreement. Pursuant to its
strategic partnership agreement, the Company anticipates assigning the license
to Nikko Multi Media, if consent of the vendor can be obtained.
The Company also anticipates entering into software license agreements
with Microsoft Corporation and Cyrus Intersoft, Inc. ("Cyrus"), a privately held
software development company. In 1998, the Company purchased 76,923 shares of
common stock of Cyrus for $50,000. The Cyrus software is intended to enable the
Set Top Box user to access multiple applications without the need of a hard
drive. The Company has had limited discussions with Cyrus, but has not had any
discussions with Microsoft. These software license agreements will either be
procured by the Company and then transferred to Nikko Multi Media or will be
procured directly by Nikko Multi Media. The Company does not know whether it or
Nikko Multi Media will be able to successfully negotiate a favorable agreement
nor when these agreements will be finalized. It anticipates, but can offer no
assurances, that such will occur before the Set Top Box enters high volume
manufacturing.
The Company is currently selecting software that could be used in the
Set Top Box. During the third calendar quarter of 2000, the Company expects that
either it or Nikko Multi Media will commence negotiating software license
agreements for installation of certain software in the Set Top Box. The Company
is further conducting certain field tests with prototype units and experimenting
with various hardware and software combinations.
HARDWARE COMPONENTS. The Company currently holds an evaluation software license
agreement from Mediamatics, Inc. This agreement permits the Company to
internally use the DVDExpress(TM) software, which enables decoding of DVD/MPEG-2
data stream for playback using a DVD drive, for testing the Set Top Box and for
customer demonstrations. Prior to entering high volume manufacturing, the
Company will need to enter into a licensing agreement with Mediamatics for the
use, installation, distribution and sublicense of the DVDExpress(TM) software
with the Set Top Box.
The Company must obtain various hardware components from vendors such
as Applied Micro Devices, Inc., Intel Corporation or Cyrix Corporation for
microprocessors to operate the Set Top Box, or Western Digital Corporation for
disc
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drives, and other hardware manufacturers for each Set Top Box it sells. To date,
the Company has not entered into any licensing agreements with any of its
hardware vendors. Historically, the Company had purchased individual licenses
for each hardware component, but will need to enter into licensing agreements
with these manufacturers prior to the Set Top Box entering high volume
manufacturing. In light of its strategic partnership agreement with Nikko and
Maxwood, the Company anticipates that the necessary hardware licenses will be
procured by Nikko Multi Media. However, there can be no assurances that the
Company or Nikko Multi Media will be able to negotiate an agreement for these
licenses.
MARKETING AND DISTRIBUTION
The Company is in the development stage and has not had any significant
sales of its products. The Company's only sale was 100 evaluation prototype Set
Top Boxes to the Midlothian School for use in a pilot educational technology
program. The Company received $55,000 from the sale. Under the agreement, the
Company must service the units until they are replaced with an upgraded model
later this year. There have been no other sales of prototype Set Top Boxes, and
the Company is not actively selling the Set Top Box as they have not yet been
fully developed or tested and are not ready for high volume manufacturing.
The Company anticipates that its target market for the Set Top Box
initially will include consumers seeking some of the functions of a PC with
Internet access, but do not desire to expend the money to purchase a complete PC
system. The Company believes it has five potential marketing or distribution
channels for its products: (1) the consumer electronics industry, targeting
individual consumers for home use; (2) original equipment manufacturers ("OEM");
(3) value added resellers; (4) system integrators; and (5) niche markets such as
hotels and educational institutions. The Company has had very limited
discussions with some of the above market participants but has no agreements
with any of these participants to sell any of its products.
The Company believes that access to the consumer electronics industry
will be achieved through leading electronic retailers. The Company has had
limited discussions with various leading electronic retailers, including Best
Buy Company, Inc. and Circuit City Stores, Inc., regarding the sale and
distribution of the Set Top Box. These retailers have expressed interest in the
Set Top Box, but have not been interested in purchasing any of the Company's
products.
OEM's are companies engaged in the production or manufacturing of
equipment for sale under their own brand name or that of leading consumer
product labels. These include companies such as Hewlett Packard and Sony
Corporation. Many computer companies engage these original equipment
manufacturers to produce computers with their brand name on the devices. The
Company hopes that as the internet and set top box industry develops and
matures, certain OEM's may be interested in either acquiring or manufacturing
the Set Top Box and reselling them under their own brand names.
A value added reseller is a company that purchases a particular
products and adds additional components to change or increase functionality or
performance. The Company anticipates that value added resellers will include
internet service providers ("ISP") and cable and satellite television providers
such as America On-line, CompuServe, Covad Communication Group, Inc. and Charter
Communications, Inc. The Set Top Box is complementary to the services offered by
this market. Specialized ISP's such as broadband or digital subscriber line
("D.L.") internet access providers may desire to offer the Set Top Box to their
customers as an alternative to traditional PC internet access. These ISP's will
need to add additional components such as a broadband or D.L. modem to the Set
Top Box for it to function pursuant to the services they provide.
System integrators include network service providers such as Com Plus
Services, Inc., who build telecommunication or computer networks such as local
area networks (LAN) or wide area networks (WAN). These network providers may, as
an additional feature, integrate the Set Top Box into their networks to provide
easy access to information. Niche markets include hotels and educational
institutions. A hotel might use the Set Top Box as a means for their guests to
access the internet, view movies, play video games and access hotel information,
as well as conduct business and check out of their rooms if the Set Top Box is
integrated into the hotel's telecommunications network. Educational institutions
may desire the Set Top Box for various functions such as communication,
presentation, and teaching. The Set Top Box will allow educators to communicate
with one another or with students who are in different locations via the
internet or an intranet network. It can also be used as a teaching tool to
obtain information or for presentations. The Company hopes to market its
products to
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these potential markets, but there are no assurances that the Company or Nikko
Multi Media will be able to manufacture or sell its products to any of these
markets.
The Company has not yet developed a complete marketing plan or
determined which of the foregoing markets or marketing methods hold the best
potential for successful commercialization of the Set Top Box and the Company's
future products. The Company hopes to penetrate these markets through
networking, referrals, and general business contacts, with a heavy emphasis on
trade shows where, to date, the Set Top Box has been received favorably. The
Company may use distributors and independent sales representatives, and personal
contacts obtained at trade shows and other industry connections to sell to these
markets. However, the Company is currently not selling any Set Top Boxes and has
not entered into any serious discussion with any participants in the above
markets. Further, in light of its strategic partnership agreement, the Company
anticipates it will be heavily dependent upon Nikko Multi Media to manufacture,
market, sell and distribute its products and will not independently market the
Set Top Box.
The Company currently has a few independent distribution or marketing
agreements with various distributors and resellers. These agreements were
primarily a means for the Company to conduct market research and to gauge the
level of interest the market had for its products. The intent was to have these
agreements in place to allow for immediate distribution of the Set Top Box when
the Company begins high volume manufacturing. These agreements do not compel
either the Company or the distributor to buy or sell a select number of Set Top
Boxes, but merely states the Company's willingness to sell Set Top Boxes to the
distributor. The Company is not obligated to fill any orders submitted, nor is
it obligated to deliver any Set Top Boxes ordered. The Company anticipates
assigning these distribution agreements to Nikko Multi Media.
COMPETITION
COMPETITORS. The market for interactive devices that run PC programs on standard
television sets is new, rapidly evolving and intensely competitive. The Company
expects competition to intensify and the number of competitors to increase in
the future. In addition, the broader personal computer and Internet access
industries are intensely competitive. The Company believes that competition
could potentially come from six different product or service segments: (a)
internet access only devices; (b) cable and satellite TV set top boxes; (c)
personal computers; (d) PC and internet set top boxes; (e) gaming consoles; and
(f) internet service providers.
Competition from the internet access only devices include manufacturers
and distributors of internet access only set top boxes and wireless internet
access devices. Competitors from this segment include Microsoft WebTV, Sony
WebTV, Philips WebTV, Uniview Technologies, WebSurfer, Eagle Wireless and
numerous other internet access only set top box manufacturers or distributors.
Wireless internet access devices are relatively new products that just recently
entered the market. These devices have very limited graphical capabilities and
are not able to produce the visual effects that a set top box produces.
Competitors from this segment include Palm, Inc. and cellular or digital phone
manufacturers. Nearly all of these competitors are larger than the Company, have
existing successful products, have technology, sales, marketing and distribution
networks that are superior to the Company's. These competitors also have greater
resources and access to capital than the Company.
The use of cable satellite television set top box is also relatively
new to the market. These manufacturers include General Instruments, Scientific
Atlanta, EchoStar and DirectTV. Unlike the Company's Set Top Box, these
competitors primarily manufacture set top boxes which are restricted to use only
with cable or satellite television services. Further, to use these products,
consumers must already have cable or satellite television service and are often
required to purchase internet access from their cable or satellite television
provider.
The personal computer is perhaps the oldest and most recognized form of
internet access. This segment produces products which often exceed the functions
offered by the Set Top Box. However, users cannot use their television set as a
monitor and are required to purchase separate monitors or are limited to
monitors which accompany their laptop. These monitors often are very expensive,
and do not offer the graphical quality found on a television set. Personal
computers and laptops are often more complicated to use and cost significantly
more than the Set Top Box.
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The PC and internet access set top box segment produces products which
will be direct competitors of the 6000 model Set Top Box. The Company is
currently aware that TVPC, Uniview Technologies, Eagle Wireless and Avastar
Technologies produce products similar to the 6000 model Set Top Box. These
companies produce set top boxes which provides internet access through a
television set, as well as PC functions such as word processing and spreadsheet,
a high speed processor, hard drive and CD/DVD drive.
The gaming consoles segment is a rapidly changing market filled with
new innovations. Some of these consoles allow internet access, gaming and CD-Rom
functions. These competitors include, among others, Sega Enterprises, Ltd. and
Sony Corporation. Sony is also in the process of developing a new gaming console
which will, among other features, offer DVD capabilities through a standard
television set.
The Company also anticipate that as technology continues to develop and
acceptance of the internet continues to grow, ISP's such as America-On-Line,
Inc. ("AOL"), Earth Link, Inc., CompuServ, Prodigy and various others may seek
to enter the set top box market. A set top box would compliment the services
these companies offer and provide them access to new markets which would
otherwise be unreachable due to the complexity and higher cost of PC systems and
laptop computers. Currently, the Company estimates that it is aware of
approximately 60 competitors that manufacture or distribute set top boxes.
COMPETITIVE FACTORS. The Company believes that the principal competitive factors
in its market are brand name recognition, product quality, variety of
value-added services, ease of use, price, availability of customer support,
reliability, and technical expertise. Many current and potential competitors
have longer operating histories, larger customer bases, greater brand
recognition and significantly greater resources than the Company. In addition,
smaller competitors may be acquired by, receive investments from or enter into
other commercial relationships with larger, well-established and well-financed
companies as use of the internet and other online services increase. Certain
competitors may be able to secure attractive hardware and software licenses from
vendors on more favorable terms, devote greater resources to marketing and
promotional campaigns, adopt more aggressive pricing or inventory availability
policies and devote substantially more resources than the Company.
The Company believes, but can offer no assurances, that it will be able
to effectively compete in the industry because of the unique mix of features and
services offered by its Set Top Box. Both models will be equipped with a
wireless keyboard that will enable users to operate the unit without being
hindered or restricted by wires. The 6000 model is compatible with a variety of
operating systems and provides unique features such as opening, saving and
downloading files, ability to run PC software (subject to memory and storage
requirements) and video conferencing. It will also contain numerous peripherals
for attaching printers or joysticks, universal serial bus slots and expansion
slots.
MANUFACTURING
To date, the Company has several working prototypes of its Set Top Box,
which need further testing and refining. In collaboration with Nikko and
Maxwood, the Company intends to manufacture 400 evaluation units. The Company
anticipates its manufacturing role will be limited to, in collaboration with
Nikko, selecting a manufacturer recommended by Maxwood and, in collaboration
with Maxwood, reviewing and monitoring production quality and costs.
To date, high volume manufacturing of the Set Top Box has not yet begun
and the Company does not know when or if such will begin and can offer no
assurance that the Set Top Box will ever be ready for high volume manufacturing.
The Company does not know what actual costs of manufacturing may be and is
unable to establish a manufacturer's suggested retail price ("MSRP") for either
model of the Set Top Box. In addition to manufacturing costs, the price of each
Set Top Box will also depend on the software that is incorporated with, and
pre-installed into each unit. Accordingly, until manufacturing and pre-installed
software costs are determined, the Company cannot price its products.
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SUPPLIERS
When manufacturing prototype Set Top Boxes, including those provided to
the Midlothian School, the Company has historically relied on MNC International,
Inc. ("MNC") and various other vendors to design, supply and fabricate the
circuit boards currently employed by the Set Top Box. The Company purchased
other components such as the Advance Micro Devices processor, hard drive, CD/DVD
drive and infra-red sensors from the various manufacturers of each component or
an authorized reseller.
The Company will not manufacture any of the components used in the Set
Top Box and intends to rely on vendors to supply all of the components needed to
manufacture its products, including certain components with lead times of up to
eight (8) weeks or more. There are a number of significant risks involved in
relying on outside vendors to supply the components for the Company's products,
including, but not limited to, lack of availability of the components, delivery
delays or interruptions, manufacturing delays, and uncertainty relating to the
quality and price of the components. Any interruption in the supply or increase
in the costs of such components by third party suppliers and vendors could
materially and adversely affect the ability of the Company's manufacturers to
efficiently manufacture the Set Top Box and may hinder the Company's ability to
compete effectively.
In addition, certain components may become unavailable if their
suppliers discontinue production of such components. If such occurs, the Company
may be forced to seek out new suppliers, obtain new replacement components,
design and develop new replacement components or redesign the Set Top Box for
use with other components available on the market. If such occurs, the Company's
business will be adversely affected.
In light of its strategic partnership agreement with Nikko and Maxwood,
the Company anticipates that Nikko Multi Media, with assistance from the
Company, Nikko and Maxwood, will procure all necessary supplier contracts.
Neither the Company or any of its partners have entered into any agreements with
any supplier to manufacture or supply the necessary components to manufacture
the Set Top Box. These contracts must be procured before high volume
manufacturing begins. There has been no discussion with any supplier and the
Company can offer no assurances that these suppliers can be found or it will be
able to reach an agreement with any supplier.
RELIABILITY AND PRODUCT WARRANTY
The Company has developed two versions of the Set Top Box, the 1000
model which provides internet access only, and the 6000 model, which contains a
high speed processor, hard drive and a CD/DVD drive. Both versions, however,
need further field-testing and refinement. Review and analysis of the
performance of either model is limited because the Company has only been able to
conduct limited testing of its prototype units. The Company has not conducted
any field testing to determine problems or other reliability issues.
