<PAGE>
As filed with the Securities and Exchange Commission on April 8, 1998
Registration No. 333-34115
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
Amendment No. 2
to
Form SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
FRONTLINE COMMUNICATIONS CORPORATION
(Exact name of small business issuer as specified in its charter)
<TABLE>
<CAPTION>
Delaware 7379 13-3950283
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification No.) Identification No.)
</TABLE>
One Blue Hill Plaza, 6th Floor
P.O. Box 1548
Pearl River, New York 10965
(914) 623-8553
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
----------------
Stephen J. Cole-Hatchard, Chairman
Frontline Communications Corporation
One Blue Hill Plaza, 6th Floor
P.O. Box 1548
Pearl River, New York 10965
(914) 623-8553
(Name, address and telephone number of agent for service)
----------------
Copies of all communications to:
ROBERT J. MITTMAN, ESQ. STEVEN MORSE, ESQ.
Tenzer Greenblatt LLP LESTER MORSE P.C.
The Chrysler Building 111 Great Neck Road
405 Lexington Avenue Great Neck, New York 11021
New York, New York 10174 Telephone: (516) 487-1446
Telephone: (212) 885-5000 Facsimile: (516) 487-1452
Facsimile: (212) 885-5001
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Secur-ities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================================================
Proposed Proposed
Maximum Offering Maximum Amount of
Title of Each Class of Amount to Price Per Aggregate Offering Registration
Securities to be Registered be Registered Security (1) Price (1) Fee
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per
share ............................... 1,725,000(2) $ 4.00 $6,900,000 $ 2,035.50
- -------------------------------------------------------------------------------------------------------------------------------
Warrants, each to purchase one
share of Common Stock ............... 1,725,000(2) $ .10 $ 172,500 $ 50.88
- -------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per
share, issuable upon exercise of
the Warrants (3) .................... 1,725,000 $ 4.80 $8,280,000 $ 2,442.60
- -------------------------------------------------------------------------------------------------------------------------------
Underwriter's Warrants, each to
purchase one share of Common
Stock (4) ........................... 150,000 $ .001 $ 150.00 (5)
- -------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per
share, issuable upon exercise of
the Underwriter's Warrants (3) ...... 150,000 $ 6.00 $ 900,000 $ 265.50
- -------------------------------------------------------------------------------------------------------------------------------
Underwriter's Warrants, each to
purchase one warrant (4) ............ 150,000 $ .001 $ 150.00 (5)
- -------------------------------------------------------------------------------------------------------------------------------
Warrants issuable upon exercise of
the Underwriter's Warrants .......... 150,000 $ .15 $ 22,500 $ 6.63
- -------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per
share, issuable upon exercise of
the warrants underlying the
Underwriter's Warrants (3) .......... 150,000 $ 7.20 $1,080,000 $ 318.60
- -------------------------------------------------------------------------------------------------------------------------------
Total Registration Fee ............................................................................... $ 5,119.71(6)
===============================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Assumes the Underwriter's over-allotment option to purchase up to 225,000
additional shares of Common Stock and/or 225,000 Warrants is exercised in
full.
(3) Pursuant to Rule 416, there are also being registered such indeterminable
additional shares of Common Stock as may become issuable pursuant to
anti-dilution provisions contained in the Warrants, the Underwriter's
Warrants and the warrants underlying the Underwriter's Warrants.
(4) Represents warrants to be issued by the Company to the Underwriter at the
time of delivery and acceptance of the securities to be sold by the Company
to the public hereunder.
(5) None, pursuant to Rule 457(g). (6) $484.55 paid herewith. $4,635.16
previously paid.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
===============================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration becomes effective.
This prospectus shall not constitute an offer to sell or the solicitation of an
offer to buy nor shall there be any sale of these securities in any jurisdiction
in which such offer, solicitation or sale would be unlawful prior to
registration or qualification under the securities laws of any such
jurisdiction.
PRELIMINARY PROSPECTUS DATED APRIL 8, 1998
SUBJECT TO COMPLETION
FRONTLINE COMMUNICATIONS CORPORATION
1,500,000 Shares of Common Stock and
Redeemable Warrants to Purchase
1,500,000 Shares of Common Stock
The Company is offering 1,500,000 shares of Common Stock (the "Common
Stock") and redeemable warrants to purchase 1,500,000 shares of Common Stock
(the "Warrants"). The Common Stock and Warrants may be purchased separately and
will be transferable immediately upon issuance. Each Warrant entitles the
registered holder thereof to purchase one share of Common Stock at a price of
$4.80, subject to adjustment in certain circumstances, at any time commencing
, 1999 through and including , 2003. The Warrants are redeemable by the
Company at any time commencing , 1999, upon notice of not less than 30
days, at a price of $.10 per Warrant, provided that (i) the closing bid
quotation of the Common Stock on all 20 trading days ending on the third day
prior to the day on which the Company gives notice (the "Call Date") has been
at least 150% (currently $7.20, subject to adjustment) of the then effective
exercise price of the Warrants and (ii) the Company obtains the written
approval of Werbel-Roth Securities, Inc. (the "Representative") to such
redemption prior to the Call Date. See "Description of Securities."
Prior to this offering, there has been no public market for the Common
Stock or Warrants and there can be no assurance that any such market will
develop. It is anticipated that the Common Stock and Warrants will be quoted on
the Nasdaq SmallCap Market ("Nasdaq") under the symbols "FCCN" and "FCCNW,"
respectively. For a discussion of the factors considered in determining the
offering prices of the Common Stock and Warrants, see "Underwriting."
------------------
THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE AND INVOLVE SUBSTANTIAL
RISKS AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY
INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK
FACTORS" COMMENCING ON PAGE 6 AND "DILUTION."
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
===============================================================================
Price Underwriting Proceeds
to Discounts and to
Public Commissions(1) Company (2)
- --------------------------------------------------------------------------------
Per Share ........... $ 4.00 $ .40 $ 3.60
- --------------------------------------------------------------------------------
Per Warrant ......... $ .10 $ .01 $ .09
- --------------------------------------------------------------------------------
Total (3) ........... $6,150,000 $615,000 $5,535,000
===============================================================================
(1) The Company has agreed to pay to the Representative a 3% nonaccountable
expense allowance, to sell to the Representative warrants (the
"Representative's Warrants") to purchase up to 150,000 shares of Common
Stock and/or 150,000 warrants and to retain the Representative as a
financial consultant. The Company has also agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses, including the nonaccountable expense allowance in
the amount of $184,500 ($212,175 if the Underwriters' over-allotment option
is exercised in full), estimated at $734,500, payable by the Company.
(3) The Company has granted to the Underwriters an option, exercisable within 45
days from the date of this Prospectus, to purchase up to an additional
225,000 shares of Common Stock and/or 225,000 additional Warrants on the
same terms set forth above, solely for the purpose of covering
over-allotments, if any. If the Underwriters' over-allotment option is
exercised in full, the total price to public, underwriting discounts and
commissions and proceeds to Company will be $7,072,500, $707,250 and
$6,365,250, respectively. See "Underwriting."
The shares of Common Stock and Warrants are being offered, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and subject
to approval of certain legal matters by counsel and to certain other conditions.
The Underwriters reserve the right to withdraw, cancel or modify the offering
and to reject any order in whole or in part. It is expected that delivery of
certificates representing the Common Stock and Warrants will be made against
payment therefor at the offices of the Representative in Boca Raton, Florida on
or about , 1998.
------------------
WERBEL-ROTH SECURITIES, INC.