Furthermore, since the components used in the Set Top Box are supplied by
outside vendors, the Company has little, if any, data regarding the maintenance
and reliability of such components. If the Set Top Boxes require significant
service or maintenance after sale, then the Company's business may be adversely
affected.
To be competitive, the Company anticipates that a limited
manufacturer's warranty will be provided with its products. Although the Company
has not yet determined the specific conditions of such limited warranty or the
reliability of the Set Top Box, the Company expects that future maintenance,
repair or replacement will be required. Such maintenance, repairs or
replacements may adversely effect the Company's financial condition and
reputation. The Company anticipates that any warranty work will be handled by
the manufacturer that the Company contracts with to manufacture the Set Top
Boxes. Because the Company has not commenced high volume manufacturing of its
products, it has little information on product reliability or warranty.
INTELLECTUAL PROPERTY RIGHTS
Currently none of the Company's technology is patented. In 1997, the
Company applied for a United States and Singapore patent on the Set Top Box
under the description "Set Top Computer." In January 2000, the Company filed an
amended application to incorporate its new board designs. The application is
still pending and the Company does not know when or if it will be approved.
However, even if the application is approved, the Company does not know if it
will have the resources to protect the patent. Further, regardless of the
Company's ability to obtain and protect its patent, others may
9
<PAGE>
develop similar know-how, concepts, and ideas in competition with the Company.
The Company further believes that patent protection, if any, may be limited
because of the scope of prior uses and publications made by others regarding the
components used in the Set Top Box.
The Company is not aware of any infringements the Set Top Box may have
on any existing or pending patents, but offers no assurances that such
infringement has not or will not occur. If the Set Top Box or any component
thereof should infringe upon any patent or proprietary rights of others, the
Company may be liable for damages, including injunctions from further
manufacturing or marketing of the Set Top Box. If this occurs, the Company's
business will be materially and adversely effected.
The Company has also filed trademark applications with the United
States Patent and Trademark Office to trademark the following:
o CYBERSPIDER
o MUXPANEL
o PINTV
o PINTV PC PERFORMANCE TV CONVENIENCE
o INTER-CON/PC
o PICK TV
o PC PERFORMANCE INTERNET-CONNECTIVITY NETWORK CAPABILITY TV
CONVENIENCE
o THE PC WITH A SET TOP BOX ATTITUDE
o THE SET TOP BOX WITH PC ATTITUDE
o TOTEBOOK
o IPC
o GET A HANDLE ON IT
o GET A HANDLE ON LIFE
The Company has received approval for the INTER-CON/PC and TOTEBOOK mark from
the United States Patent and Trademark Office. The remaining marks have not been
approved and the Company is currently unable to determine when such approval
will be granted or if they will be granted at all.
REGULATORY REQUIREMENTS
FCC CERTIFICATION. Prior to selling the Set Top Box in the United States, the
Company will need to obtain FCC certification, which it intends to seek later
this year. This requires submitting the Set Top Box to an independent laboratory
for testing. Testing will take approximately one day, and often can be done
shortly after the product is submitted. If the Set Top Box satisfies FCC
requirements, an FCC certificate will be issued. The Company anticipates, but
offers no assurances, that FCC certification can be obtained within
approximately one week from the time the Set Top Box is submitted to an
independent laboratory for testing. The Company anticipates, but can offer no
assurances, that it will seek FCC approval for the Set Top Box in the third
quarter of 2000. The Set Top Box has undergone FCC testing on one prior
occasion, but failed electromagnetic radiation testing because of its plastic
casing. The Company is developing new casings for the Set Top Box which it
believes will eliminate possible electromagnetic radiation problems. The Company
believes, but offers no assurances, that the Set Top Box will satisfy FCC
requirements.
FOREIGN REGULATORY REQUIREMENTS. If the Company is able to expand into foreign
markets, then other testing may be required to satisfy foreign regulatory
requirements, if any, of each foreign market the Company enters. The Company
currently does not know which foreign markets, if any, it will sell the Set Top
Box and is therefore unable to determine what other regulatory requirements, if
any, it must satisfy.
FOREIGN NON-REGULATORY REQUIREMENTS. In addition, the Set Top Box may need to
satisfy certain non-regulatory approval to effectively compete in certain
foreign markets. Non-regulatory requirements are certifications which are not
necessary to sell the Set Top Box in the country, but is required from a
marketing stand point. This may include, among others,
10
<PAGE>
obtaining a "CE" marking in the European Union. The CE Marking is not required
to sell a product in the European Union, but the marking is so common for
electronic products that without it, the Company will not be able to compete in
this market. However, since the Company is currently unable to determine which
foreign markets, if any, it will enter, it is currently unable to determine what
other non-regulatory requirements, if any, it must satisfy.
UL LISTING REQUIREMENTS. The Company does not anticipate obtaining certification
from Underwriters Laboratories, Inc. ("UL") for the Set Top Box. The Company has
determined that in the United States, the only component of the Set Top Box
which requires UL listing is the power supply, which will be an external
component separate from the Set Top Box itself. The Company will only purchase
UL listed power supplies from vendors who have UL listing for their products.
The Company believes that because the power supply will be an external
component, the Company will not need to obtain separate UL listing for the Set
Top Box.
RESEARCH AND DEVELOPMENT
The goal of the Company is to contract for research and development of
the Set Top Box and other products. Research and development expenditures will
not only be for new product developments but also for upgrading and improving
existing products. For the period ended December 31, 1998 and December 31, 1999,
the Company spent approximately $731,362 and $165,098, respectively, on research
and development. The Company anticipates that further development and
enhancement will be necessary to bring the Set Top Box to market.
EMPLOYEES
The Company has 8 full-time employees and 4 part-time employees. The
Company is not subject to any collective bargaining agreement and does not
anticipate any significant changes in its personnel structure.
ADDITIONAL RISK FACTORS
Investment in the company is highly speculative, involves a high degree
of risk and is suitable only for investors: (a) who have a continuing high level
of annual income and a substantial net worth, (b) who can afford to bear that
risk, and (c) who have no need for liquidity from this investment. Each
prospective investor should carefully consider the information presented in this
registration or incorporated by reference into this registration, including
without limitation the following additional risks summarized below, and should
consult his own legal and financial advisors with respect thereto.
NEW BUSINESS; ABSENCE OF OPERATING HISTORY
The Company has virtually no sales of its products. It is a development
stage company with very little operating history and very limited operating
capital. It is subject to all the risks inherent in the commencement of a new
business enterprise. Additionally, the Company has very little business history
that investors can analyze to aid them in making an informed judgment as to the
merits of an investment in the Company. Any investment in the Company should be
considered high risk because the company may encounter unforeseen costs,
expenses, competition and other problems which most development stage companies
often encounter. The Company's prospects for success must be considered in light
of the risks, expenses and difficulties encountered in establishing a new
business in a highly competitive industry confronted with rapid technological
development.
CONTINUED DEVELOPMENT REQUIRED
The Company is completing research and development of the Set Top Box
and is commencing pre-production engineering. Further testing and refining of
the Set Top Box is required before entering high volume manufacturing. The
Company has not obtained necessary FCC approval for commercialization of its
products. The Company had made one attempt to obtain FCC approval, but the
product failed due to excessive heat and electromagnetic radiation. The Company
has developed new designs to correct for the problem. The Company believes, but
can offer no assurances, that the Set Top Box will satisfy FCC requirements. It
is possible that further design of the motherboard and plastic case will be
required.
11
<PAGE>
Thorough field testing of the product has not been completed, and it is possible
that such tests may reveal the need for additional modifications to the Set Top
Box.
NO ASSURANCE OF FUTURE PROFITABILITY; FACTORS AFFECTING FINANCIAL PROJECTIONS
There can be no assurances that the Company will be able to
successfully develop its products and bring them to market or that the Set Top
Box will perform as the Company anticipates. Further, there are no assurances
that the Company's assessments regarding development of its products, the market
size, market share, or market acceptance of the Company's products are correct.
Any future success of the Company will depend upon many factors, including
factors which may be beyond the control of the Company or which cannot be
predicted at this time. There can be no assurance that the Company will ever
successfully develop its product or achieve profitability.
DEPENDENCE ON THE INTERNET; UNCERTAIN ADOPTION AS A MEDIUM FOR COMMUNICATION AND
COMMERCE
A key function of the Set Top Box is its ability to access the
internet. Rapid growth in the use of and interest in the internet is a recent
phenomenon. The products are highly dependent upon the increased acceptance and
use of the internet as a medium for communication and entertainment. Many
critical issues concerning use of the internet, including security, cost,
adaptability, complexity of use and quality of service, still remain and may
hinder its continued expansion. If use and acceptance of the internet does not
continue to rapidly grow, the Company may be materially and adversely effected.
CAPITAL REQUIREMENTS; LIMITED SOURCES OF LIQUIDITY
The Company has very limited cash or cash equivalents and requires
substantial capital to pursue its operating objectives and maintain its current
level of operations. Without additional funding, the Company will not be able to
satisfy its current debt obligations and fund its operations. Management plans
to pursue additional financing through the issuance of debt or common stock, but
offers no assurances that it will be able to successfully obtain such funds. If
additional funding is not obtained, it is doubtful that the Company will be able
to continue as a going concern.
TECHNOLOGY CHANGES
The Company competes in a highly competitive industry confronted with
rapid and constant technological changes. The internet is a relatively young
development and new technology relating to its use and performance are
constantly being developed. Development by others of new or improved products or
technologies may make the Company's products obsolete or less competitive. There
can be no assurance that the Company will be able to develop a commercial market
for its products in response to future technology advances and developments.
DEPENDENCE ON FOUNDER; NEED FOR ADDITIONAL QUALIFIED PERSONNEL
The foundation of the Company's business has been based upon the ideas
and contacts of its co-founder and Chief Executive Officer, Michael P. Ferderer.
Mr. Ferderer, however, has limited experience in operating a business. Although
Mr. Ferderer has knowledge of the telecommunications industry, his experience in
the computer or internet related industry is minimal. Mr. Ferderer's background
and abilities are in marketing and sales and not the operations, management or
finance of a business. The Company does not have personnel with any significant
finance and accounting background. The Company does not have any personnel who
is familiar with generally accepted accounting principals to prepare, monitor
and organize its books and records. The Company has had difficulties properly
maintaining its books and records.
The Company must hire additional personnel to grow and develop the
Company and its products. The Company plans to hire additional personnel, but
can offer no assurances that it will succeed in hiring and retaining qualified
personnel. The loss of qualified personnel or the inability to hire and retain
qualified personnel may have a material adverse effect on the Company and its
business.
12
<PAGE>
DEPENDENCE ON NIKKO, MAXWOOD AND NIKKO MULTI MEDIA
The Company has granted Nikko Multi Media, a exclusive world-wide right
to use, manufacture, market and distribute the Set Top Box and its related
products. The Company will be dependent on the efforts of Nikko Multi Media,
with the assistance of the Company, Nikko and Maxwood, to manufacture, market
and distribute its products. The Company's sole source of revenue will be 5% of
the cost of each Set Top Box unit sold by Nikko Multi Media and its 50% interest
in Nikko Multi Media. Any distributions from Nikko Multi Media will require the
consent of Nikko and is made after repayment of loans made by Nikko. The Company
can offer no assurances that Nikko Multi Media will be able to successfully
manufacture, market and sell any of its products or that Nikko Multi Media will
ever become profitable. Further, even if Nikko Multi Media does become
profitable, there can be no assurances that any of the profits will be
distributed to the Company in the foreseeable future.
CONDITION OF RECORDS
The Company is a development stage company and has limited resources to
dedicate to record keeping. All records are maintained at the Company's
principal office in Eden Prairie, Minnesota. The Company does not have
sufficient qualified personnel to properly maintain and organize the Company's
records. The Company hopes to hire additional personnel to properly maintain and
organize all of its records. There can be no assurances that the Company will be
able to hire such personnel or that such personnel will be able to successfully
maintain or organize all of the Company's current and future records.
CONFLICTS OF INTERESTS
There are several potential conflicts of interest that exist between
the Company and related parties, including but not limited to: (i) Mr. Ferderer,
who is the Chief Executive Officer, sole director and principal shareholder of
the Company, (ii) Mr. Ferderer's spouse, Pamela J. Holl is the Vice President of
Engineering and Operations of the Company, (iii) Mr. Ferderer's daughter is an
employee of the Company, (iv) MPF, Inc., a company wholly owned by Mr. Ferderer
is a party to several transactions with the Company, (v) FutureComm, Inc., a
company owned by Mr. Ferderer, a non-affiliated minority shareholder and Joe
Novogratz, a principal shareholder of the Company, is a party to a transaction
with the Company, (vi) the Company leases office, warehouse and production space
from Equitable Holdings, Inc., a company wholly owned by Mr. Novogratz, and (vi)
Michael Pint and Thomas Schrade, both principal shareholders of the Company are
parties to transactions with the Company. Many transactions between the Company
and these parties have not been approved by independent directors and may not be
at arms-length.
PRODUCT LIABILITY RISKS
The Company must inherently face risks of exposure to product
liability. Currently, the Company does not maintain product liability insurance.
The Company may, in the future, attempt to obtain product liability insurance to
minimize its exposure. However, such insurance is expensive and the Company can
offer no assurance that it will be able to procure such insurance. A successful
product liability claim in the absence of adequate insurance will have a
material adverse effect on the Company and will threaten its ability to continue
to exist.
PENNY STOCK REGULATION
The Company's common stock is a penny stock within the meaning of the
SEC rules. See section entitled "Penny Stock Regulation" in Item 8.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS
PLAN OF OPERATION
Historically, the Company has relied upon private sales of bridge
notes, notes payable, and equity securities to investors, as well as upon
capital contributions and advances from existing shareholders and employees to
fund its operations.
13
<PAGE>
To date, the Company has raised over $4.5 million from these transactions and
has incurred a substantial amount of debt. The Company does not have adequate
funds to commercially produce, market and sell its products. The Company does
not believe that it has sufficient funds available to satisfy its debt
obligations and operating needs for the next twelve months and will need to
raise additional funds in order to support such operations. The Company
believes, but can offer no assurances, that it will be able to defer some of its
current liabilities, and estimates that its cash flow requirement for the next
twelve months is as follows:
Research & Development $ 123,000
Legal and Accounting Fees $ 118,000
Repayment of current liabilities, interest and obligations $ 312,000
Trade Shows $ 35,000
Payroll $ 516,000
Monthly Operating Expense (rent, utilities, etc.) $ 120,000
Consulting Fees $ 50,000
Capital contribution to NIKKO Multi Media, Inc. $ 25,000
Travel $ 100,000
Miscellaneous Expenses $ 78,000
----------
TOTAL $1,477,000
For the period ended December 31, 1999, approximately $165,098 was
spent on research and development. However, additional financing will be
required to complete development and enhancement of the Set Top Box and to bring
them to market. For the next 12 months, the Company anticipates spending
approximately $123,000 on research and development. However, the Company can
offer no assurances that this amount will be sufficient to complete research and
development. The Company has commenced pre-production engineering and
anticipates, but offers no assurances, that the Set Top Box will be ready for
high volume manufacturing later this year. The Company hopes, but offers no
assurances, that it will begin generating revenues from the sale of the Set Top
Boxes near the end of fourth quarter 2000 or the beginning of first quarter
2001.