The date of this Prospectus is , 1998.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS, ON
NASDAQ, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE, WHICH STABILIZE, MAINTAIN
OR OTHERWISE AFFECT THE PRICES OF THE COMMON STOCK AND WARRANTS. SPECIFICALLY,
THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR
AND PURCHASE SHARES OF COMMON STOCK AND WARRANTS IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and financial statements appearing elsewhere in this
Prospectus. Each prospective investor is urged to read this Prospectus in its
entirety. Unless otherwise indicated, all information in this Prospectus gives
effect to (i) a Reorganization (as defined below) in May 1997, (ii) a 4- for-5
reverse stock split effected in March 1998 and (iii) the repurchase by the
Company of 231,520 shares of Common Stock (the "Stock Repurchase") from Michael
Char, a former officer and director of the Company upon the consummation of this
offering, and assumes no exercise of the Underwriters' over-allotment option to
purchase an additional 225,000 shares of Common Stock and/or 225,000 additional
warrants. See "Certain Transactions" and "Underwriting."
The Company
Frontline Communications Corporation (the "Company") is an Internet service
provider that offers "dial-up" Internet access primarily to individual
subscribers. The Company provides subscribers with direct access to a wide range
of Internet applications and resources, including electronic mail, world wide
web sites and regional and local information and data services. The Company
believes that its low subscriber to modem ratio, its technical and customer
support and ancillary services position the Company to capitalize on the
emerging and expanding markets for Internet services.
In recent years, the Internet has experienced a rapid increase in the
number of users. Industry sources estimate that the number of online households
in the United States was approximately 9.6 million at the end of 1995, 15.2
million at the end of 1996, 19.2 million at the end of 1997, and project that
the number of online households will exceed 40 million by the year 2000. The
Company believes that increasing penetration of computers and modems into
households and businesses, the growth of the informational, entertainment and
commercial resources of the Internet and the increasing availability of
user-friendly navigational tools that enable easier access to the Internet's
resources will continue to contribute favorably to the growth of the Internet.
The Company's telecommunications network is currently comprised of leased
high-speed data lines and ten points-of-presence ("POPs") serving suburban areas
in Rockland, Orange, Dutchess, Sullivan, Putnam, Ulster and Westchester counties
in New York and Bergen county in New Jersey. These POPs permit subscribers in
these areas to access the Internet through a local telephone call. The Company
currently supports 14.4, 28.8 and 36.6 Kbps modems at each of its POPs and has
X2 56K and ISDN technologies at most of its POPs. The Company has approximately
1,600 individual subscribers as of the date of this Prospectus. Pursuant to its
currently proposed plan of operation, the Company will seek to establish up to
twenty-four additional POPs during the twelve months following the consummation
of this offering.
The Company's objective is to expand its network of POPs rapidly into
selected geographic markets. The Company currently anticipates that it will
initially seek to achieve significant penetration in suburban markets in the
greater New York metropolitan area, including Morris and Passaic counties in New
Jersey, and Fairfield and New Haven counties in Connecticut. The Company intends
to target suburban markets with attractive demographic characteristics similar
to the Company's existing POPs. To achieve its goal, the Company will seek to
cluster POPs for operational efficiency and to share certain marketing,
financial, customer service and management personnel. The Company will also seek
to capitalize on demand for Internet access by offering subscriber service which
combines the capabilities typically provided by large companies with the
flexibility and responsiveness of a small Internet service provider.
Since its inception, the Company has engaged in only limited operations and
has not yet generated meaningful revenues. The Company requires the proceeds of
this offering to fully implement its proposed plan of operation. The Company
expects to incur substantial up-front expenses in connection with establishing
additional POPs, engaging in marketing activities and hiring executive,
technical, marketing and other personnel, which will result in losses for the
foreseeable future. There can be no assurance the Company will be able to
successfully implement its business plans. See "Risk Factors."
3
<PAGE>
The Company was incorporated under the laws of the State of Delaware in
February 1997 under the name Easy Street Online, Inc. as successor to the
business of Hobbes & Co., LLC ("Hobbes"), INET Communications Company, LLC
("INET") and Sara Girl & Co., LLC ("Sara Girl") (collectively, the "Predecessor
Companies"), limited liability companies organized in May and August 1995 and
July 1996 to own and operate POPs. In May 1997, the Company effected a
reorganization (the "Reorganization") pursuant to which the Predecessor
Companies transferred all of their assets, subject to all of their liabilities,
to the Company, (ii) Messrs. Nicko Feinberg and Stephen J. Cole-Hatchard,
officers, directors and principal stockholders of the Company, and Mr. Michael
Char, a former officer and director of the Company, exchanged their respective
interests in the Predecessor Companies for promissory notes in the aggregate
principal amount of $372,137 and (iii) each of the Predecessor Companies
dissolved. Unless otherwise indicated, all references in this Prospectus to the
Company include the Predecessor Companies. See "Certain Transactions."
The Company's executive offices are located at One Blue Hill Plaza, 6th
Floor, P.O. Box 1548, Pearl River, New York 10965, and its telephone number is
(914) 623-8553. The Company's home page is located on the World Wide Web at
www.fcc.net.
The Offering
Securities offered....... 1,500,000 shares of Common Stock and
Warrants to purchase 1,500,000 shares of
Common Stock. See "Description of
Securities."
Common Stock to be outstanding
after the offering(1)... 2,676,480 shares
Warrants
Number to be outstanding after
the offering(2)......... 1,500,000 Warrants
Exercise terms........... Exercisable for a period of four years
commencing , 1999, each to purchase one
share of Common Stock at a price of $4.80,
subject to adjustment in certain
circumstances. See "Description of
Securities -- Redeemable Warrants."
Expiration date........ , 2003.
Redemption............... Redeemable by the Company at any time
commencing , 1999, upon notice of not less
than 30 days, at a price of $.10 per
Warrant, provided that (i) the closing bid
quotation of the Common Stock on all 20
trading days ending on the third day prior
to the day on which the Company gives notice
has been at least 150% (currently $7.20,
subject to adjustment) of the then effective
exercise price of the Warrants and (ii) the
Company obtains the written consent of the
Underwriter to such redemption prior to the
Call Date. The Warrants will be exercisable
until the close of business on the date
fixed for redemption. See "Description of
Securities -- Redeemable Warrants."
Use of Proceeds.......... The Company intends to use the net proceeds
of this offering for the acquisition of
subscriber bases; the establishment of
additional POPs; marketing and advertising;
repayment of indebtedness; the Stock
Repurchase; and the balance for working
capital and general corporate purposes. See
"Use of Proceeds."
Risk Factors............. The securities offered hereby are highly
speculative and involve substantial risks
and immediate substantial dilution and
should not be purchased by investors who
cannot afford the loss of their entire
investment. See "Risk Factors" and
"Dilution."
4
<PAGE>
Proposed NASDAQ SmallCap
Market symbols.......... Common Stock -- FCCN
Warrants -- FCCNW
- -------------
(1) Gives effect to the Stock Repurchase. Does not include (i) 1,500,000 shares
of Common Stock reserved for issuance upon exercise of the Warrants; (ii) an
aggregate of 300,000 shares of Common Stock reserved for issuance upon
exercise of the Representative's Warrants and the warrants included therein;
(iii) 165,600 shares of Common Stock reserved for issuance upon exercise of
outstanding options under the Company's 1997 Stock Option Plan (the "Plan");
(iv) 334,400 shares of Common Stock reserved for issuance upon exercise of
options available for future grant under the Plan; and (v) 300,000 shares of
Common Stock reserved for issuance upon the exercise of warrants issued in
December 1997. See "Management -- 1997 Stock Option Plan," and
"Underwriting."
(2) Does not include any Warrants referred to in clause (ii) and (iii) of Note 1
above.
Summary Financial Information
The summary financial information set forth below is derived from and
should be read in conjunction with the financial statements, including the notes
thereto, appearing elsewhere in this Prospectus.
Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1996 1997
------------ ---------------
<S> <C> <C>
Revenues .............................................. $ 98,699 $ 321,706
Cost of revenues ...................................... (67,582) (251,928)
Selling, general and administrative costs ............. (81,220) (540,883)
Non-cash compensation ................................. -- (1,537,000)
Net loss .............................................. (54,206) (2,037,417)
Net loss per share .................................... (.11) (1.67)
Weighted average number of shares outstanding ......... 512,000 1,218,000
</TABLE>
Balance Sheet Data:
December 31, 1997
--------------------------------
Actual As Adjusted(1)
-------------- ---------------
Working capital (deficit) .............. $ (423,369) $4,081,668
Total assets ........................... 486,200 4,661,700
Total liabilities ...................... 931,148 566,148
Accumulated deficit .................... 2,099,548 2,099,548
Stockholders' (deficit) equity ......... (444,948) 4,095,552
- -------------
(1) Gives effect to (i) the Stock Repurchase and (ii) the sale of the Common
Stock and Warrants offered hereby and the application of the estimated net
proceeds therefrom. See "Use of Proceeds."
Notice to California Investors. Each purchaser of Common Stock and Warrants in
California must be an "accredited investor" as that term is defined in Rule
501(a) of Regulation D promulgated under the Securities Act of 1933, as amended
(the "Securities Act") or satisfy one of the following suitability standards:
(i) minimum annual gross income of $50,000 and a net worth (exclusive of home,
home furnishings and automobiles) of $75,000; or (ii) minimum net worth
(exclusive of home, home furnishings and automobiles) of $150,000.
5
<PAGE>
RISK FACTORS
The securities offered hereby are highly speculative and involve
substantial risks. Prospective investors should carefully consider the following
risk factors before making an investment decision.
Recent Organization; Early Stage Company. The Company was organized in
February 1997 as successor to the business of the Predecessor Companies and is
in an early stage of development. Accordingly, the Company has a limited
operating history upon which an evaluation of its performance and prospects can
be made. The Company is subject to all of the risks, uncertainties, expenses,
delays, problems and difficulties frequently encountered in the establishment
of a new business in a rapidly evolving industry characterized by intense
competition and an increasing and substantial number of new market entrants and
new Internet products and services. See "Business."
Proposed Plan of Operation. The Company's proposed plan of operation and
prospects will be largely dependent upon the Company's ability to successfully
establish and equip additional POPs on a timely and cost effective basis; hire
and retain skilled management, technical, marketing and other personnel; and
attract and retain significant numbers of subscribers. The Company has limited
experience in commercializing new Internet products and services and there is
limited information available concerning the potential performance or market
acceptance of the Company's POPs. There can be no assurance that the Company
will be able to successfully implement its business plan or that unanticipated
expenses, problems or technical difficulties will not occur which would result
in material delays in its implementation. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Limited Revenues; Significant Losses; Explanatory Paragraph in Report of
Independent Public Accountant. The Company has not yet generated any meaningful
revenues, and will not generate any meaningful revenues until after the Company
establishes additional POPs and attracts and retains a significant number of
subscribers, which the Company does not anticipate will occur until several
months following the consummation of this offering, if at all. For the period
from May 1, 1995 (inception) to December 31, 1997, the Company incurred a
cumulative net loss of approximately $2,099,548. Since December 31, 1997, the
Company has incurred losses and anticipates that it will continue to incur
significant losses until, at the earliest, the Company generates sufficient
revenues to offset the substantial up-front expenditures and operating costs
associated with establishing additional POPs and attracting and retaining a
significant subscriber base. There can be no assurance that the Company will be
able to attract and retain a sufficient number of subscribers to generate
meaningful revenues or achieve profitable operations. The Company's independent
public accountants have included an explanatory paragraph in their report on the
Company's financial statements stating that certain factors raise substantial
doubt about the Company's ability to continue as a going concern. At December
31, 1997, the Company had a working capital deficit of $423,369. See Financial
Statements.
Dependence on Offering Proceeds; Possible Need for Additional Financing.
The capital requirements relating to implementation of the Company's business
plan will be significant. The Company is dependent on the proceeds of this
offering or other financing in order to continue in business and fully implement
its proposed plan of operation. Based on currently proposed plans and
assumptions relating to the implementation of its business plans (including the
timetable of, and costs associated with, establishing additional POPs), the
Company believes that the proceeds of this offering will be sufficient to
satisfy its contemplated cash requirements for at least twelve months following
the consummation of this offering. In the event that the Company's plans change,
its assumptions change or prove to be inaccurate or if the proceeds of this
offering prove to be insufficient to implement its business plans, the Company
would be required to seek additional financing sooner than currently
anticipated. There can be no assurance that the proceeds in this offering will
be sufficient to permit the Company to implement its proposed business plan or
that any assumptions relating to the implementation of such plan will prove to
be accurate. To the extent that the proceeds of this offering are not sufficient
to enable the Company to generate meaningful revenues or achieve profitable
operations, the inability to obtain additional financing will have a material
adverse effect on the Company. There can be no assurance that any such financing
will be available to the Company on commercially reasonable terms, or at all.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operation."
Limited Number of POPs; Geographic Concentration; Uncertainty of Network
Expansion. There are currently ten POPs in operation, only three of which have
been in operation for more than one year, and all of which
6
<PAGE>
are in the greater New York metropolitan area. Consequently, the results
achieved to date by the Company's POPs may not be indicative of the prospects or
market acceptance of a larger number of POPs, particularly in wider and more
geographically dispersed areas with varied demographic characteristics. The
process of identifying suitable sites and establishing additional POPs is
lengthy and network installation typically requires six to eight weeks to
complete from the time a lease for a new POP is entered into. There can be no
assurance that the Company will be successful in identifying suitable sites or
in establishing additional POPs. Unforeseen events, including failure to obtain
and install telephone lines and network equipment on a timely and cost-effective
basis, could materially delay the Company's plans in target markets. The Company
has relatively limited experience in establishing POPs and has limited financial
and other resources. There can be no assurance that the Company will be able,
for financial or other reasons, to successfully expand its network or that any
expansion will not be subject to unforeseen delays and costs. See "Business --
Network Infrastructure."
Dependence on Sole Suppliers and Manufacturers; Possible Service
Interruptions and Equipment Failures. The Company is currently dependent on a
sole supplier (Tinkleman Enterprises, Inc.) to provide Internet access via
leased telecommunications lines on a cost-effective and continuous basis. The
Company has not entered into an interconnect agreement with such supplier.
Although the Company believes that it currently has sufficient access to
telecommunications networks on favorable terms and believes that its
relationship with such supplier is satisfactory, any increase in rates charged
by such supplier would materially adversely affect the Company's operating
margins. Failure to obtain continuing access to such networks would also have a
material adverse effect on the Company, including possibly requiring the Company
to significantly curtail or cease its operations. The Company also is dependent
on third-party manufacturers of hardware components. Certain components used by
the Company in providing its networking services are generally acquired from
only one source, including high performance routers manufactured by Cisco
Systems, Inc. and remote access servers manufactured by 3 Com (formerly U.S.
Robotics, Inc.). The Company has not entered into agreements with any equipment
manufacturer and purchases equipment components pursuant to purchase orders
placed from time to time in the ordinary course of business. Although the
Company believes that network equipment is currently available from numerous
sources, failure by manufacturers to deliver quality products on a timely basis
or the inability to develop alternative sources if and as required, could result
in delays which could materially adversely affect the Company's business and
limit the Company's ability to expand its operations.
In addition, the Company's operations require that its POPs and its
third-party telecommunications networks operate on a continuous basis. It is
possible that the Company's POPs and third-party telecommunications networks may
from time to time experience service interruptions or equipment failures.
Service interruptions and equipment failures resulting in material delays would
adversely affect subscriber confidence as well as the Company's business
operations and reputation. See "Business -- Internet Access Providers and
Suppliers."