The Company does not anticipate any significant sales or purchases of
plant or equipment that may materially impact its financial condition. The
Company may hire additional personnel, but does not anticipate any significant
changes to the number of its employees.
LIQUIDITY AND CAPITAL RESOURCES
For the years ended December 31, 1998 and December 31, 1999, the
Company had negative cash flows from operating activities of ($1,303,814) and
($966,692), respectively. This includes expenditures of $731,362 and $165,098
for research and development during the period ended December 31, 1998 and 1999,
respectively. The Company expensed $1,275,858 and $1,437,669 on payroll,
contract labor and general and administrative expenses during the period ended
December 31, 1998 and 1999, respectively. Of this amount, for the period ended
December 31, 1998 and 1999, $139,908 and $107,890, respectively was attributable
to depreciation and amortization, which does not impact cash flow. The Company
paid part of its payroll and administrative expenses through the issuance of
common stock, options and warrants in the amount
14
<PAGE>
of $26,250 and $319,378 for the year ended December 31, 1998 and 1999,
respectively. In 1998, the Company reduced pre-paid expenses by $31,018 and
deferred payment of certain obligations which increased accounts payables and
accrued expenses by $514,685. In 1999, the Company reduced pre-paid expenses by
$51,786 and deferred payment of certain obligations which increased its account
payables and accrued expenses by $71,272. Also in 1999, a non-cash impacting
write-off of $87,645 was recorded for the write-off of the Flagstick note
receivable.
In 1998 the Company made an investment of $100,000 in a note receivable
from Flagstick and $50,000 in common stock of Cyrus. The Company received a
payment of $25,000, of which $14,505 was applied principal and $10,495 to
accrued interest, from Flagstick. The Company accrued interest of $2,150 on the
note in 1998. The Company has not received any other payments on the note. Along
with investments in property and equipment of $11,360 and $3,006 for the period
ended December 31, 1998 and 1999, the Company's net cash flows from investing
activities for such periods were ($149,005) and ($3,006), respectively. In 1999,
the Company also acquired $112,892 worth of property and equipment through the
issuance of its common stock.
The Company has historically financed its operations through the
issuance of bridge notes, notes payable and common stock. In 1998, proceeds of
$818,890 were received through the issuance of notes payables, of which $102,641
were from related parties. The Company paid debt placement costs of $115,848 and
repaid $1,555 of principal on the notes. In 1999, $916,103 was raised through
the issuance of notes payables and $127,500 from the issuance of common stock
and warrants. The Company also repaid $38,885 of its notes payable. For the
period ended December 31, 1998 and December 31, 1999, the Company had positive
cash flows of $701,487 and $1,004,718 from financing activities. In 1999,
$1,221,250 of bridge notes and notes payables were converted into common stock
of the Company.
The Company is still in the development stage and its products are
subject to rapid changes in technology. From its inception, the Company has
never had any significant sales of its products and had more expenses than
income in each year of its operations. The accumulated deficits at December 31,
1998 and December 31, 1999 were ($3,816,286) and ($5,475,619), respectively.
Management anticipates that net losses will continue in the foreseeable future.
The Company has been able to maintain a positive cash position solely through
financing activities. The Company's total current liabilities significantly
exceed its total assets. As of December 31, 1999, the Company's cash and cash
equivalents totaled $37,778. It had current assets totaling $38,659 and total
current liabilities of $1,326,546. Additional financing will be necessary to
complete development of the Company's products and to bring them to market. As a
result, the independent auditor has issued a going concern opinion and has
expressed substantial doubt regarding the Company's ability to continue as a
going concern.
Subsequent to year end, the Company has raised $1,629,000 through the
sale of 5,618,560 shares of common stock. The Company believes the capital
infusion will help cover current liabilities and operating expenses for calendar
year 2000, but will not relieve it of the need to raise additional funding. As
of December 31, 1999, the Company's total current liabilities were $1,298,416,
excluding $28,130 in deferred revenues. The Company will require approximately
$370,662 just to service its notes payable. The Company does not believe that it
has sufficient funds available to satisfy its current obligations and to fund
its calendar year 2000 operating expenses. Management plans to continue to
pursue additional financing through the issuance of debt or common stock. It
anticipates that this will be accomplished through another round of private
placements. There are currently no identifiable source of funding and the
Company anticipates seeking the assistance of an investment firm to help secure
viable sources of capital. If additional capital is not secured, there is
substantial doubt as to whether the Company will be able to continue as a going
concern for the remainder of calendar year 2000.
The Company anticipates, but can offer no assurances, that it will
begin generating revenues from Nikko Multi Media during the end of fourth
quarter 2000 or early first quarter 2001, but such revenues alone may be
insufficient to satisfy its current liabilities and operating expenses for the
next 12 months. The Company believes, but offers no assurances, that if it can
successfully develop its products, proceed with high volume manufacturing and if
Nikko Multi Media successfully commences distribution of its products, it will
be able to generate revenues that should enable it to continue as a going
concern after the year 2000.
15
<PAGE>
Other than as described above, there are no known trends, events or
uncertainties that are likely to have a material impact on the short or long
term liquidity of the Company. The primary source of liquidity in the future
will be additional financing and sales of its products. Other than $25,000 to
capitalize Nikko Multi Media, there are no material commitments for capital
expenditures. The Company currently does not know when it will make its $25,000
contribution to Nikko Multi Media. This commitment is expected to be determined
at the next meeting of the Board of Directors of Nikko Multi Media. The Company
anticipates, but can offer no assurance, that the next meeting of the Board of
Directors of Nikko Multi Media will be held toward the end of third quarter or
early fourth quarter of this year. There are no known trends, events or
uncertainties reasonably expected to have a material impact on the revenues or
income from continuing operations of the Company. Any income or loss generated
will be from continuing operations and there are no seasonal aspects to the
business of the Company.
ITEM 3. PROPERTIES
The Company leases office, warehouse and production space located at
7667 Equitable Drive, Eden Prairie, Minnesota from Equitable Holdings, Inc., a
principal shareholder. Other than cash or cash equivalents, intangibles and
trade show equipment and displays, all of the Company's property and equipment
are located at the above address. As of December 31, 1999, the Company had,
valued at cost, equipment of $81,755 and leasehold improvements of $101,887 less
accumulated depreciation of $51,024. Equipment consists primarily of office
equipment, furniture and fixtures, and production and testing equipment, all of
which are in good working condition. Leasehold improvements includes costs
incurred to modify the leased space to meet with the Company's requirements and
are permanently fixed to the real estate. None of the leasehold improvements is
salvageable if the Company is unable to renew its lease or moves to a new
location.
The Company's trade show equipment and displays are located at Tiberti
Mini Storage, 4780 Valley View, Las Vegas, Nevada. These consist primarily of
television sets, rugs, monitors, display booths and miscellaneous trade show
materials. These property are secure and are in good working condition. The
Company estimates these property have a fair market value of less than $20,000.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information discloses security ownership of certain beneficial
owners and management as of September 8, 2000.
<TABLE>
<CAPTION>
Name and Address of Number of
Beneficial Owner Shares(1)(2) Percent (%) of Shares(1)
------------------- ------------ ------------------------
<S> <C> <C>
Michael P. Ferderer 6,625,005(1) 19.2%
7667 Equitable Drive, Suite 101
Eden Prairie, Minnesota 55344
Pamela J. Holl 75,833(2) .2%
7667 Equitable Drive, Suite 101
Eden Prairie, Minnesota 55344
Thomas Schrade 6,374,330(3) 18.5%
23 Cascade Creek Lane
Las Vegas, Nevada 89113-1245
Michael Pint 2,511,973(4) 7.3%
1235 Yale Place
Minneapolis, Minnesota 55403
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<PAGE>
Equitable Holdings, Inc. 1,738,335(5) 5.1%
c/o Joseph Novogratz
7667 Equitable Drive
Eden Prairie, Minnesota 55344
All Officers and Directors as a Group 6,700,838 19.4%
</TABLE>
(1) Mr. Ferderer holds 6,000,005 shares in his name. The total includes
250,000 shares held by MPF, Inc., a company wholly-owned by Mr.
Ferderer, options for 125,000 shares held by Mr. Ferderer and warrants
for 250,000 shares held by MPF, Inc. which are exercisable within 60
days of September 8, 2000. Mr. Ferderer's total excludes shares held by
his wife, Pamela J. Holl.
(2) Ms. Holl holds 25,000 shares in her name. The total includes options
for 33,333 shares and warrants for 17,500 shares which are exercisable
within 60 days of September 8, 2000. Ms. Holl's total excludes shares
held by her husband, Michael P. Ferderer.
(3) Mr. Schrade holds 6,000,000 shares in his name. The total includes
options for 1,000 shares and warrants for 373,330 shares exercisable
within 60 days of September 8, 2000.
(4) Mr. Pint holds 2,375,079 shares in his name. The total includes 20,000
shares held by his children, options for 40,000 shares and warrants for
76,894 shares exercisable within 60 days of September 8, 2000.
(5) Equitable Holdings, Inc. is wholly owned by Joseph Novogratz, who holds
1,443,335 shares. The total includes options for 120,000 shares and
warrants for 175,000 shares exercisable within 60 days of September 8,
2000.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
The officers and directors of the Company are:
Name Age Offices
---- --- -------
Michael P. Ferderer 53 Chairman of the Board and sole director,
Chief Executive Officer and Secretary
Pamela J. Holl 50 Vice President of Engineering and Operations
Following is a brief summary of the business experience of each of the
officers and directors of the Company.
MICHAEL P. FERDERER -CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER AND
SECRETARY
Michael P. Ferderer has been Chairman and Chief Executive Officer of
the Company since its inception. His career assignments include 25
years with US West, specializing in land-line communication products to
the wireless communications industry as an Account Manager as well as a
host of other supporting assignments. Prior to joining US West, Mr.
Ferderer served with the United States Navy and Naval Reserve working
primarily on communications. Mr. Ferderer attended the University of
Minnesota where he obtained his degree in business and Labor Relations.
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PAMELA J. HOLL -VICE PRESIDENT OF ENGINEERING AND OPERATIONS
Pamela J. Holl is the spouse of Michael P. Ferderer and joined the
Company in June of 1999. Prior to joining the Company she served as a
consultant in computer telephony integration for various companies. Ms.
Holl's 27-year career includes experience in telecommunications,
project management and enterprise resource planning. She is a graduate
of the University of Minnesota and the University of Minnesota's
Carlson School's Minnesota Management Institute.
ITEM 6. EXECUTIVE COMPENSATION.
COMPENSATION SUMMARY
The following table shows the compensation earned for services rendered
in all capacities to the Company by the Chief Executive Officer and the other
most highly compensated executive officer of the Company whose salary and
bonuses exceeded $100,000 for the year ended December 31, 1999 (the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
--------------------- ---------------------
NAME AND FISCAL SECURITIES UNDERLYING
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS (# SHARES)
------------------ ---- ------ ----- ------------------
<S> <C> <C> <C> <C>
MICHAEL P. FERDERER 1999 $100,000 $0 0
Chairman of the Board 1998 $100,000 $0 125,000
Chief Executive Officer 1997 $100,000 $0 0
and Secretary
</TABLE>
Mr. Ferderer was not granted any options during the year ended December
31, 1999. Mr. Ferderer did not exercise any options during the year ended
December 31, 1999.
EMPLOYMENT AGREEMENTS
On January 1, 2000, the Company entered into an employment contract
with Mr. Ferderer to employ him as Chief Executive Officer for 5 years at
$100,000 per year along with benefits and discretionary bonuses to be awarded at
the sole discretion of the Board of Directors. To date, the Company has not paid
any bonuses to Mr. Ferderer. The agreement contains an 18 months non-compete
clause or if termination is without cause, then for the period of time during
which "termination pay," as defined below, is paid by the Company.
Pursuant to the agreement, the Company cannot terminate Mr. Ferderer
except for cause, such as failure or refusal to perform duties of employment for
a period of 15 days after written notice from the Company, gross misconduct
relating to dishonesty or misappropriation of Company property, theft,
conviction of a crime, acts of disloyalty, or breach of the employment
agreement, including duties of confidentiality and non-disclosure.
If employment is terminated in the event of death, the Company shall
pay to a designated beneficiary or to Mr. Ferderer's estate, his base salary for
a period of 3 months after death. If employment is terminated because of
disability caused by injury or illness and Mr. Ferderer is unable to render
services for a period of 90 days, then the Company shall continue to pay him his
base salary during the period of disability for a period of 3 months following
termination of employment. If termination is for cause, then the Company must
compensate Mr. Ferderer for all services rendered but not yet paid, including
accrued vacation and benefits. If Mr. Ferderer is terminated without cause, he
would be entitled to receive "termination pay" equal to his remaining base
salary plus health and dental insurance which would otherwise be payable over
the remainder of the employment agreement and to participate in any
compensation, pension or profit sharing plan established
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by the Company. Such payment must be made, at the discretion of Mr. Ferderer,
either in semi-monthly installments or as a lump sum payment based upon the
present value of the future payments.
COMPENSATION OF DIRECTORS
The Company currently has no outside directors. In 1997, 1998 and 1999,
the Company did have outside directors. In the past, the Company granted options
to outside directors. Outside Directors receive no cash compensation for their
services on the Company's Board of Directors. However, each outside director was
granted an option to purchase 120,000 shares of the Company's common stock on
the date he or she becomes a director at an exercise price equal to fair market
value at the time of grant. The options will vest and become exercisable at a
rate of 1/3 after 6 months from the date of grant, 1/3 after 12 months from the
date of grant and the remaining 1/3 after 24 months from the date of grant. On
the date of each annual meeting of the shareholders, each outside director will
automatically receive an option to purchase 30,000 shares of the Company's
common stock at an exercise price equal to fair market value on the date of
grant. Such options will vest and become exercisable after six months from the
date of grant. All vested options granted to outside directors will expire the
shorter of 10 years from the date of grant or 5 years after the holder ceases to
be a director. Employee directors of the Company are not compensated for their
service on the Board of Directors.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Since its origin, the Company has engaged in several transactions with
related parties. The Company believes that the terms and conditions of the
transactions with these related parties were at least as favorable to the
Company as those it could have obtained from unrelated third parties through
arms-length negotiations. However, the Company currently does not have outside
directors to evaluate related party transactions.