New Industry; Uncertainty of Market Acceptance; Limited Marketing, Service
and Support Capabili-ties. The Internet connectivity services industry is
characterized by a limited operating history and a high rate of business
failures. Because the market is relatively new and current and future
competitors are likely to introduce competing Internet connectivity and/or
online services and products, it is difficult to predict the rate at which the
market will grow or at which new or increased competition will result in market
saturation. The novelty of the market for Internet access services may adversely
affect the Company's ability to retain new subscribers who may be unfamiliar
with the Internet and more likely to discontinue the Company's services after an
initial trial period. Any significant decline in demand for Internet
connectivity services or in the computer industry generally or in particular
target markets would have a material adverse effect on the Company's business
and prospects. The Company's success will be largely dependent upon the
Company's ability to continually attract and retain additional subscribers and
replace terminating subscribers. To date, the Company has relied entirely on the
efforts of its executive officers for the marketing of its services. Full scale
marketing of the Company's services to individuals may require reliance on third
party distribution channels, such as retail stores, catalogs, book publishers
and computer hardware and software vendors. There can be no assurance that the
Company will be able to successfully develop or maintain relationships with
these parties. The successful implementation of the Company's business plans
will also require the Company to expand customer service and support
capabilities necessary to satisfy customer requirements. The Company currently
has limited marketing experience and limited marketing, service, customer
support and other resources. There can be no assurance that the Company will be
able to successfully expand its marketing activities or customer service or
support capabilities, or that the Company's efforts will result in initial or
continued market acceptance for the Company's Internet access services. See
"Business -- Marketing and Sales."
7
<PAGE>
Subscriber Attrition. The Company's operating results will be significantly
affected by subscriber attrition rates. Subscribers may discontinue service
without penalty at any time, and there can be no assurance that subscribers will
continue to purchase services from the Company or that the Company will not be
subject to significant subscriber attrition. The Company has historically
experienced a subscriber attrition rate of less than 20%. Significant levels of
subscriber attrition in the future would have a material adverse effect on the
Company's operating results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Competition. The market for Internet access services is highly competitive.
There are no substantial barriers to entry, and the Company expects that
competition will intensify in the future. The Company believes that its ability
to compete successfully will be significantly affected by numerous factors,
including price, ease of use, reliability, customer support, geographic coverage
and industry and general economic trends (particularly unfavorable economic
conditions adversely affecting consumer discretionary spending). The Company's
competitors include many large companies that have substantially greater market
presence and financial, technical, marketing and other resources than the
Company, including (i) international, national and regional commercial Internet
service providers, such as Performance Systems International, Inc., Bolt Beranek
& Newman, Inc. and UUNET Technologies, Inc.; (ii) established on-line services
companies that currently offer Internet access, such as America Online, Inc.,
CompuServe Incorporated, Prodigy Services Company, Earthlink and Delphi Internet
Services; (iii) computer hardware and software and other technology companies,
such as IBM and Microsoft Corp.; (iv) national long distance carriers, such as
AT&T Corp., MCI Communications Corp. and Sprint Corp.; (v) regional telephone
companies; and (vi) cable operators, such as Tele-Communications, Inc. New
competitors, including large computer hardware and software, media, cable and
telecommunications companies, have increased their focus on the Internet access
market. Increased competition has resulted and could continue to result in
significant price competition, which in turn could result in significant price
reductions. In addition, increased competition for new subscribers could result
in increased sales and marketing expenses and related subscriber acquisition
costs, which could materially adversely affect the Company's potential
profitability. There can be no assurance that the Company will be able to offset
the effects of any such competition or resulting price reductions through an
increase in the number of its subscribers, higher revenue from enhanced services
or cost reductions or that the Company will have the financial resources,
technical expertise or marketing and support capabilities to compete
successfully. See "Business -- Competition."
Capacity Constraints; System Failure and Security Risks. The Company's
operations will depend upon the capacity, reliability and security of its
network infrastructure. The Company currently has limited network capacity and
will be required to continually expand its network infrastructure to accommodate
significant numbers of users and increasing amounts of information they may wish
to access. Expansion of the Company's network infrastructure will require
significant financial, operational and management resources. There can be no
assurance that the Company will be able to expand its network infrastructure to
meet potential demand on a timely basis, at a commercially reasonable cost, or
at all. Failure by the Company to expand its network infrastructure on a timely
basis would have a material adverse effect on the Company. The Company's
operations will also be dependent on the Company's ability to protect its
computer equipment against damage from fire, power loss, telecommunications
failures and similar events. The Company's network infrastructure will be
vulnerable to computer viruses, break-ins and similar disruptions from
unauthorized tampering with the Company's computer systems. Computer viruses or
problems caused by third parties could lead to material interruptions, delays or
cessation in service to consumers. Inappropriate use of the Internet by third
parties could also potentially jeopardize the security of confidential
information stored in the computer systems of consumers. Security and privacy
concerns of consumers may limit the Company's ability to develop a significant
subscriber base. See "Business -- Network Infrastructure."
Rapid Technological Change. The market for Internet access is characterized
by rapidly changing technology, evolving industry standards, emerging
competition and frequent new software and service introductions. There can be no
assurance that the Company can successfully identify new product and service
opportunities as they arise and develop and bring new products and services to
market in a timely manner or that software, services or technologies developed
by others will not render the Company's services or technologies noncompetitive,
obsolete or less marketable. The Company currently does not have any proprietary
applications software. The Company's business is also subject to fundamental
changes in the way Internet access services are delivered. Currently, Internet
services are accessed primarily by computers and are delivered by telephone
lines. To
8
<PAGE>
the extent that the Internet becomes increasingly accessible by screen-based
telephones, television or other consumer electronic devices or customer
requirements change the way Internet access is provided, the Company may be
required to acquire or develop new technology or modify its existing technology
to accommodate these developments. Technological advances include compression,
full-motion video, and integration of video, voice, data and graphics. The
pursuit of these technological advances may require substantial time and
expense, and there can be no assurance that the Company will succeed in adapting
its Internet service business to alternate access devices and conduits. See
"Business -- Network Infrastructure."
Risks Associated with Expansion and Acquisitions. The Company intends to
use the proceeds of this offering to expand its operations through internal
growth and acquisition. The Company plans to establish additional POPs, attract
significant numbers of additional subscribers, expand its work force and expand
its presence in selected geographic markets. To successfully manage growth, the
Company will be required to continue to implement and improve its operating
systems, train and manage its employees, monitor operations, control costs and
maintain effective quality controls. The Company has limited experience in
effectuating rapid expansion and in managing operations which are geographically
dispersed, and there can be no assurance that the Company will be able to
successfully expand its operations or manage growth. The Company intends to
pursue opportunities by making selective acquisitions of subscriber bases. While
the Company from time to time evaluates possible acquisition opportunities, as
of the date of this Prospectus, the Company has no plans, agreements,
commitments, understandings or arrangements with respect to any such
acquisition. There can be no assurance that the Company will ultimately effect
any acquisition, that it will be able to successfully integrate into its
operations any subscriber base which it may acquire or that the Company will not
incur significant amortization expense associated with attrition of newly
acquired subscriber bases.
The Company may determine, depending upon the opportunities available to
it, to seek additional debt or equity financing to fund the cost of acquiring
subscriber bases. To the extent that the Company finances an acquisition with
equity securities, any such issuance of equity securities would result in
dilution to the interests of the Company's stockholders. Additionally, to the
extent that the Company incurs indebtedness or issues debt securities in
connection with any acquisition, the Company will be subject to risks associated
with incurring substantial indebtedness, including the risks that interest rates
may fluctuate and cash flow may be insufficient to pay principal and interest on
any such indebtedness. See "Use of Proceeds" and "Business -- Company Strategy."
Broad Discretion in Application of Proceeds; Benefits to Related Parties.
Approximately $930,500 (19.4%) of the estimated net proceeds of this offering
has been allocated to working capital and general corporate purposes.