ORIGIN. The Company was capitalized with limited cash investments and transfers
of technology from Michael P. Ferderer and SAC, the founders of the Company. Mr.
Ferderer contributed $2,000, a Central Terminal System/Internet Access Switch
known as the I-PAD, along with engineering design drawings and specifications,
program and program documentation and codes. The Company issued 6,000,000 shares
of common stock to Mr. Ferderer for his contributions. SAC contributed
preliminary components for a Set Top Box, and the MUX-Panel and DATA-COP system
for 6,000,000 shares of common stock of the Company. The technology contributed
by Mr. Ferderer was valued by the Company at $38,000. The technology contributed
by SAC was valued by the Company at $40,000. For financial accounting purposes,
no value was recorded for the technologies contributed by either party since
such were internally developed and had no accounting value.
SUPPORT SERVICES, SUBLEASE AND EQUIPMENT SHARING AGREEMENT. In September 1996,
the Company entered into a sublease and equipment sharing agreement with MPF,
Inc., a corporation wholly owned by the Company's Chairman and Chief Executive
Officer, Michael P. Ferderer. The agreement continues on a monthly basis, and
requires the Company to provide office space to MPF at a rate of $624 per month.
On March 1,1997, the rate was reduced to $531 per month as MPF moved to a
smaller office space. Under the sharing agreement, MPF provides the Company with
telecommunication services such as telephone numbers and installations, and
permits the Company to use its office furniture and equipment for a monthly fee
of $500. The total sublease income was $6,372 for the years ended December 31,
1998 and 1999, respectively, and total annual equipment rent expense was $6,000
for the years ended December 31, 1998 and 1999, respectively.
On September 1, 1996, the Company entered into a support services
agreement with MPF, Inc. ("MPF") for local and long distance carrier services to
be paid monthly based on actual usage. Pursuant to the agreement, MPF agreed not
to market or sell internet access switches or services directly in competition
with the Company except in the Minneapolis-St. Paul area of Minnesota. The three
year agreement is subject to termination or renewal as provided in the
employment agreement of Michael P. Ferderer. The agreement was terminated in
January 2000, at which time the Company engaged a new carrier to provide
service.
TECHNICAL SUPPORT AGREEMENT. On November 1, 1996, the Company entered into a
technical support and cooperative development agreement with SAC. Pursuant to
this agreement, SAC provided technical support regarding the Set Top Box, and
was to design, develop and deliver the MUX-Panel and DATA-COP system in
accordance with detailed specifications.
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For its services, the Company agreed to pay SAC $15,566 per month for the first
six months and $11,667 per month thereafter, for an additional 30 months.
Expenses related to this agreement for the year ended December 31, 1997 were
$156,000. On December 31, 1997, the agreement was terminated by agreement of the
parties. At the time of termination, the Company was discharged from the $42,621
which it owed SAC. The discharge was accounted as a contribution and recorded as
common stock.
EMPLOYMENT AGREEMENTS. On September 1, 1996, the Company executed an employment
agreement with Michael P. Ferderer in which he would be employed as Chief
Executive Officer of the Company for a period of 3 years at $100,000 per year
plus discretionary bonuses to be awarded at the sole discretion of the Board of
Directors. No bonuses were paid to Mr. Ferderer under this agreement. On January
1, 2000, the Company renewed its employment agreement with Mr. Ferderer to
employ him as Chief Executive Officer for a period of 5 years at $100,000 per
year along with benefits and discretionary bonuses to be awarded at the sole
discretion of the Board of Directors. See Employment Agreements Under Item 6.
LEASED PROPERTY. The Company leases space from Equitable Holdings, Inc.
("Equitable"), a principal shareholder. The lease will expire on September 30,
2002 and requires the Company to pay a monthly base rent plus real estate taxes
and operating expenses. Pursuant to an amendment on November 5, 1996, Equitable
agreed to accept 333,335 shares of the Company's common stock and a warrant to
purchase 125,000 shares at $.35 per share exercisable from March 1, 1998 to
December 31, 1999 as payment in full for all of the Company's rent and tenant
improvement obligations from September 1, 1996 to May 31, 1999. In 1999, the
exercise period of the warrant was extended to December 31, 2000. The Company
valued the transaction at $100,000 and allocated it between rent expense and
pre-paid rent. For the period ended December 31, 1998 and 1999, $36,360 and
$15,150, respectively, of prepaid rent was amortized. In 1998 and 1999, the
Company acquired additional space from Equitable to expand its warehouse and
production areas. In June 1999, the Company issued 500,000 shares of common
stock to Equitable for past leasehold improvements made to the Company's leased
premises. The transaction was valued at $100,000. In September 1999, the Company
paid all of its current and past due rent obligations up until October 31, 1999,
by issuing 610,000 shares of common stock valued at $.10 per share and warrants
to purchase 50,000 shares of common stock exercisable at $1.50 per share to
Equitable. The Company paid a total of $11,690.42 in cash to satisfy its rent
liabilities in November and December of 1999 and is current with its rent
obligations. The Company's future minimum annual base rents for the year 2000,
2001 and 2002 are $69,324, $69,324 and $51,993, respectively.
ACQUISITIONS. In June 1999, the Company acquired the assets of FutureComm, an
internet services division of MPF. Pursuant to the transaction, the Company
acquired the name FutureComm and its Internet Service Provider ISP switches,
along with its servers, modems, software, approximately 200 internet subscribers
and customer lists and its Customer Service Unit/Demark Service Unit. In return,
MPF received 250,000 shares of the Company's common stock and a warrant to
purchase an additional 250,000 shares of common stock at an exercise price of
$.70 per share. The transaction was recorded on a historical cost basis of
$12,892. The Company estimates the fair value of the 250,000 shares of common
stock to be approximately $175,000.
In June 1999, the Company also agreed to acquire FutureComm, Inc.,
which was owned by Equitable, Michael P. Ferderer and a non-affiliated minority
shareholder of the Company. In April 1999, Mr. Ferderer surrendered all of his
interests in the company back to FutureComm, Inc. The Company agreed to issue
500,000 shares of common stock and a warrant to purchase an additional 500,000
shares of common stock at an exercise price of $.70 per share to FutureComm,
Inc.'s remaining shareholders. The transaction would give the Company telephone
line switches, telephone licenses, NPA/NXX code 612-468, CSU's paging terminal
and the use of the FutureComm, Inc. name. However, the Company has not issued
any stock or warrants pursuant to the FutureComm, Inc. acquisition because
FutureComm, Inc. has not yet conveyed the agreed upon telecommunication
licenses. The Company is currently in discussion with FutureComm, Inc. and
anticipates that the matter will be resolved in the near future.
ACCOUNTS OR NOTES PAYABLE TO RELATED PARTIES. In December 1998, Pamela J. Holl,
a spouse of a principal shareholder and officer of the Company invested $17,500
and received 25,000 shares of common stock and a five year warrant to purchase
17,500 shares of common stock at $.84 per share. The Company also entered into
consulting agreements with such individual. For the period ended December 31,
1998 and 1999, expenses of $80,850 and $9,050, respectively, were recorded for
such services. She is now the Company's Vice President of Engineering and
Operations.
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As of December 31, 1998 the Company had $256,515 in accounts payable to
related parties. This includes a payable of $10,921 to MPF, Inc. for payment of
certain expenses it made on behalf of the Company, a payable to Mr. Ferderer in
the amount of $41,140 for cash advances he made to the Company, a note payable
to Ms. Holl in the amount of $44,000, with interest at a rate of 12% per annum,
for cash advances she made to the Company, plus accrued interest of $2,440, a
loan payable to Ms. Holl in the amount of $17,500, and consulting fees of
$140,514 relating to research and development of the Set Top Box, payable to Ms.
Holl and a member of the Company's advisory board. As of December 31, 1999, the
Company had $281,945 in accounts payable to related parties. This consists of a
payable of $13,238 to MPF, Inc. for payment of certain expenses it made on
behalf of the Company, a payable to Mr. Ferderer in the amount of $40,858 for
cash advances he made to the Company, a note payable to Ms. Holl in the amount
of $50,100, with interest at a rate of 12% per annum, for cash advances she made
to the Company, plus accrued interest of $7,565, and consulting fees of $170,184
for services relating to the research and development of the Set Top Box,
payable to Ms. Holl and a member of the Company's advisory board. Total interest
expense to related parties were $2,440 and $9,278 for the years ended December
31, 1998 and 1999, respectively. As of December 31, 1998 and 1999, the Company
had accrued payroll expenses of $18,526 and $63,803 payable to an officer and
principal shareholder, his spouse and his daughter.
In 1997, pursuant to a private placement, Thomas J. Schrade acquired
250,000 shares of common stock of the Company for $157,500. In January 1999, Mr.
Schrade loaned $150,000 to the Company with interest at 12% and a warrant to
purchase 350,000 shares of common stock at an exercise price of $.84 per share.
The note is secured by 76,923 shares of common stock of Cyrus owned by the
Company. As of December 31, 1999, the outstanding principal balance on the note
was $146,603. In February 1999, Mr. Schrade purchased 3,000,000 shares of common
stock from SAC and became a principal shareholder of the Company. On May 18,
1999, the Company issued to Mr. Schrade a promissory note for $8,500 with
interest at 12% per year and warrants to purchase 23,330 shares of common stock
at an exercise price of $.84 per share for his $8,500 loan to the Company. On
September 16, 1999, Mr. Schrade loaned $20,000 to the Company for payroll. On
October 1, 1999, in appreciation of Mr. Schrade's loan, the Company granted him
an option to purchase 1,000 shares of its common stock at an exercise price of
$.35 per share. The loan was fully repaid on October 5, 1999. In November 1999,
Mr. Schrade purchased the remaining 3,000,000 shares of common stock of the
Company held by SAC.
In June 1999, Michael Pint, a former Infopac shareholder became a
minority shareholder of the Company pursuant to the Infopac acquisition. During
May and June 1999, Mr. Pint had loaned a total of $600,000 to the Company with
interest at 2% plus prime interest rate. In June 1999, he received 718,830
shares of common stock of the Company for conversion of the $600,000 notes
payables from the Company. In 1999, he loaned $100,000 to the Company at
interest of 2% plus prime interest rate and was issued warrants to purchase
54,894 shares of common stock at an exercise price of $.84 per share. The note
is convertible into 1,000,000 shares of common stock at a rate of $.10 per
share. In December 1999, he also loaned $22,000 to the Company at interest of 2%
plus prime interest rate and was granted a warrant to purchase 22,000 shares of
common stock exercisable at $1.50 per share. On September 15, 1999, the Company
issued Mr. Pint a $30,000 convertible note for his $30,000 loan to the Company.
The note bears interest at 2% plus prime interest rate and is convertible into
common stock of the Company at a rate of $.10 per share. As of December 31,
1999, the outstanding principal balance on the loans were $152,000. In March
2000, the Company issued Mr. Pint 1,065,340 shares of common stock for
conversion of a $100,000 note payable and accrued interest.
On December 15, 1999, the Company issued 100,000 shares of common stock
and warrants to purchase 50,000 shares of common stock of the Company at an
exercise price of $1.50 per share exercisable over five years to the parents of
an officer and principal shareholder of the Company in exchange for their
$10,000 investment.
ITEM 8. DESCRIPTION OF COMPANY'S SECURITIES.
Under its Articles of Incorporation, the Company's authorized capital
stock consists of 50,000,000 shares of common stock, no par value. All of the
issued and outstanding shares of the Company's common stock are duly authorized
and validly issued, fully paid and nonassessable. Each share of Common Stock
entitles the holder thereof to one vote, in person or by proxy, upon all matters
submitted for a vote by the shareholders of the Company. Holders of shares of
common stock do not have cumulative voting rights for the election of directors.
Thus, the owners of a majority of the voting power outstanding may elect all of
the directors, if they choose to do so, and the owners of the balance of such
shares would not be able to elect
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any directors. Each share of common stock is entitled to participate equally in
dividends as and when declared by the Board of Directors of the Company out of
funds legally available, and is entitled to participate equally in the
distribution of assets in the event of liquidation. All shares, when issued and
fully paid, are nonassessable and are not subject to redemption or conversion
and have no conversion rights.
ANTI-TAKEOVER PROVISIONS OF MINNESOTA BUSINESS CORPORATION ACT
Section 302A.671 of the Minnesota Business Corporation Act provides
that, unless the acquisition of certain new percentages of voting control (in
excess of 20%, 33 1/3% or 50%) by an existing shareholder or other person is
approved by a majority of the Company's disinterested shareholders, the shares
acquired above such new percentage level will have no voting rights. The Company
is required to hold a special shareholders' meeting to vote on any such
acquisition within 55 days after the delivery to the Company by the acquirer of
an information statement describing, among other things, the acquirer and any
plans of the acquirer to liquidate or dissolve the Company and copies of
definitive financing agreements for any financing of the acquisition not to be
provided by funds of the acquirer. If any acquirer does not submit an
information statement to the Company within ten days after acquiring shares
representing a new threshold percentage of voting control, or if the
disinterested shareholders vote not to approve such an acquisition, the Company
may redeem the shares so acquired by the acquirer at their fair market value.
Section 302A.671 generally does not apply to a cash offer to purchase all shares
of voting stock of the issuing corporation if such offer has been approved by a
majority vote of disinterested board members of the issuing corporation.
Section 302A.673 of the Minnesota Business Corporation Act restricts
certain transactions between the Company and a shareholder who becomes the
beneficial holder of 10% or more of our outstanding voting stock (an "interested
shareholder") unless a majority of the disinterested directors have approved,
prior to the date on which the interested shareholder acquired a 10% interest,
either the business combination transaction suggested by such a shareholder or
the acquisition of shares that made such a shareholder a statutory interested
shareholder. If such prior approval is not obtained, the statute imposes a
four-year prohibition on mergers, sales of substantial assets, loans,
substantial issuances of stock and various other transactions involving the
Company and the interested shareholder or its affiliates.
These statutory provisions could, in certain circumstances, delay or
prevent a change in control of the Company.
PENNY STOCK REGULATION
Broker-dealer practices in connection with transactions in "penny stocks" are
regulated by certain penny stock rules adopted by the Securities and Exchange
Commission. Penny stock generally are equity securities with a price of less
than $5.00 (other than securities registered on certain national securities
exchanges or quoted on the Nasdaq system, provided that current price and volume
information with respect to transactions in such securities is provided by the
exchange or system). The penny stock rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document that provides information about penny
stocks and the risks in the penny stock market. The broker-dealer must also
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson in the transaction,
and monthly account statements showing the market value of each penny stock held
in the customer's account. In addition, the penny stock rules generally require
that prior to a transaction in a penny stock the broker-dealer make a special
written determination that the penny stock is a suitable investment for the
purchaser and receive the purchaser's written agreement to the transaction.
These disclosure requirements may have the effect of reducing the level of
trading activity in the secondary market for a stock that becomes subject to the
penny stock rules. The Company's securities are subject to the penny stock
rules, and investors may find it more difficult to sell their securities.
TRANSFER AGENT AND REGISTRAR
Fidelity Transfer Company has been appointed as the transfer agent and
registrar for our common stock.
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PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
The Company's common stock has been traded since June, 1999 on the OTC
Bulletin Board under the symbol "IPCN." Prior to that time, none of its
securities were publicly traded.
The following table sets forth for the periods indicating the range of
high and low closing bid quotations per share as reported by the
over-the-counter market. These quotations represent inter-dealer prices, without
retail markups, markdowns or commissions and may not necessarily represent
actual transactions.
Price per Share
---------------
High Low
---- ---
Third Quarter (July 1, 1999 $2.065 $0.56
through September 30, 1999)
Fourth Quarter (October 1, 1999 $0.875 $.25
through December 31, 1999)
HOLDERS
The Company believes that as of September 8, 2000, there are
approximately 98 shareholders of the common stock of the Company. In addition,
there were shares held in street name for an undetermined number of additional
shareholders. The Company only has one class of common equity security.
DIVIDENDS
The Company has never declared a cash dividend on its common stock and
does not anticipate declaring any cash dividends in the foreseeable future.
Under the Minnesota Business Corporations Act, the Board of Directors cannot
declare a cash dividend unless the Company is able to satisfy all of its debts
in the ordinary course of business after such dividends are declared. There are
no other restrictions on the Company's ability to declare cash dividends.
ITEM 2. LEGAL PROCEEDINGS
The Company is the plaintiff in a case filed in Colorado District
Court, El Paso County, against Flagstick Enterprises, Inc ("Flagstick"). The
case concerns a promissory note issued by Flagstick to the Company in the amount
of $100,000. Flagstick was in default on the note in 1998 and in August 1999,
the Company brought suit to recover due and unpaid principal and interest. On
October 22, 1999, the Company obtained judgment against Flagstick from the
Colorado District Court in the amount of $100,140.67, consisting of due and
unpaid principal, interest and costs. To date, the Company has not collected on
any of the judgment and has referred the matter to a collection agency. The
Company believes that successfully collecting on the judgment will help to
significantly improve its financial condition, but failure to collect will not
threaten its existence.
In October 1999, S & W Plastics, Inc. ("S & W") brought suit against
the Company in Minnesota District Court, Hennepin County, alleging the Company
still owed $108,800 for services rendered pursuant to a May 1998 agreement. The
agreement required S & W to manufacture, according to specifications provided by
the Company, casing for the Set Top Box. Upon delivery, the casing was not
molded correctly, did not fit properly and was not manufactured according to the
Company's specifications. The Company had already paid S & W a total of
$140,000. The Company has filed a counterclaim to recover the $140,000 paid and
lost profits for breach of contract. The Company anticipates the matter will go
to trial later this year. A successful outcome would significantly improve the
Company's financial position. If the Company is unsuccessful, it may have to pay
damages up to $108,800 plus interests and costs. An unfavorable outcome will
have a material adverse effect on the Company's financial condition and may
threaten its ability to continue as a going concern.
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ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements concerning matters of accounting
principals or financial statement disclosure between the Company and its
accountants of the type requiring disclosure hereunder.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Since the Company's inception in 1996, the Company raised capital
pursuant to the following issuances of securities. Each of the following
transactions involved the offering of securities to a limited number of persons
who purchased the securities as an investment for his or her own account and not
with a view to distribution thereof pursuant to Rules 504, 505 or 506 under the
Securities Act of 1933, as amended (the "Act"). Based in part on the foregoing,
the Company believes that the transactions were exempt under Section 4(2) of the
Act, and from the Registration and prospectus delivery requirements of that Act
and from applicable state securities laws in the states where the purchasers
reside. All share issuances described below are adjusted to reflect a 5-for-1
forward stock split in June 1999.
In June 1996 the Company was founded by Michael P. Ferderer and SAC.
The Company was capitalized with limited cash investments and transfers of
technology from both Michael P. Ferderer and SAC. Mr. Ferderer contributed
$2,000, a Central Terminal System/Internet Access Switch known as the I-PAD,
along with engineering design drawings and specifications, program and program
documentation and codes. The technology contributed was valued by the Company at
$38,000. The Company issued 6,000,000 shares of common stock to Mr. Ferderer for
his contributions. SAC contributed preliminary components for a Set Top Box, and
the MUX-Panel and DATA-COP system for 6,000,000 shares of common stock of the
Company. The technology contributed was valued by the Company at $40,000. For
financial accounting purposes, no value was recorded for the technologies
contributed since such were internally developed and had no accounting value.
On November 5, 1996, the Company issued 333,335 shares of common stock
and warrants for 125,000 shares of common stock at an exercise price of $.35 per
share to the Company's landlord, Equitable, as rent payment from September 1,
1996 through May 31, 1999. The transaction was valued at $100,000 and was
partially recorded as pre-paid rent and amortized over the applicable period.
On November 29, 1996, the Company engaged Tuschner & Company, Inc.
("Tuschner") to act as agent for the Company in connection with the issuance of
$500,000 of bridge notes to nine non-affiliated investors. The notes paid
interest of 8% for two years and were convertible into common stock at the rate
of $.30 per share. Attached to the bridge notes are warrants to purchase an
aggregate 250,000 shares of common stock at an exercise price of $.35 per share.
Tuschner received a 10% commission in cash, a warrant to purchase 166,665 shares
of common stock at an exercise price of $.42 per share and a 3% expense
reimbursement.
In May 1997, for their services on the Board of Directors, the Company
issued to Joseph F. Novogratz, a principal shareholder and another member
options for each to purchase up to 120,000 shares of common stock at an exercise
price of $.35 per share to vest at the rate of 1/3 after 6 months from the date
of grant, another 1/3 after 12 months after the date of grant and the remaining
1/3 after 24 months after the date of grant.
In June 1997, the Company sold $197,500 in convertible bridge notes to
seven non-affiliated investors. These notes paid interest at 8% and were
convertible into shares of common stock at an exercise price of $.35 per share.
The Company engaged Tuschner to act as agent in connection with this financing
and paid them 2% of the aggregate proceeds. The bridge notes were accompanied by
warrants to purchase an aggregate of 98,750 shares of common stock at an
exercise price of $.45 per share.
In July of 1997, the Company entered into an agreement with a third
party to assist the Company in the development of plastic casings for its Set
Top Box. The agreement was for $53,000, of which $18,000 would be paid in
installment of $500 per month. The remaining $35,000 was paid with the issuance
of 25,000 shares of common stock on July 22, 1997, and an additional 75,000
shares of common stock on April 15, 1998.
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Also in August and September 1997, the Company raised $1,968,750
through a private placement of 4,375,000 shares of common stock to 100
non-affiliated investors. The Company paid a total of $107,539 in attorney fees
related to the offering. As agent, Tuschner received a total of $210,824 in
commissions and expense reimbursements. The Company paid a total of $107,539 in
attorney fees related to the offering. Tuschner also received warrants to
purchase 437,500 shares of common stock at an exercise price of $.54 per share
for its services.
In June and July 1998, the Company sold $700,000 in convertible bridge
notes to thirty-two non-affiliated investors. These notes paid interest at 8%
and were convertible into common stock at the rate of $.70 per share. The notes
were accompanied by five year warrants to purchase an aggregate of 350,000
shares of common stock at an exercise price of $1 per share. Tuschner acted as
the Company's agent in connection with this offering and received a 10% cash
commission, a 3% expense reimbursement and a warrant to purchase 100,000 shares
of common stock at an exercise price of $.84 per share.
In August 1998, pursuant to its stock option plan, the Company granted
10 employees options to purchase common stock of the company exercisable at $.70
per share, with the exception of the option to Michael P. Ferderer in which the
exercise price was $.77 per share. Each employee received options ranging from
7,000 shares to 120,000 shares. The aggregate number of shares underlying this
option grant were 587,500 shares.
On January 27, 1999, the Company issued to Thomas Schrade, a principal
shareholder, a note payable for $150,000 at 12% and a warrant to purchase up to
350,000 shares of common stock at an exercise price of $.84 per share. The note
is secured by 76,923 shares of common stock of Cyrus owned by the Company. On
the same day, the Company issued a 8% unsecured, convertible promissory note in
the amount $17,500 with a five-year warrant to purchase 17,500 shares of common
stock at an exercise price of $.84 per share to a non-affiliated investor. The
note is convertible into common stock of the company at an exercise price of
$.70 per share. The Company repaid the note in the first quarter of 2000.
On February 10, 1999, the Company issued 25,000 shares of common stock
to Pamela J. Holl, the current Vice President of Engineering and Operations and
spouse of an officer and principal shareholder of the Company, in exchange for
an investment of $17,500. Ms. Holl also received warrants to purchase an
additional 17,500 shares of the common stock of the Company at an exercise price
of $.84 per share. Also, employees of the company were granted options
exercisable at $.70 per share to purchase up to a total of 21,275 shares of
common stock of the Company. Also in February, pursuant to its Stock Option
Plan, the Company issued, to two members of its advisory board who assisted the
Company with research and development of the Set Top Box, stock options to
purchase an aggregate of 60,000 shares of common stock at an exercise price of
$.70 per share.
In March 1999, the Company authorized the issuance 500,000 shares of
common stock to Equitable, a principal shareholder, for $100,000 of tenant
improvements made to space leased by the Company. The shares were issued on June
7, 1999.
On April 30, 1999, the Company granted Michael Pint, a principal
shareholder, options to purchase 120,000 shares of common stock at an exercise
price of $.70 per share for his financial consulting services on the advisory
board. The options vest at a rate of 40,000 shares per year for three years.
On May 18, 1999, the Company issued to Thomas Schrade a promissory note
for $8,500 with interest at 12% per year and warrants to purchase 23,330 shares
of common stock at an exercise price of $.84 per share for his $8,500 loan to
the Company. On May 28, 1999, the Company granted its employees, advisory board
members and consultants options to purchase an aggregate of 517,815 shares of
common stock at an exercise price of $.70 per share. Also, the Company issued to
its outside counsel a promissory note for $56,514 and a five-year warrant to
purchase 80,725 shares of common stock at an exercise price of $.84 per share
for legal services rendered. The warrants will vest and become exercisable at a
rate of 16,145 shares per year for the shorter of 5 years or when the note is
repaid.
On June 7, 1999, the Company acquired FutureComm, a Division of MPF, in
exchange for 250,000 shares of the Company's common stock and warrants to
purchase up to an additional 250,000 shares of common stock at an exercise price
of $.70 per share. The Company valued FutureComm at approximately $175,000. The
Company also approved the
25
<PAGE>
acquisition of FutureComm, Inc. in exchange for 500,000 shares of common stock
and a warrant to purchase 500,000 shares of common stock at an exercise price of
$.70 per share. However, to date, the Company has not issued any shares or
warrants to FutureComm, Inc. as that transaction has not been completed. The
Company is currently in discussion with FutureComm, Inc. and anticipates that
the matter will be resolved in the near future.
On June 8, 1999, Infopac acquired all of the outstanding common stock
of the Company. Pursuant to a 5-for-1 stock split, the Company exchanged
3,946,667 shares of common stock for 19,733,335 shares of Infopac Systems'
common stock. After the transaction, a total of 24,064,935 shares of common
stock were outstanding, of which shareholders of the Company owned 19,733,335
shares and existing Infopac shareholders owned 4,331,600 shares.
In June 1999, the Company granted Pamela J. Holl, for her commencement
of employment with the Company, options to purchase 100,000 shares of common
stock at an exercise price of $.87 per share. The options will vest at a rate of
1/3 per year for a period of 3 years. On June 1, 1999, the Company issued 15,570
shares of common stock to a third party as a bonus for his research and
development services. In April 2000, for tax reasons, the shares were returned
to the Company. He received no consideration for returning his shares. Also on
June 1, 1999, the Company issued 1,940 shares of common stock to Rare Earth
Coatings for its services relating to the metalization of the Set Top Box
casing, 10,075 shares of common stock to Casco Products International for its
assistance in developing the keyboard for the Set Top Box, and 41,500 shares of
common stock to Quality Computer Products for providing custom cables for the
Set Top Box. The estimated total value of the services rendered was $37,406.98.
Also in June 1999, Michael Pint, a principal shareholder of the Company,
received 718,830 shares of common stock for conversion of $600,000 of the
Company's notes payables. He was also issued, for his $100,000 loan to the
Company, a convertible note for $100,000 with interest at 2% plus prime interest
rate and warrants to purchase 54,894 shares of common stock at an exercise price
of $.84 per share. The note is convertible at the rate of $.10 per share. In
March 2000, Mr. Pint converted the $100,000 note, plus accrued interest, into
1,065,340 shares of common stock of the Company at a conversion price of $.10.
In August 1999, the Company issued options to purchase 40,931 shares of
common stock exercisable at various prices to select employees as a bonus for
their continued service with the Company. On September 12, 1999, a former member
of the Advisory Board received 22,473 shares of common stock as payment for
services rendered from May 16, 1999 to September 30, 1999. The individual
assisted the Company with its market analysis of the Set Top Box. His services
were valued at $17,255. On September 15, 1999, the Company issued a $30,000
convertible note payable to Michael Pint, a principal shareholder, for a $30,000
loan. The note bears interest at 2% plus prime and is convertible into common
stock of the Company at a rate of $.10 per share.
On October 1, 1999 the Company issued to Equitable, 610,000 shares of
common stock and warrants to purchase 50,000 shares of common stock exercisable
at $1.50 per share as payment for past due rent and for its rent obligations
until October 31, 1999. The shares and warrants were issued to satisfy $61,139
of the Company's rent obligations for the period of October 1998 to October 1999
for additional space leased by the Company in October 1998 and from June 1999 to
October 1999 for its original leased premises.
On October 1, 1999, the Company issued to a non-affiliated investor, in
exchange for a $100,000 investment, 500,000 shares of common stock of the
Company and warrants to purchase an additional 50,000 shares of common stock at
an exercise price of $.30 per share. On the same day, in appreciation of Thomas
Schrade's loan to the Company for payroll, the Company issued him an option to
purchase 1,000 shares of common stock at an exercise price of $.35 per share.