Accordingly, the Company's management will have broad discretion as to the
application of such proceeds. The Company also intends to use an aggregate of
$435,000 (9.1%) of the net proceeds of this offering to (i) repay $175,000 of
indebtedness owed to Michael Char, a former officer and director of the Company
and (ii) effect the Stock Repurchase, pursuant to which the Company will
repurchase 231,520 shares of Common Stock from Mr. Char for $260,000. The
Company also intends to use $20,000, $20,000, $40,000, $30,000 and $85,000,
respectively, of the net proceeds of this offering to repay outstanding
principal amounts of indebtedness to Messrs. Cole-Hatchard and Feinberg, Mr.
Cole-Hatchard's mother, Provident Bank on behalf of Cole-Hatchard, and The Rough
Group, a partnership of which Ronald C. Signore, a director of the Company, is a
general partner. Additionally, a portion of the proceeds of this offering
allocated to working capital may be used to pay the salaries of executive
officers (which is anticipated to be approximately $225,000 (or 4.7% of the net
proceeds) during the twelve months following this offering) to the extent
operating cash flow is insufficient for such purpose. See "Use of Proceeds" and
"Certain Transactions."
Government Regulation; Potential Liability for Content. Recently enacted
federal, state and local legislation aimed at limiting the use of the Internet
to transmit certain content and materials could result in significant potential
liability to Internet service providers. These types of legislative actions
present the potential for increased focus and attempts to impose liability upon
Internet access providers for information disseminated through their systems.
The adoption or strict enforcement of any such laws or regulations may limit the
growth of the Internet, which could in turn decrease the demand for the
Company's services and increase the Company's cost of doing business. Inasmuch
as the applicability to the Internet of the existing laws governing issues such
as property ownership, libel and personal privacy is uncertain, any such new
legislation or regulation or the
9
<PAGE>
application of existing laws and regulations to the Internet could have an
adverse effect on the Company's business and prospects. Changes in the
regulatory environment relating to the Internet connectivity industry,
including regulatory changes which directly or indirectly affect
telecommunication costs or increase the likelihood or scope of competition from
local and regional telephone companies or others, could also have an adverse
effect on the Company's business and prospects. See "Business."
Lack of Intellectual Property Protection. The Company relies on a
combination of copyright and trademark laws, trade secrets, software security
measures, license agreements and nondisclosure agreements to protect its
proprietary information. The Company currently has no registered copyrights or
patents or patent applications pending. It may be possible for unauthorized
third parties to copy aspects of, or otherwise obtain and use, the Company's
proprietary information without authorization. In addition, there can be no
assurance that any confidentiality agreements between the Company and its
employees or any license agreements with its customers will provide meaningful
protection for the Company's proprietary information in the event of any
unauthorized use or disclosure of such proprietary information. See "Business."
Dependence on Key Personnel; Limited Management; Need for Qualified
Management and Other Personnel. The success of the Company will be dependent on
the personal efforts of Nicko Feinberg, Chief Information Officer and Vice
President of Technology, Stephen J. Cole-Hatchard, Chairman, Chief Executive
Officer and President, and other key personnel. Although the Company has entered
into employment agreements with each of Messrs. Feinberg and Cole-Hatchard, as
well as Mr. Michael Olbermann, Chief Operating Officer, the loss of the services
of such individuals could have a material adverse effect on the Company's
business and prospects. The Company intends to obtain "key-man" insurance on the
life of each of Messrs. Feinberg and Cole-Hatchard in the amount of $1,000,000.
Mr. Cole-Hatchard will devote no less than forty hours a week to the Company.
Mr. Cole-Hatchard is also employed as a detective, and the Company has only five
employees in addition to its executive officers. The success of the Company is
largely dependent upon its ability to hire and retain additional qualified
management, marketing, technical, financial and other personnel including a
Chief Financial Officer. Competition for qualified personnel is intense, and
there can be no assurance that the Company will be able to hire or retain
additional qualified personnel. Any inability to attract and retain qualified
management and other personnel will have a material adverse effect on the
Company. See "Business -- Employees" and "Management."
Control by Current Stockholders. Upon consummation of this offering, the
Company's current stockholders will beneficially own, in the aggregate,
approximately 44.0% of the outstanding shares of Common Stock (assuming no
exercise of the Warrants). Accordingly, such persons, acting together, will be
in a position to control the Company, elect all of the Company's directors,
cause an increase in the authorized capital or the dissolution, merger or sale
of the assets of the Company, and generally to direct the affairs of the
Company. See "Management" and "Principal Stockholders."
No Dividends. To date, the Company has not paid any cash dividends on its
Common Stock and does not expect to declare or pay dividends on the Common
Stock in the foreseeable future. See "Description of Securities -- Dividend
Policy."
Limitation on Liability. The Company's Certificate of Incorporation
includes provisions to limit, to the full extent permitted by Delaware Law, the
personal liability of directors of the Company for monetary damages arising from
a breach of their fiduciary duties as directors. As a result of such provisions
in the Certificate of Incorporation, stockholders may be unable to recover
damages against the directors of the Company for actions taken by them which
constitute negligence, gross negligence or a violation of certain of their
fiduciary duties, which may reduce the likelihood of stockholders instituting
derivative litigation against directors and may discourage or deter stockholders
from suing directors for breaches of their duty of care, even though such an
action, if successful, might otherwise benefit the Company and its stockholders.
See "Management -- Indemnification of Directors and Officers."
Immediate and Substantial Dilution. This offering involves an immediate
and substantial dilution of $2.47 per share (61.8%) between the net tangible
book value per share after the offering and the initial public offering price
per share. See "Dilution."
Shares Eligible for Future Sale. Upon consummation of this offering, the
Company will have 2,676,480 shares of Common Stock outstanding (assuming no
exercise of the Warrants or outstanding options), of which
10
<PAGE>
the 1,500,000 shares of Common Stock offered hereby will be freely tradable
without restriction or further registration under the Securities Act of 1933, as
amended (the "Securities Act"). All of the remaining 1,176,480 shares of Common
Stock outstanding are "restricted securities," as that term is defined under
Rule 144 promulgated under the Securities Act and will become eligible for sale,
pursuant to Rule 144, on various dates commencing 90 days from the date of this
Prospectus, subject to the contractual restrictions described below. The holders
of all of such shares, other than 160,000 shares issued in connection with a
private placement in May 1997, have agreed not to sell such shares for a period
of at least twelve months from the date of this Prospectus without the
Representative's prior written consent. The holders of 160,000 shares issued in
the private placement have agreed not to sell such shares for a period of six
months from the date of this Prospectus. Messrs. Feinberg, Olbermann,
Cole-Hatchard and Char, who hold an aggregate of 624,480 shares of Common Stock,
have agreed not to sell or otherwise dispose of any securities of the Company
beneficially owned by them until the Company achieves $1.9 million in pre-tax
earnings, but in no event sooner than two years from the date of this
Prospectus. The Company has granted certain demand and "piggy-back" registration
rights to the Representative with respect to the securities issuable upon
exercise of the Representative's Warrants. No prediction can be made as to the
effect, if any, that sales of shares of Common Stock or even the availability of
such shares for sale will have on the market prices prevailing from time to
time. The possibility that substantial amounts of Common Stock may be sold in
the public market may adversely affect the prevailing market price for the
Common Stock and could impair the Company's ability to raise capital through the
sale of its equity securities. See "Shares Eligible for Future Sale" and
"Underwriting."