Also in October 1999, the Company issued to members of the advisory board,
option to purchase 670,000 shares of common stock at an exercise price of $.34
per share, for their services to the Company relating to, among others,
marketing analysis, shareholder communications and general business advice. The
Company also issued select employees options to purchase 20,000 shares of common
stock at an exercise price of $.70 per share.
On October 1, 1999, the Company issued to a third party 10,057 shares
of common stock for $7,040 worth of market consulting services. On the same
date, the Company issued 10,000 shares of common stock as a bonus to a third
party for his services with the research and development of the Set Top Box. The
Company valued the shares at $5,625. In April 2000, for tax reasons, the shares
were returned to the Company. He was not paid any consideration for returning
his shares. Also
26
<PAGE>
in October 1999, the Company also granted Thomas Schrade, for his services on
the advisory board, options to purchase 60,000 shares of common stock at an
exercise price of $.70 per share. The options will vest at a rate of 20,000
shares per year for three years. Mr. Schrade assisted the Company with its
business relations matters.
On December 1, 1999, the Company issued to two members of the advisory
board, who assisted the Company with preparation of its business plan, options
to purchase 152,000 shares of common stock at an exercise price of $.34 per
share. On the same day, the Company issued to another member of the advisory
board, who provides the Company assistant with maintaining security, an option
to purchase 150,000 shares of common stock at an exercise price of $.44 per
share. Finally, the Company issued options to two marketing advisory board
members to purchase 20,000 shares of common stock at an exercise price of $.38
per share.
On December 15, 1999, the Company issued 100,000 shares of common stock
and warrants to purchase 50,000 shares of common stock of the Company at an
exercise price of $1.50 per share exercisable over five years to the parents of
an officer and principal shareholder of the Company, in exchange for their
$10,000 investment in the Company. On December 30, 1999, Michael Pint received,
for his $22,000 loan to the Company, a $22,000 promissory note with interest at
2% plus prime interest rate and warrants to purchase 22,000 shares of common
stock exercisable at $1.50 per share. The Company repaid the note in June 2000.
On December 31, 1999, the Company issued 48,150 shares of common stock to a
former employee for rendering $33,705 worth of services as a public relations
representative to the Company.
On January 3, 2000, pursuant to its stock option plan, the Company
granted its employees options to purchase a total of 132,300 shares of common
stock at an exercise price of $.34 per share. On January 13, 2000, the Company
issued 600,000 shares of common stock, in exchange for $60,000 of investments
from three non-affiliated investors. The investors were also granted warrants to
purchase 300,000 shares of common stock of the Company at an exercise price of
$1.50 per share, exercisable over five years. On the following day, the Company
issued two advisory board members, in exchange for their $55,000 investment,
400,000 shares of common stock and warrants to purchase an additional 200,000
shares at an exercise price of $1.50 per share exercisable over five years. In
addition, the Company issued to a non-affiliated investor, in exchange for a
$40,000 investment, 200,000 shares of common stock and warrants to purchase
100,000 shares of common stock at an exercise price of $1.50 per share
exercisable over five years.
On January 18, 2000, the Company issued to an employee, in exchange for
her $22,000 investment in the Company, 220,000 shares of common stock of the
Company and a warrant to purchase 110,000 shares of common stock at an exercise
price of $1.50 per share exercisable over five years. The next day, three
non-affiliated investors invested $452,000 into the Company and received
2,260,000 shares of common stock and warrants to purchase 1,130,000 shares at an
exercise price of $1.50 per share exercisable over five years. On January 21,
2000, the Company issued to a non-affiliated investor, in exchange for his
$20,000 investment, 44,444 shares of common stock of the Company and a warrant
to purchase 22,222 shares at an exercise price of $1.50 per share exercisable
over five years.
On February 2, 2000 a non-affiliated investor invested $10,000 into the
Company and received 50,000 shares of common stock and warrants to purchase
25,000 shares at an exercise price of $1.50 per share exercisable over five
years. On February 16, 2000, the Company issued 200,000 shares of common stock
to a non-affiliated investor for his $60,000 investment. The investor also
received warrants to purchase 100,000 shares at an exercise price of $1.50 per
share exercisable over five years.
On March 3, 2000, the Company issued to an investor, in exchange for
his $22,500 investment in the Company, 50,000 shares of common stock of the
Company and a warrant to purchase 25,000 shares of common stock at an exercise
price of $2.50 per share exercisable over five years. On March 15, 2000, a
non-affiliated investor invested $37,500 into the Company and received 50,000
shares of common stock and warrants to purchase 25,000 shares at an exercise
price of $3.00 per share exercisable over five years.
In February 2000, prior to executing the strategic partnership
agreement between the Company, Nikko and Maxwood, the Chairman of the Board of
Directors of Nikko and the President of Maxwood invested a total of $100,000
into the Company in exchange for 294,116 shares of common stock. In conjunction
with the strategic partnership agreement, the
27
<PAGE>
Company received additional investments totaling $750,000 and issued an
additional 1,250,000 shares of common stock to the above individuals.
On April 10, 2000, pursuant to its 1997 Stock Option Plan, the Company
granted an employee options to purchase 3,640 shares of common stock at an
exercise price of $.87. As of September 8, 2000, warrants representing an
aggregate of 98,750 shares of common stock have expired. Options representing a
total of 723,150 have expired.
The Company believes that all of the above transactions were
transactions not involving any public offering within the meaning of Section
4(2) of the Securities Act of 1933, since (a) each of the transactions involved
the offering of such securities to a substantially limited number of persons;
(b) each person took the securities as an investment for his own account and not
with a view to distribution; (c) each person had access to information
equivalent to that which would be included in a registration statement on the
applicable form under the Act; (d) each person had knowledge and experience in
business and financial matters to understand the merits and risk of the
investment; and (e) the Company did not engage in any general solicitation;
therefore no registration statement need be in effect prior to such issuances.
ITEM 5. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Minnesota Statutes contain an extensive indemnification provision
which requires mandatory indemnification by a corporation of any officer,
director and affiliated person who was or is a party, or who is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was a member, director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a member,
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses, including attorneys' fees,
and against judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted, or failed to act, in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. In some instances a court must approve such
indemnification.
As to indemnification for liabilities arising under the Securities Act
of 1933 for directors, officers or persons controlling the Company, the Company
has been informed that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy and unenforceable.
PART F/S
The following documents are filed as part of this Form 10SB.
Page
Report of Independent Accountants at December 31, 1999 and
for the two years then ended F-1
Balance Sheets at December 31, 1999 and 1998 F-2
Statements of Operations for the years ended
December 31, 1999 and 1998 and for the period of June 17 to
December 31, 1999 F-3
Statements of Changes in Stockholders' Equity
for the years ended December 31, 1999, 1998, 1997 and 1996 F-4
Statements of Cash Flows for the years ended
December 31, 1999 and 1998 and for the period of June 17 to
December 31, 1999 F-8
Notes to Financial Statements for the years
ended December 31, 1999 and 1998 F-10
28
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Inter-Con/PC, Inc.
Eden Prairie, Minnesota
We have audited the accompanying balance sheets of Inter-Con/PC, Inc. (a
development stage company) as of December 31, 1999 and 1998, and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
years then ended and for the period June 17, 1996 (inception) to December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Inter-Con/PC, Inc. as of
December 31, 1999 and 1998, and the results of its operations for the years then
ended and the period June 17, 1996 (inception) to December 31, 1999, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. However, as discussed in Note 2 to the
financial statements, the Company is in the development stage, has not generated
any revenues since inception, and has a deficit accumulated during the
development stage, all of which raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also discussed in Note 2. These financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
/s/ Schechter, Dokken, Kanter, Andrews & Selcer, Ltd.
May 12, 2000
Minneapolis, Minnesota
F-1
<PAGE>
INTER-CON/PC, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
-----------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 2,758 $ 37,778
Note receivable 87,645 0
Prepaid expenses 52,667 881
Debt placement costs, net 57,446 0
------------ ------------
Total current assets 200,516 38,659
------------ ------------
Property and equipment:
Equipment 67,743 81,755
Leasehold improvements 101,887
Less accumulated depreciation (18,944) (51,024)
------------ ------------
48,799 132,618
------------ ------------
Other assets:
Miscellaneous 976
Investment 50,000 50,000
------------ ------------
50,976 50,000
------------ ------------
Total assets $ 300,291 $ 221,277
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Accounts payable:
Trade $ 465,723 $ 393,107
Related parties 256,515 281,945
Accrued expenses 134,244 252,702
Deferred revenue 28,130
Notes payable, current portion 695,532 370,662
------------ ------------
Total current liabilities 1,552,014 1,326,546
------------ ------------
Note payable, long-term 1,773
------------
Stockholders' equity (deficit):
Common stock, no par, authorized 50,000,000 shares,
shares outstanding; 18,889,250, December 31, 1998;
26,971,945, December 31, 1999 2,562,790 4,370,350
Deficit accumulated during the development stage (3,816,286) (5,475,619)
------------ ------------
(1,253,496) (1,105,269)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 300,291 $ 221,277
============ ============
</TABLE>
See notes to financial statements.
F-2
<PAGE>
INTER-CON/PC, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
June 17, 1996
Years ended December 31 (inception) to
----------------------------- December 31,
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Operating expenses:
Payroll, contract labor, and related costs $ 512,500 $ 496,186 $ 1,432,501
Product development 731,362 165,098 1,490,331
General and administrative 763,358 941,483 2,427,507
------------ ------------ ------------
Operating loss 2,007,220 1,602,767 5,350,339
------------ ------------ ------------
Other income (expense):
Interest income 22,235 3,245 45,955
Interest expense (47,117) (90,921) (223,985)
Miscellaneous income 16,427 31,110 52,750
------------ ------------ ------------
(8,455) (56,566) (125,280)
------------ ------------ ------------
Net loss $ (2,015,675) $ (1,659,333) $ (5,475,619)
============ ============ ============
Basic and diluted loss per share $ (0.11) $ (0.07) $ (0.33)
============ ============ ============
Weighted average number of shares outstanding,
basic and diluted 18,867,880 22,920,026 16,385,919
============ ============ ============
</TABLE>
See notes to financial statements.
F-3
<PAGE>
INTER-CON/PC, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common stock Deficit
no par, authorized accumulated
50,000,000 shares during the
---------------------------- development
Shares Amount stage Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Initial sale of common
stock at $0.007 per share 300,000 $ 2,000 $ 2,000
Common stock issued
October 31, 1996, at $0.00
per share in exchange for
contribution of technology:
I-Pad(TM) 5,700,000 0 0
Set Top Box 6,000,000 0 0
Common stock issued in
exchange for rent
November 5, 1996, at
$0.30 per share 333,335 100,000 100,000
Fair value of warrants
issued November 29, 1996,
to debt holders and place-
ment agent 50,763 50,763
Net loss $ (216,836) (216,836)
------------ ------------ ------------ ------------
Balance, December 31,
1996 12,333,335 152,763 (216,836) (64,073)
Common stock issued July 22,
1997, for fair value of services
at $0.35 per share 25,000 8,750 8,750
Fair value of warrants
issued to debt holders,
June and July 1997 7,323 7,323
Common stock issued
August and September
1997, at $0.38 per share 4,375,000 1,650,387 1,650,387
</TABLE>
See notes to financial statements.
F-4
<PAGE>
INTER-CON/PC, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
<TABLE>
<CAPTION>
Common stock Deficit
no par, authorized accumulated
50,000,000 shares during the
---------------------------- development
Shares Amount stage Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Common stock issued for debt
conversions:
September 29, 1997, at $0.35
per share 414,265 $ 145,000 $ 145,000
October 27, 1997, at $0.30 per
share 1,666,650 500,000 500,000
Contribution by SAC Technologies,
Inc. 42,621 42,621
Net loss $ (1,583,775) (1,583,775)
------------ ------------ ------------ ------------
Balance, December 31, 1997 18,814,250 2,506,844 (1,800,611) 706,233
Common stock issued April 15, 1998,
for fair value of services $0.35 per
share 75,000 26,250 26,250
Fair value of warrants issued to debt
holders June, July and September
1998 29,696 29,696
Net loss (2,015,675) (2,015,675)
------------ ------------ ------------ ------------
Balance, December 31, 1998 18,889,250 2,562,790 (3,816,286) (1,253,496)
Common stock issued February 10,
1999, at $0.70 per share 25,000 17,500 17,500
Common stock issued for fair value
of product development costs, June
1, 1999, at $0.70 per share 69,085 48,359 48,359
Common stock issued to acquire
equipment at historical net book
value from related party, June
7, 1999, at $0.052 per share 250,000 12,892 12,892
</TABLE>
See notes to financial statements.
F-5
<PAGE>
INTER-CON/PC, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
<TABLE>
<CAPTION>
Common stock Deficit
no par, authorized accumulated
50,000,000 shares during the
---------------------------- development
Shares Amount stage Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Common stock issued for leasehold
improvements at fair value, June
7, 1999, at $0.20 per share 500,000 $ 100,000 $ 100,000
Common stock outstanding of Infopac
Systems, Inc. recorded in connection
with merger June 8, 1999 4,331,600 0 0
Common stock issued for debt
conversion, June 25, 1999, at
$0.835 per share 718,830 600,000 600,000
Common stock issued for debt
conversion, September 12, 1999,
at $0.70 per share 887,500 621,250 621,250
Common stock issued for consulting,
September 30, 1999, at $0.76 per
share 22,473 17,255 17,255
Common stock issued for consulting,
October 1, 1999, at $0.70 per share 10,057 7,040 7,040
Common stock issued for rent,
October 1, 1999, at $0.10 per share 610,000 61,139 61,139
Common stock issued for product
development costs, at October 1,
1999, at $0.56 per share 10,000 5,625 5,625
Common stock issued for cash, at
October 1, 1999, at $0.20 per share 500,000 100,000 100,000
Common stock issued to related
party for cash, at December 15, 1999,
at $0.10 per share 100,000 10,000 10,000
</TABLE>
See notes to financial statements.
F-6
<PAGE>
INTER-CON/PC, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
<TABLE>
<CAPTION>
Common stock Deficit
no par, authorized accumulated
50,000,000 shares during the
---------------------------- development
Shares Amount stage Total
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Common stock issued for consulting,
December 31, 1999, at $.70 per share 48,150 $ 33,704 $ 33,704
Fair value of stock options issued
to consultants, lender and board
members 32,052 32,052
Fair value of stock options issued
to the Marketing Advisory Board 4,581 4,581
Fair value of stock options issued
to Advisory Board Members 101,481 101,481
Fair value of warrants issued for
interest during 1999 8,142 8,142
Conversion feature of convertible
debt 26,540 26,540
Net loss $ (1,659,333) (1,659,333)
------------ ------------ ------------ ------------
Balance, December 31, 1999 26,971,945 $ 4,370,350 $ (5,475,619) $ (1,105,269)
============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-7
<PAGE>
INTER-CON/PC, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
June 17, 1996
Years ended December 31 (inception) to
----------------------------- December 31,
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,015,675) $ (1,659,333) $ (5,475,619)
Adjustment to reconcile net loss to net cash
flows from operating activities:
Depreciation 11,078 32,079 51,023
Amortization 128,830 75,811 393,231
Write-off of note receivable 87,645 87,645
Common stock issued for services and rent 26,250 173,122 208,123
Fair value of options and warrants issued
to non-employees 146,256 188,876
Conversion feature of convertible debt 26,540 26,540
Change in assets and liabilities:
Prepaid expenses 31,018 51,786 14,269
Other assets (23,316)
Accounts payable:
Trade 317,949 (72,616) 393,107
Related parties 93,730 25,430 179,304
Accrued expenses 103,006 118,458 252,702
Deferred revenue 28,130 28,130
------------ ------------ ------------
Net cash used in operating activities (1,303,814) (966,692) (3,675,985)
------------ ------------ ------------
Cash flows from investing activities:
Expenditures for:
Property and equipment (11,360) (3,006) (70,749)
Note receivable (100,000) (100,000)
Investment (50,000) (50,000)
Repayment received on note receivable 12,355 12,355
------------ ------------ ------------
Net cash used in investing activities (149,005) (3,006) (208,394)
------------ ------------ ------------
</TABLE>
See notes to financial statements.
F-8
<PAGE>
INTER-CON/PC, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
June 17, 1996
Years ended December 31 (inception) to
----------------------------- December 31,
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from:
Notes payable $ 716,249 $ 916,103 $ 2,329,852
Related parties 102,641 102,641
Issuance of common stock and warrants 127,500 1,779,887
Repayment on notes payable (1,555) (38,885) (92,940)
Debt placement costs (115,848) (197,283)
------------ ------------ ------------
Net cash provided by financing activities 701,487 1,004,718 3,922,157
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents (751,332) 35,020 37,778
Cash and cash equivalents:
Beginning 754,090 2,758
------------ ------------ ------------
Ending $ 2,758 $ 37,778 $ 37,778
============ ============ ============
Cash paid for interest $ 14,231 $ 53,853 $ 120,085
============ ============ ============
Supplemental disclosure of non-cash investing
and financing activities:
Fair value of warrants and options issued $ 29,696 $ 146,256 $ 244,461
============ ============ ============
Common stock issued:
For services $ 26,250 $ 111,983 $ 146,983
============ ============ ============
For rent $ 61,139 $ 161,139
============ ============
For debt conversion $ 1,221,250 $ 1,866,250
============ ============
For property and equipment $ 112,892 $ 112,892
============ ============
Contribution by SAC Technologies, Inc. $ 42,621
============
</TABLE>
See notes to financial statements.
F-9
<PAGE>
INTER-CON/PC, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Nature of business and basis of presentation:
Inter-Con/PC, Inc. (the "Company"), was incorporated in Minnesota in 1996
and has been a development stage company since inception. On June 8, 1999,
Infopac Systems, Inc. acquired all outstanding common stock of Inter-
Con/PC, Inc. For accounting purposes, the acquisition has been treated as an
acquisition by Inter-Con/PC, Inc. of Infopac Systems, Inc. and as a
recapitalization of Inter-Con/PC, Inc. The historical financial statements
prior to June 8, 1999, are those of Inter-Con/PC, Inc. All share and per
share information has been restated for this transaction.
InterCon/PC, Inc. was formed as a technology-development Company whose
mission is to develop, manufacture, and market a set-top-box computer that
would facilitate the convergence of voice, video, data and other
technologies and all through the TV screen. To address the challenges of
ever-evolving technologies, the Company built its convergent set-top-box in
the foundation of a full-function personal computer. This platform is
augmented by proprietary technologies designed to allow the set-top-box to
serve as the control center for a myriad of evolving home and business
applications. The Company's products will be targeted towards and positioned
within the consumer electronics and telecommunications industries. The
Company is continuing to develop its set-top-box products, and has
manufactured a small number of prototype units in preparation for entering
into high volume manufacturing. The Company has begun marketing two
set-top-box products; the TOTEBOOK(TM)6000 which features a high speed
processor, hard drive, and DVD drive that functions as an interactive,
multi-media home entertainment center, and the internet access only
TOTEBOOK(TM) 1000. The Company is considering selling the set-top-box
products under the names "NETCTV(TM)", "CYBER SPIDER(TM)",
"INTER-CON/PC(TM)", AND "P.I.N.TV(TM)". The Company also has several patents
pending and copyrights on its board design and other intellectual
properties.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Actual
results could differ from those estimates.
Cash equivalents:
Cash equivalents consist of highly liquid, interest bearing investments that
have original maturities of three months or less.
Concentration of credit risk:
The Company maintains its cash at two financial institutions in the
Minneapolis/St. Paul area of Minnesota. At times, balances may exceed
federally insured limits.
Deferred revenue:
Pursuant to Financial Accounting Standards Board Concept Number 5, the
Company recorded deferred revenues to reflect the receipt of payments before
year-end for prototype units shipped after year end.
Investment:
The investment consists of a minority interest in common stock of a
development stage company and is recorded at cost.
F-10
<PAGE>
INTER-CON/PC, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Property, equipment, leasehold improvements and depreciation:
Property, equipment and leasehold improvements are carried at cost.
Depreciation of equipment is computed using the straight-line method over
estimated lives of 3-7 years. Amortization of leasehold improvements is
provided for on the straight-line method over the term of the lease.
Organization costs:
Organization costs were being amortized using the straight-line method over
a 60 month period. On January 1, 1999, unamortized organization costs were
expensed as a result of adoption of Statement of Position 98-5, "REPORTING
ON THE COSTS OF START-UP ACTIVITIES."
Miscellaneous income:
Miscellaneous income consists of discharge of indebtedness attributable to
expenses recorded in accounts payable and accrued in a prior year, minimal
subscription income from internet access services and rental income from the
lease of space to MPF, Inc.
Debt placement costs:
Debt placement costs in connection with bridge financing are being amortized
over the term of the notes using the straight-line method. The straight-line
method provides results that are not materially different than the interest
rate method due to the term of the notes being only one year.
Earnings per share:
Basic earnings per share is computed using the weighted average number of
common shares outstanding. Diluted earnings per share is computed using the
combination of dilutive common share equivalents and the weighted average
number of common shares outstanding. Diluted earnings per share is not
presented as the effect of outstanding warrants and options is
anti-dilutive.
Stock-based compensation:
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION"
("SFAS No. 123"), and elected to continue the accounting set forth in
Accounting Principles Board No. 25, "ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES" ("APB No. 25"). The Company has provided the necessary pro forma
disclosures as if the fair value method had been applied.
Disclosures of fair value of financial instruments:
The carrying amounts reported in the balance sheet for cash, approximate
fair value due to the short maturity of such instrument. The fair value of
the Company's equity investment in a privately held company has no quoted
market prices and accordingly, a reasonable estimate of fair market value
could not be made without incurring excessive costs.
The fair value of the Company's notes payable is not practical to estimate
due to conversion features and warrants offered with the debt, whose market
value is not determinable.
F-11
<PAGE>
INTER-CON/PC, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
2. DEVELOPMENT STAGE ENTERPRISE AND GOING CONCERN:
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. However, the Company is in the development stage
with no sales of its products and its products are subject to rapid changes in
technology. Subsequent to year end in January 2000, the Company sold 100
prototype models that are to be replaced once the units have been updated and
the Company is ready for commencement of its principal operations. There is no
assurance that the Company will be able to generate significant sales of its
products. Additionally, the Company has a deficit accumulated during the
development stage of $3,816,286 as of December 31, 1998 and $5,475,619 as of
December 31, 1999. Management anticipates net losses will continue for the
foreseeable future. Additional financing will be required to complete
development and enhancement of the Company's products and bring them to market.
Subsequent to year end, the Company raised $1,629,000 through the sale of
5,618,560 shares of common stock, of which $850,000 was raised from individuals
who control NIKKO Co. Ltd.
The Company has completed a Joint-Venture Strategic Partnership Agreement (the
"Agreement")with NIKKO Co., Ltd. of Tokyo, Japan, and Maxwood Technology Ltd. of
Hong Kong, China on May 12, 2000. The parties plan to collaborate in the
production, sales, and distribution of several of the Company's proprietary
set-top-box product designs. This strategic alliance utilizes the combined
resources and expertise of all three companies to more effectively launch the
Company's set-top-box products on a global scale. As part of the Agreement, the
Company and NIKKO Co., Ltd. will form and equally own another joint-venture
company named NIKKO Multi Media, Inc., in order to globally market all versions
of the Company's set-top-box products. This Company will be capitalized by NIKKO
Co., Ltd. and the Company contributing $25,000 each and additional funding will
be obtained by NIKKO Co., Ltd. providing loans at 8% interest to the
Joint-Venture.
The Company will be responsible for ongoing set-top-box development engineering
plus research and development for new products. Maxwood Technology Ltd. will be
responsible for high volume production design, engineering, and manufacturing.
NIKKO Co., Ltd. will provide the financial resources necessary for component
purchasing as well as coordinating with the parties all product sales and
distribution through NIKKO Multi Media, Inc. The Company will receive ongoing
royalty revenue for set-top-box product sales plus equally share with NIKKO Co.,
Ltd., all profits generated by NIKKO Multi Media, Inc.
The Company believes that the amount of capital infusion will help cover the
operating expenses until it realizes revenue from its Joint-Venture Strategic
Partnership Agreement with NIKKO Co., Ltd. of Tokyo, Japan, and Maxwood
Technology Ltd. of Hong Kong, China. At the same time the Company plans to
pursue additional financing. The Company anticipates generating revenue from its
Partnership Agreement during the end of 4th quarter of 2000 and 1st quarter of
2001.
F-12
<PAGE>
INTER-CON/PC, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
2. DEVELOPMENT STAGE ENTERPRISE AND GOING CONCERN (CONTINUED):
Although the Company has raised additional capital, and management's plans
include raising additional capital and launching the set-top-box, there is
substantial doubt about the Company's ability to continue as a going concern.
Recoverability of a major portion of the recorded asset amounts shown in the
accompanying balance sheet is dependent upon the Company advancing beyond the
development stage and developing sustained operations. The accompanying
financial statements do not include any adjustments that might be necessary
should the Company be unable to continue in existence.
3. NOTE RECEIVABLE:
The Company invested $100,000 in a note receivable from Flagstick Guarantee,
Inc. on February 1998, with interest accruing on the unpaid principal at a rate
of 1.25% per month through December 1998. The note matured on April 30, 1998,
the date Flagstick Guarantee, Inc. defaulted on the note. In October 1998, the
Company received interest of $10,495, to the date of the receipt, plus $14,505
of principal, but has not collected anything more since then. Based upon
discounted estimated future cash flow from the note at that time, the Company
accrued $2,150 of interest income from October 1998 to December 1998. The
Company ceased to accrue interest on the note as of January 1, 1999. In 1999,
the Company wrote off the remaining unpaid principal balance and interest
accrued. The Company is still pursuing collection of the outstanding balance.
4. INVESTMENT:
The Company has invested $50,000 for 76,923 shares of common stock in Cyrus
Intersoft, Inc., (Cyrus) a software company that is in the development stage.
The stock split three for one, resulting in the Company holding 230,769 shares.
The Company plans to use Cyrus Intersoft Software as an application overlay with
a LINUX operating system. This provides the TOTEBOOK(TM) user with a multiple
number of applications and eliminates the need for a hard drive within the
TOTEBOOK(TM). Management believes the value of the investment is not less than
cost, but the stock is not currently traded. However, the return of the
investment is uncertain. At December 31, 1999, the Company had pledged 76,923
shares to secure a note payable personally by the President, who advanced the
proceeds to the Company and pledged another 76,923 shares to secure notes
payable. Subsequent to year-end, the final 76,923 shares were pledged for a
letter of credit to help secure credit with a vendor.
5. NOTES PAYABLE:
Notes payable consist of the following:
<TABLE>
<CAPTION>
1998 1999
------------- -------------
<S> <C> <C>
Notes payable, individual, payable quarterly with $18,000 installments plus
interest at 12%, balance due in May 2000. Pursuant to a verbal agreement, the
note was converted into a demand note in May 2000, the date of maturity, under
substantially equivalent terms, secured by stock investment of 76,923 shares in
Cyrus Intersoft Inc. Warrants to purchase 373,330 shares of common stock at
$0.84 per share were also Issued. The Warrants expire in May, 2004. $ 146,604
</TABLE>
F-13
<PAGE>
INTER-CON/PC, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
5. NOTES PAYABLE (CONTINUED):
<TABLE>
<CAPTION>
1998 1999
------------- -------------
<S> <C> <C>
Note payable individual, due on demand with interest at 12%, unsecured, issued
with warrants to purchase 17,500 shares of common stock at $0.84 per share,
expiring February 2004 17,500
Note payable, due on demand with no interest $ 9,600
Note payable, bank, due in monthly installments of $303 through June 2000
with interest at 8.75%, secured by vehicle. 5,094 2,058
Convertible debentures individual, interest payable monthly at 2% above the
prime rate, 10.5% at December 31, 1999, with principal due on demand,
convertible into 1,520,000 shares of common stock issued with warrants to
purchase 54,894 shares of common stock at $0.84 per share, expiring September
2004, and warrants to purchase 22,000 shares of common stock at $1.50 per
share expiring January, 2003. 152,000
Convertible notes payable, $700,000, at 8% interest, imputed
interest at 12%, unsecured due June 1999(A) 682,611 52,500
------------- -------------
697,305 370,662
Less current portion 695,532 370,662
------------- -------------
$ 1,773 $ 0
============= =============
</TABLE>
(A) The notes can be converted into 1,000,000 shares of common stock and were
sold with 350,000 detachable warrants to purchase common stock at $0.70 per
share. The notes and warrants were recorded using a 12% interest rate to
recognize the value of the warrants and conversion feature. Additional warrants
were issued to the selling agent to purchase 100,000 shares of stock at $0.84
per share. No amounts were ascribed to these warrants. The Company requested
note holders to exercise their conversion rights in 1999 on the date of maturity
and 31 note holders converted $621,250 of the notes in September 1999. The
conversion period was extended because the Company did not have the necessary
funds to repay the notes when they were due. Two notes with a total principal
amount of $52,500 remain unpaid at December 31, 1999, because the two note
holders allowed the Company to defer payment of their notes until the year 2000,
under substantially equivalent terms.