Contractual Obligations to the Representative. The Company will have
certain ongoing contractual obligtions to the Representative following the
consummation of this offering. The Company has agreed to use its best efforts to
elect a designee of the Representative as a non-voting adviser to the Company's
Board of Directors, if requested to do so by the Representative, for a period of
three years from the date of this Prospectus; and subject to certain limitations
and exclusions, to register, at the Company's expense, the Representative's
Warrants and the 300,000 shares of Common Stock underlying such warrants under
the Securities Act on one occasion during their exercise term and to include
such securities in any appropriate registration statement which is filed by the
Company during the seven years following the date of this Prospectus. In
addition, the Company will pay the Representative a consulting fee upon the
consummation of this offering, whether or not any consulting services are
performed, and a 5% Warrant solicitation fee. See "Underwriting."
Authorized Preferred Stock. The Company's Certificate of Incorporation
authorizes the Company's Board of Directors to issue 1,000,000 shares of "blank
check" Preferred Stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of these shares, without further
stockholder approval. The rights of the holders of Common Stock will be subject
to and may be adversely affected by the rights of holders of any Preferred Stock
that may be issued in the future. The ability to issue Preferred Stock without
stockholder approval could have the effect of making it more difficult for a
third party to acquire a majority of the voting stock of the Company, thereby
delaying, deferring or preventing a change in control of the Company.
See "Description of Securities."
No Assurance of Public Market; Arbitrary Offering Price; Possible
Volatility of Market Price of Common Stock and Warrants; Representative's
Potential Influence on the Market. Prior to this offering, there has been no
public trading market for the Common Stock or Warrants. There can be no
assurance that a regular trading market for the Common Stock or Warrants will
develop after this offering or that, if developed, it will be sustained.
Moreover, the initial public offering prices of the Common Stock and the
Warrants and the exercise price of the Warrants have been determined by
negotiations between the Company and the Representative and, as such, are
arbitrary in that they do not necessarily bear any relationship to the assets,
book value or potential earnings of the Company or any other recognized criteria
of value and may not be indicative of the prices that may prevail in the public
market. The market prices of the Company's securities following this offering
may be highly volatile. Factors such as the Company's operating results and
announcements by the Company or its competitors may have a significant impact on
the market price of the Company's securities. In addition, in recent years, the
stock market has experienced a high level of price and volume volatility and
market prices for the stock of many companies have experienced wide price
fluctuations which have not necessarily been related to the operating
performance of such companies. Although it has no obligation to do so, the
Representative intends to make a market in the Common Stock and Warrants and may
otherwise effect transactions in the Common
11
<PAGE>
Stock and Warrants. If the Representative makes a market in the Common Stock or
Warrants, such activities may exert a dominating influence on the market and
such activity may be discontinued at any time. The prices and liquidity of the
Common Stock and Warrants may be significantly affected to the extent, if any,
that the Representative participates in such market. See "Underwriting."
Possible Delisting of Securities from Nasdaq System; Risks Relating to
Penny Stocks. It is currently anticipated that the Company's Common Stock and
Warrants will be eligible for listing on the Nasdaq SmallCap Market upon the
completion of this offering based upon the Company having at least $4,000,000 in
net tangible assets after giving effect to the receipt of the proceeds of this
offering. In order to continue to be listed on Nasdaq, however, the Company must
maintain $2,000,000 in net tangible assets, a $1,000,000 market value of the
public float and have two market makers and a minimum bid price of $1.00 per
share. Although the Company believes that it will be able to satisfy these
maintenance criteria, failure to do so in the future may result in the delisting
of the Company's securities from Nasdaq, and trading, if any, in the Company's
securities would thereafter be conducted in the non-Nasdaq over-the-counter
market. As a result of such delisting, an investor could find it more difficult
to dispose of, or to obtain accurate quotations as to the market value of, the
Company's securities. In addition, if the Common Stock were to become delisted
from trading on Nasdaq and the trading price of the Common Stock were to fall
below $5.00 per share on the date the Company's securities were delisted,
trading in such securities would also be subject to the requirements of certain
rules promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), which require additional disclosure by broker-dealers in
connection with any trades involving a stock defined as a penny stock
(generally, any non-Nasdaq equity security that has a market price of less than
$5.00 per share, subject to certain exceptions). Such rules require the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith, and impose
various sales practice requirements on broker-dealers who sell penny stocks to
persons other than established customers and accredited investors (generally
institutions). For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transaction prior to sale. The additional
burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in the Company's securities, which
could severely limit the market price and liquidity of such securities and the
ability of purchasers in this offering to sell their securities of the Company
in the secondary market.
Potential Adverse Effect of Warrant Redemption. The Warrants are subject to
redemption by the Company at any time commencing on , 1999, upon notice of not
less than 30 days, at a price of $.10 per Warrant, provided that the closing bid
quotation of the Common Stock on all 20 trading days ending on the third day
prior to the day on which the Company gives notice has been at least 150%
(currently $7.20, subject to adjustment) of the then effective exercise price of
the Warrants and the Company obtains the written consent of the Representative
to such redemption prior to the Call Date. Redemption of the Warrants could
force the holders to exercise the Warrants and pay the exercise price at a time
when it may be disadvantageous for the holders to do so, to sell the Warrants at
the then current market price when they might otherwise wish to hold the
Warrants, or to accept the redemption price, which is likely to be substantially
less than the market value of the Warrants at the time of redemption. See
"Description of Securities -- Redeemable Warrants."
Possible Inability to Exercise Warrants. The Company intends to qualify the
sale of the securities offered hereby in a limited number of states. Although
certain exemptions in the securities laws of certain states might permit the
Warrants to be transferred to purchasers in states other that those in which the
Warrants were initially qualified, the Company will be prevented from issuing
Common Stock in such states upon the exercise of the Warrants unless an
exemption from qualification is available or unless the issuance of Common Stock
upon exercise of the Warrants is qualified. The Company may decide not to seek
or may not be able to obtain qualification of the issuance of such Common Stock
in all of the states in which the ultimate purchasers of the Warrants reside. In
such a case, the Warrants held by purchasers will expire and have no value if
such Warrants cannot be sold. Accordingly, the market for the Warrants may be
limited because of these restrictions. Further, a current prospectus covering
the Common Stock issuable upon exercise of the Warrants must be in effect before
the Company may accept Warrant exercises. There can be no assurance the Company
will be able to have a prospectus in effect when this Prospectus is no longer
current, notwithstanding the Company's commitment to use its best efforts to do
so. See "Description of Securities -- Redeemable Warrants."
Unrelated Bankruptcy. Nicko Feinberg, Chief Information Officer and
director of the Company, owned and operated Creative Images, Inc., which filed
for protection under Chapter 7 of the United States Bankruptcy Code in 1991.
See "Management."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the securities offered
hereby are estimated to be $4,800,500 ($5,603,075 if the Underwriter's
over-allotment option is exercised in full). The Company expects to use the net
proceeds during the twelve months following this offering approximately as
follows:
<TABLE>
<CAPTION>
Approximate
Approximate Percentage of
Application of Proceeds Dollar Amount Dollar Amount
- ----------------------- --------------- --------------
<S> <C> <C>
Acquisition of subscriber bases(1) ........................ $2,100,000 43.7%
Establishment of additional POPs(2) ....................... 600,000 12.5
Marketing and advertising(3) .............................. 450,000 9.4
Repayment of indebtedness(4) .............................. 460,000 9.6
Stock Repurchase(5) ....................................... 260,000 5.4
Working capital and general corporate purposes(6) ......... 930,500 19.4
---------- -----
Total ......................................... ......... $4,800,500 100.0%
========== =====
</TABLE>
- ------------
(1) Represents anticipated costs to acquire subscriber bases. As of the date of
this Prospectus, the Company has no plans, agreements, commitments,
understandings or arrangements with respect to any such acquisition. See
"Business -- Company Strategy."
(2) Represents anticipated costs associated with the establishment of up to
twenty-four additional POPs, including the cost of equipment, telephone
lines and initial rent, the cost of adding subscriber capacity to existing
POPs and salaries for up to ten additional technical and support personnel.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Plan of Operation."