6. PROVISION FOR INCOME TAXES:
The Company has approximately $3,800,000 and $5,500,000 of net operating loss
carryforwards for tax purposes at December 31, 1998 and 1999, respectively. Net
operating loss carryforwards may be subject to limitations under Section 382 of
the Internal Revenue Code should the ownership of the Company change
substantially and otherwise expire in years 2011-2014.
F-14
<PAGE>
INTER-CON/PC, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
6. PROVISION FOR INCOME TAXES (CONTINUED):
Gross deferred tax assets of approximately $1,520,000 and $2,120,000 result from
the net operating loss carryforwards as of December 31, 1998 and 1999,
respectively. However, due to the uncertainty surrounding realization of
deferred tax assets, a valuation allowance has been recorded and accordingly, no
benefit has been included in these financial statements.
7. RELATED PARTY TRANSACTIONS AND COMMITMENTS:
Contributed technology:
In 1996, technology was contributed related to the I-Pad(TM) and set-top-box
in exchange for common stock. The Company recorded no value related to the
technology since the contributors' accounting value for the technology was
zero due to these technologies being internally developed by each
contributor.
Technical support and cooperative development agreement:
The Company entered into a technical support and cooperative development
agreement effective November 1, 1996, with SAC Technologies, Inc. (SAC), a
principal stockholder of the Company. In November 1999, SAC sold their stock
in the Company.
The agreement required SAC to provide technical support regarding the
set-top-box, and design, develop, and deliver the Mux Panel and Data-Cop
products in accordance with detailed specifications for which the Company
agreed to pay SAC $15,566 per month for the first six months of ongoing
technical support. Thereafter, 30 monthly payments of $11,667 were required.
Expense related to this agreement for the year ended December 31, 1997 was
$156,000.
The agreement originally was set to expire October 31, 1999, but was
terminated by the parties as of December 31, 1997. The Company owed SAC
$42,621 at the termination date and this amount was contributed to the
Company and recorded as common stock.
Support, sublease, and sharing agreements:
The Company has a support services agreement with MPF, Inc., a company
wholly-owned by a principal stockholder of the Company. The three year
agreement is dated September 1, 1996, and is subject to any termination or
renewal as provided in the employment agreement of the principal stockholder
of the Company. MPF, Inc. is required to make available to the Company local
and long distance carrier services which will be paid for based on actual
usage on a monthly basis. In addition, MPF, Inc. agrees not to market
internet access switches or services directly in competition with the
Company except in the Minneapolis/St. Paul area of Minnesota.
F-15
<PAGE>
INTER-CON/PC, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
7. RELATED PARTY TRANSACTIONS AND COMMITMENTS (CONTINUED):
The Company also has a sublease and sharing agreement with MPF, Inc. dated
September 1, 1996, and continuing on a monthly basis thereafter. The Company
subleases office space to MPF, Inc. for $624 per month. Effective March 1,
1997, the amount was reduced to $531 per month as MPF, Inc. moved to smaller
office space than initially agreed upon. MPF, Inc. permits the Company to
use certain equipment owned or leased by MPF, Inc. for a monthly fee of
$500.
The amount of annual sublease income was $6,372 for 1998 and 1999,
respectively. Total annual equipment rent expense was $6,000 for 1998 and
1999.
Employment agreements:
The Company has entered into an employment agreement through August 1999
with a principal stockholder that obligates the Company to employ him as
chief executive officer at a base salary of $100,000 per year, along with
certain benefits and discretionary bonuses. This agreement was renewed
effective January 1, 2000, for five years.
In the event the Company terminates his employment without cause, the
employee will be entitled to receive the remaining amount of base salary
paid semi-monthly due under this agreement or at his option, a lump sum
payment of the value of the remaining salary. The agreement restricts the
employee's post-employment activities for a period of 18 months following
his termination of employment.
The Company also has an employment agreement with a vice-president effective
August 1, 1998, for a three year period for $81,000 per year with benefits
and discretionary bonuses. The agreement includes a two year non-compete
clause along with a requirement to pay a six month severance for termination
without cause. In September 1999, the vice-president resigned.
Office lease:
The Company leases office space from Equitable Holdings, Inc., a minority
stockholder, expiring September 30, 2002. The Company pays a monthly base
rent and additional amounts equal to its share of real estate taxes and
building operating expenses.
In an amendment to the lease dated November 5, 1996, the lessor agreed to
accept 333,335 shares of the Company's common stock and a warrant to
purchase 125,000 shares of common stock at $0.35 per share exercisable from
March 1, 1998 through December 31, 1999 as prepayment of all base rent and
additional rent for the period September 1, 1996 through May 31, 1999. Such
rent has been valued at $100,000 and has been capitalized as prepaid rent
amortizable over 33 months using the straight-line method. For the years
ended December 31, 1999 and 1998, amortization of prepaid rent was $15,150
and $36,360, respectively. In 1999, the Company paid some of their rent by
issuing 610,000 shares of common stock at $0.10 per share.
F-16
<PAGE>
INTER-CON/PC, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
7. RELATED PARTY TRANSACTIONS AND COMMITMENTS (CONTINUED):
Office lease (continued):
Future minimum annual base rents payable on the lease as of December 31,
1999, are as follows:
2000 $ 69,324
2001 69,324
2002 51,993
Accounts payable related parties:
Accounts payable to related parties includes amounts due to officers,
shareholders and family members of principal shareholders which were the
result of services performed, payments made on behalf of the Company, or
cash advances to the Company. The amount due at December 31, 1998 and 1999,
includes $44,000 and $50,100 of notes payable, respectively, to an officer's
spouse, with interest at 12%. Interest expense for related parties was
$2,440 and $9,278 for the years ending December 31, 1998 and 1999,
respectively.
The Company also entered into consulting agreements with an officer's spouse
and a shareholder of the Company, in which the Company has agreed to pay for
services rendered by common stock. Amounts included in expenses are $80,850
and $9,050 for the years ending December 31, 1998 and 1999, respectively.
Acquisitions:
In June 1999, the Company acquired equipment and an internet switch from
MPF, Inc., a Company owned by the President of the Company. The original
consideration for the acquisition was 50,000 shares of common stock and
warrants to purchase 50,000 shares of common stock. These shares were
subject to the merger into the public shell which required a 5-1 forward
split at that time and resulted in adjusted consideration of 250,000 shares
of common stock and warrants to purchase 250,000 shares of common stock at
$.70 per share. The Company recorded the acquisition at MPF Inc.'s.,
historical cost basis of $12,892, since the acquisitions were from a related
party who controls both the acquiring and the selling company. At the time
the assets were acquired, it was contemplated that the Company would provide
internet access services in connection with the sale of its Set Top Box.
However, the Company subsequently decided not to provide these complementary
services and is instead focusing its attention and resources on the
development, manufacturing, marketing and sale of the Set Top Box. The
Company is using the assets acquired, including the servers and modems, to
establish and maintain its own internal networks and for testing the Set Top
Box. The Company may offer internet access services to interested customers,
but will do so through third party internet service providers. The Company
has not entered into any agreement with third party providers regarding
such services, but anticipates doing so prior to commencing high volume
production of the Set Top Box.
The Company also has an agreement to purchase certain assets of FutureComm
Inc. a company owned by the President and certain stockholders, for 500,000
shares of common stock plus warrants to purchase 500,000 shares of common
stock at $0.70 per share. This transaction has not closed as of December 31,
1999.
F-17
<PAGE>
INTER-CON/PC, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
8. STOCK OPTIONS AND WARRANTS:
1997 Stock Option Plan:
On March 6, 1997, the Company adopted the 1997 Stock Option Plan intended to
provide two types of options:
- Qualified incentive stock options for the benefit of the Company's
officers and employees.
- Nonqualified options for the benefit of the Company's directors,
officers, employees, and consultants.
Aggregate shares issued under this plan shall not exceed 2,000,000 shares,
adjusted for stock splits, dividends, or combinations that may occur. The
Board of Directors has sole discretion in determining which eligible
individuals will be granted options, what type, the option price, the number
of shares subject to each option, and whether other terms will apply. The
plan expires March 5, 2007.
1997 Directors Stock Option Plan:
The Company has a 1997 Directors Stock Option Plan intended to attract
individuals for service as outside directors. None of these options are
incentive stock options. Aggregate shares issued under this plan shall not
exceed 750,000 shares, adjusted for stock splits, dividends, or combinations
that may occur.
Each outside director shall be granted an option to purchase 24,000 shares
of the Company's common stock, on the date such person first becomes a
director. Any director who qualified for this option prior to the merger of
Inter-Con/PC. Inc. with the public shell were subject to the 5-1 forward
split. All new directors after the merger will be granted the option to
purchase 24,000 shares of the Company's common stock, with vesting occurring
over three years unless otherwise determined by the Board of Directors.
On the date of each annual meeting, each director will automatically receive
an option to purchase 30,000 shares of the Company's common stock to become
exercisable six months after the date granted.
These options will expire ten years from the date the option is granted.
Vesting occurs only while a director remains a director, but vested options
shall be exercisable for up to five years after the date a director ceases
to be a director. The option price per share will be 100% of the fair market
value on the date the option was granted.
F-18
<PAGE>
INTER-CON/PC, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
8. STOCK OPTIONS AND WARRANTS (CONTINUED):
Information relating to all stock options is as follows:
<TABLE>
<CAPTION>
1998 1999
--------------------------- ---------------------------
Weighted Weighted
Number average Number average
of exercise of exercise
shares price shares price
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Beginning 360,000 $ 0.35 795,500 $ 0.55
Granted 587,500 0.71 1,933,021 0.47
Exercised 0 0
Forfeited (152,000) 0.70 (571,150) 0.58
Expired 0 0
------------ ------------
Ending 795,500 $ 0.55 2,157,371 $ 0.48
============ ======= ============ =====
Exercise price range $0.35 to $0.77 $0.34 to $1.00
============== ==============
Exercisable shares 275,500 $ 0.45 1,877,371 0.59
============ ======= ============ =======
Weighted average remaining life 6.4 years 7.2 years
</TABLE>
Pro forma information regarding net loss is required by Statement of Financial
Accounting Standards No. 123, "ACCOUNTING FOR STOCK BASED COMPENSATION," and has
been determined as if the Company had accounted for the stock options under the
fair value method in that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions:
1998 1999
------------ ------------
Risk-free interest rate 6.0% 6.5%
Dividend yield 0.0% 0.0%
Volatility factor 0.0% 0.0%
Weighted average expected life 3 years 3 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
F-19
<PAGE>
INTER-CON/PC, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
8. STOCK OPTIONS AND WARRANTS (CONTINUED):
The Company's proforma net loss is as follows:
1998 1999
------------- -------------
As reported:
Net loss $ (2,015,675) $ (1,659,333)
Loss per share $ (0.11) $ (.07)
Proforma:
Net loss $ (2,075,476) $ (1,687,364)
Loss per share $ (0.11) $ (.07)
Stock warrants:
The Company has issued stock warrants to its landlord, placement agent, and
the note holders.
<TABLE>
<CAPTION>
1998 1999
--------------------------- --------------------------
Weighted Weighted
Number average Number average
of exercise of exercise
shares price shares price
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Beginning 1,077,915 $ 0.45 1,527,915 $ 0.53
Granted 450,000 0.73 965,949 0.96
Exercised 0 0
Expired 0 98,750 0.45
------------ ------------
Ending 1,527,915 $ 0.53 2,395,114 $ 0.75
============ ======= ============ =======
Exercise price range $0.35 - $0.84 $0.35 - $1.50
Exercisable shares 1,527,915 $ 0.53 2,395,114 $ 0.75
============ ======= ============ =======
Weighted average remaining life 3.0 years 3.5 years
</TABLE>
F-20
<PAGE>
INTER-CON/PC, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1999
9. CONTINGENCIES:
The Company is involved in two disputes with vendors that could result in
additional liability to the Company as follows:
The Company has a dispute that involves failure for payment for services
rendered. The vendor alleges the Company has been billed for work completed
for over $250,000. The Company has recorded approximately $108,000 in
accounts payable that had been invoiced to them. The Company has countered
with a claim for breach of contract, fraud and negligence. Management
expects that this dispute will be settled favorably and has not recorded any
additional liability in the financial statements for this contingency.
The Company has another dispute with a vendor for payment of services
rendered. The vendor has demanded payment for approximately $91,000. The
Company has accrued approximately $75,000 and believes it will have no
further liability.
The Company is also the subject of various claims on a continuing basis,
including general liability claims and claims made by employees and former
employees. Costs for claims not covered by insurance are recognized when
known. In the opinion of management, the amount of any additional liability
will not have a material impact on the financial statements.
F-21
<PAGE>
PART III
INDEX TO EXHIBITS
Other than exhibit 27.1, which is attached hereto, the following exhibits were
filed with the Company's Amended Form 10-SB filed on June 28, 2000.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
2.1 MPF, Inc. Assignment Agreement dated June 8, 1999
2.2 FutureComm, Inc. Assignment Agreement dated June 8,1999
2.3 Info Pac Agreement and Plan of Merger dated June 8, 1999
3.1 Articles of Incorporation of the Company, as amended
3.2 By-Laws of the Company
4.1 Form of Stock Certificate
4.2 Form of Common Stock Purchase Warrant
4.3 Form of Employee Stock Option Letter
4.4 Form of Promissory Note and Warrant
4.5 Form of Convertible Promissory Note
10.1 Office/Warehouse Lease with Equitable Holdings, Inc. dated July 12, 1996
10.1(a) Amendment #1 to Office/Warehouse Lease with Equitable Holdings, Inc. dated September 4, 1996
10.1(b) Amendment #2 to Office/Warehouse Lease with Equitable Holdings, Inc. dated November 5, 1996
10.1(c) Amendment #3 to Office/Warehouse Lease with Equitable Holdings, Inc. dated August 25, 1998
10.2 Employment Agreement of Michael P. Ferderer dated January 1, 2000
10.3 Employment Agreement of John Walker dated August 1, 1998
10.4 Joint Venture Strategic Partnership Agreement by and among the Company, Nikko Co. Ltd. and
Maxwood Technology, Ltd. dated May 12, 2000
10.5 MPF, Inc. Support Service Agreement dated September 1, 1996
10.6 MPF, Inc. Sublease and Equipment Sharing Agreement dated September 1, 1996
10.7 1997 Stock Option Plan*
10.8 1997 Director's Stock Option Plan*
11.1 Statement Regarding Computation of Per Share Earnings
27.1 Financial Data Schedule
* Indicates compensation plan
</TABLE>
29
<PAGE>
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this Amendment No. 2 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
INTER-CON/PC, INC.
Dated: January 4, 2001 By /s/ Michael P. Ferderer
--------------------------------------------
Michael P. Ferderer, Chief Executive Officer
30