(3) Includes costs associated with advertising in local newspapers and trade
publications, fees for independent marketing consultants and the salaries
for up to three marketing and sales personnel. See "Business -- Marketing
and Sales."
(4) Represents amounts to be used for the repayment of (i) $150,000 principal
amount of promissory notes issued in December 1997 together with interest at
the rate of 9% per annum due on the earlier of the consummation of this
offering or December 22, 1999; (ii) $20,000 payable to each of Messrs.
Cole-Hatchard and Feinberg, bearing interest at the rate of 8% per annum;
(iii) $95,000 together with accrued interest at the rate of 9% per annum
payable to Provident Savings Bank; and (iv) $175,000 payable to Mr. Char.
The Company used the proceeds of borrowings for working capital purposes.
See "Certain Transactions."
(5) Gives effect to the Stock Repurchase. See "Certain Transactions."
(6) Working capital may be used, among other things, to pay salaries of the
Company's executive officers (which is anticipated to be approximately
$225,000 during the twelve months following the offering), rent, trade
payables, professional fees and other operating expenses.
If the Underwriter exercises its over-allotment option in full, the Company
will realize additional net proceeds of $802,575, which will be added to the
Company's working capital.
Based on currently proposed plans and assumptions relating to the
implementation of its business plans, the Company believes that the proceeds of
this offering will be sufficient to satisfy its contemplated cash requirements
for at least twelve months following the consummation of this offering. In the
event that the Company's plans change, its assumptions change or prove to be
inaccurate or if the proceeds of this offering otherwise prove to be
insufficient to implement its business plans, the Company may find it necessary
or desirable to reallocate a portion of the proceeds within the above described
categories, use proceeds for other purposes, seek additional financing or
curtail its operations. There can be no assurance that any additional financing
will be available to the Company on acceptable terms, or at all.
13
<PAGE>
Proceeds not immediately required for the purposes described above will be
invested principally in United States government securities, short-term
certificates of deposit, money market funds or other short-term interest bearing
investments.
DILUTION
The difference between the initial public offering price per share of
Common Stock and the net tangible book value per share after this offering
constitutes the dilution to investors in this offering. Net tangible book value
per share of Common Stock is determined by dividing the net tangible book value
of the Company (total tangible assets less total liabilities) by the number of
shares of Common Stock outstanding.
As of December 31, 1997, the Company had a negative net tangible book value
of ($676,019) or ($.48) per share of Common Stock. After giving effect to (i)
the Stock Repurchase and (ii) the sale of the securities offered hereby (less
underwriting discounts and commissions and estimated expenses of this offering),
the pro forma net tangible book value of the Company as of December 31, 1997
would have been $4,095,552 or $1.53 per share, representing an immediate
increase in net tangible book value of $2.01 per share of Common Stock to
existing stockholders and an immediate dilution of $2.47 per share (61.8%) to
new investors. The following table illustrates this dilution to new investors on
a per share basis:
<TABLE>
<S> <C> <C>
Initial public offering price ..................................... $ 4.00
Net tangible book value before offering ..................... $ .48)
Increase attributable to investors in this offering ......... 2.01
------
Net tangible book value after offering ............................ 1.53
------
Dilution to new investors ......................................... $ 2.47
======
</TABLE>
The following table sets forth, with respect to existing stockholders and
new investors in this offering, a comparison of the number of shares of Common
Stock issued by the Company, the percentage of ownership of such shares, the
total cash consideration, the percentage of total cash consideration paid and
the average price per share.
<TABLE>
<CAPTION>
Shares Purchased Total Cash Consideration Average
----------------------- ------------------------- Price
Number Percent Amount Percent Per Share
----------- --------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders ......... 1,176,480 44.0% $ 415,600 6.5% $ .35
New Investors ................. 1,500,000 56.0 $6,000,000 93.5 4.00
--------- ----- ---------- -----
Total ............. ......... 2,676,480 100.0% $6,415,600 100.0%
========= ===== ========== =====
</TABLE>
The above tables assume no exercise of the Underwriter's over-allotment
option. If such option is exercised in full, the new investors will have paid
$6,900,000 for 1,725,000 shares of Common Stock, representing approximately
94.3% of the total consideration for 59.5% of the total number of shares of
Common Stock outstanding.
The above tables assume no exercise of outstanding stock options or
warrants. As of the date of this Prospectus, there are outstanding stock options
to purchase an aggregate of 165,600 shares of Common Stock at an exercise price
of $2.00 per share. To the extent that stock options are exercised, there will
be further dilution to new investors. See "Management -- 1997 Stock Option
Plan," "Description of Securities" and "Underwriting."
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997, on an actual basis, and as adjusted to give effect to (i) the
Stock Repurchase and (ii) the sale of the securities offered hereby and the
anticipated application of the estimated net proceeds therefrom:
<TABLE>
<CAPTION>
December 1997
---------------------------------
Actual As Adjusted
--------------- ---------------
<S> <C> <C>
Long-term debt ........................................... $ 547,589 $ 182,589
------------ ------------
Stockholders' equity (deficit):
Preferred Stock, $.01 par value, 1,000,000 shares
authorized, no shares issued and outstanding ......... $ -- $ --
Common stock, $.01 par value, 10,000,000 shares
authorized, 1,408,000 shares outstanding, 2,676,480
as adjusted(1) ....................................... 14,080 26,765
Additional paid-in-capital ............................ 1,646,520 6,434,335
Stock subscriptions receivable ........................ (6,000) (6,000)
Accumulated deficit ................................... (2,099,548) (2,099,548)
Treasury Stock ........................................ -- (260,000)
------------ ------------
Total stockholders' equity (deficit) ..................... (444,948) 4,095,552
------------ ------------
Total capitalization ..................................... $ 102,641 $ 4,278,141
============ ============
</TABLE>
(1) Does not include (i) 1,500,000 shares of Common Stock reserved for issuance
upon exercise of the Warrants; (ii) an aggregate of 300,000 shares of Common
Stock reserved for issuance upon exercise of the Underwriter's Warrants and
the warrants included therein; (iii) 165,600 shares of Common Stock reserved
for issuance upon exercise of outstanding options under the Plan; (iv)
334,400 shares of Common Stock reserved for issuance upon exercise of
options available for future grant under the Plan; and (v) 300,000 shares of
Common Stock reserved for issuance upon the exercise of warrants issued in
December 1997. See "Management -- 1997 Stock Option Plan," and
"Underwriting."
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Overview
The Company was organized in February 1997 as successor to the business of
the Predecessor Companies and is in an early stage of development. The Company's
financial statements include the accounts of the Company and the Predecessor
Companies.
The Company's revenues are derived primarily from providing Internet access
services to individuals and to a lesser extent to business subscribers. Revenues
are comprised principally of recurring revenues from the Company's customer
base, non-recurring start-up fees for X2 56K and leased line connections and
from various ancillary services. The Company charges subscription fees which are
billed monthly or quarterly, in advance, typically pursuant to pre-authorized
credit card accounts. For the year ended December 31, 1997, sales to individuals
accounted for approximately 80.0% of the Company's revenues.
Monthly subscription service revenue is recognized over the period in which
services are provided. Service revenues derived from dedicated access services,
which require the use of Company provided installation of equipment at a
subscriber's location, are recognized when the service is commenced. Fee
revenues for ancillary services are recognized as services are performed.
The Company has not yet generated any meaningful revenues, and will not
generate any meaningful revenues until after the Company establishes additional
POPs and attracts and retains a significant number of subscribers, which the
Company does not anticipate will occur until several months following the
consummation of this offering, if at all. For the period from May 1, 1995
(inception) to December 31, 1997, the Company incurred a cumulative net loss of
approximately $2,099,548 (after giving effect to non-cash compensation expense
of $1,537,000). Since December 31, 1997, the Company has incurred losses and
anticipates that it will continue to incur significant losses until, at the
earliest, the Company generates sufficient revenues to offset the substantial
up-front expenditures and operating costs associated with establishing
additional POPs and attracting and retaining a significant subscriber base. The
Company currently estimates, based on its projected expenses, including the
payment of executive and additional management salaries, that it should achieve
profitability with approximately 10,000 subscribers at its existing POPs. There
can be no assurance that the Company will be able to attract and retain a
sufficient number of subscribers to generate meaningful revenues or achieve
profitable operations.
The Company's operating results will be significantly affected by
subscriber attrition rates. Subscribers may discontinue service without penalty
at any time, and there can be no assurance that subscribers will continue to
purchase services from the Company or that the Company will not be subject to
significant subscriber attrition. The Company has historically experienced a
subscriber attrition rate of less than 20%. Significant levels of subscriber
attrition in the future would have a material adverse effect on the Company's
operating results.
Acceleration in the growth of the Company's subscriber base or changes in
usage patterns among subscribers may increase operating costs. Acceleration in
the growth of the subscriber base could require the Company to hire additional
personnel and increase the Company's expenses related to marketing, network
infrastructure and customer support sooner than anticipated. An increase in peak
time usage or an overall increase in usage by subscribers could adversely affect
the Company's ability to consistently meet the demand for its access services.
As a result, the Company may be required to hire additional personnel and
increase expenses related to network infrastructure capacity with minimal
corresponding increases in revenue on a per subscriber basis.
Plan of Operation
The Company's proposed plan of operation and prospects will be largely
dependent upon the Company's ability to successfully establish and equip
additional POPs on a timely and cost effective basis; hire and retain skilled
management, technical, marketing and other personnel; and attract and retain
significant numbers of subscribers.
The Company's telecommunications network is currently comprised of leased
high-speed data lines and ten POPs. Pursuant to its currently proposed plan of
operation, the Company will seek to establish up to twenty-four additional POPs
during the twelve months following the consummation of this offering. The number
of POPs
16
<PAGE>
will be dependent upon, among other things, market acceptance and demand in
target geographic markets and the technical effectiveness of alternative
delivery technologies. Certain new network services known as "display virtual
private networks" may permit the Company to establish a presence in particular
geographic markets without establishing additional POPs by permitting the
Company to connect its existing POPs to such networks. See "Business--Network
Infrastructure."
The Company anticipates that the average cost to acquire and install
equipment (consisting of a router, access server and communications hub) and
telephone lines in each POP will be approximately $13,000. The Company expects
to expand the capacity of its network through POP expansion at existing
locations. The Company's POPs, as initially configured, accommodate up to
approximately 160 subscribers. The Company expects that the average cost to
upgrade a POP to accommodate each additional 160 subscribers will be
approximately $8,500. The Company's existing network configuration has capacity
for up to approximately 3,000 subscribers.
The Company currently has five employees in addition to its executive
officers. The Company has entered into employment agreements with its executive
officers which provide for the payment of salaries in the aggregate amount of
$225,000 on an annual basis. Such salary expense could negatively affect future
operating results, and to the extent that the Company uses a portion of the
proceeds of this offering to pay such salaries, the Company will have less
resources available to it for other purposes. Depending upon the level of its
business activity, the Company anticipates that it will use a portion of the
proceeds of this offering to hire up to three additional employees over the next
twelve months to market the Company's access services to potential subscribers.
The Company also intends to hire up to ten additional technical and support
personnel during the twelve months following the offering. The Company believes
that it will be able to hire and retain additional personnel to meet an
expanding customer base.
Results of Operations
The Company commenced operations in late 1995 and established four POPs
during 1996. The Company had approximately 700 subscribers at December 31, 1996.
Revenues for the year ended December 31, 1997 were $321,706, compared to $98,699
for the prior comparable period. The increase was primarily attributable to
"dial-up" customer growth at the Company's Nyack and Goshen, New York POPs. At
December 31, 1997 and December 31, 1996, the Company had ten and four POPs,
respectively. The Company had approximately 1,600 and 700 subscribers,
respectively, at December 31, 1997 and 1996. For the year ended December 31,
1997, the Company's Nyack and Goshen, New York POPs accounted for approximately
92.5% of the Company's revenues. Six POPs were established in 1997. Such POPs
have not yet contributed significantly to revenue growth.
Cost of revenues for 1996 were $67,582, or approximately 68.5% of revenues,
approximately $42,000 of which related to communications expense for the
installation of customer dial-up lines and high speed T-1 line access to the
Internet. Cost of revenues for 1997 were $251,928, or approximately 78.3% of
revenues. The increase in cost of revenues was due to communications expense,
depreciation and personnel costs for maintaining equipment and were directly
related to volume increases in revenue. The Company expects these costs to
increase in absolute dollars as additional POPs are established.
Operating expenses for 1996 were $81,220, or 82.3% of revenues,
approximately $40,400 of which related to advertising and payroll. Operating
expenses for 1997 were $2,077,883, including a non-cash charge of $1,537,000,
and advertising and payroll expenses of $305,000. The increase in operating
expenses was attributable to payroll, rent and professional fees. Payroll
increases were directly related to volume increases in revenues. Rent increases
were attributable to the addition of new POPs and the establishment of larger
administrative space. Management anticipates future increases in operating
expenses for advertising, rent, payroll, depreciation and professional fees.
Included in operating expenses in 1996 and 1997 were $3,000 and $6,000
respectively, which were recorded as capital contributions. These expenses
related to administrative services performed by Michael Char, a former officer
and director of the Company. The value of these services was determined based on
estimated hours worked and an hourly rate consistent with the services
performed, and considering the amounts paid in cash to Mr. Feinberg during 1996
and 1997. The amount of salary expensed in 1996 and 1997 related to Mr. Char was
$15,233, and $15,378, respectively. During these periods, Mr. Char's principal
responsibilities were administrative and recordkeeping functions.
17
<PAGE>
Interest expense for the year ended December, 1997 was $28,421 or 8.8% of
revenues, as compared to $6,677, or 6.7% of revenues for the prior year.
Interest expense relates primarily to financing the purchase of computer
hardware for the year.
For the years ended December 31, 1996 and 1997, the Company incurred net
losses of $54,206 and $2,037,417, respectively.
Liquidity and Capital Resources
The Company's primary capital requirements have been and will continue to
be to fund the purchase and installation of network equipment at its POPs, as
well as for working capital, including the salaries of executive and other
personnel. To date, the Company has financed its capital requirements through
the issuance of debt and equity securities. At December 31, 1997, the Company
had a working capital deficit of $423,369.
In May 1997, the Company consummated a private placement pursuant to which
it issued 200,000 shares of Common Stock and received proceeds of $400,000. The
proceeds were used primarily for the purchase of network equipment, salaries
and expenses in connection with this offering. See "Certain Transactions."
In May 1997, the Company effected the Reorganization, pursuant to which it
issued promissory notes in the amounts of $141,800, $163,537 and $66,800,
respectively, to Messrs. Feinberg, Char and Cole-Hatchard. Included in such
indebtedness is $21,737 and $35,000, respectively, of advances made to the
Company by Messrs. Char and Cole-Hatchard to establish additional POPs. The
promissory notes were issued to Messrs. Feinberg, Char and Cole-Hatchard in
partial consideration of their effort in founding the Predecessor Companies.
See "Certain Transactions."
In March 1998, the Company entered into a settlement agreement with Mr.
Char pursuant to which Mr. Char agreed to discontinue a lawsuit and release the
Company from all claims (including for monies owed) in consideration of (i) an
up-front payment of $65,000 and (ii) a payment of $435,000 on the consummation
of this offering to satisfy an aggregate of $240,000 of existing obligations due
to Mr. Char (including $15,000 of legal fees) and to effect the Stock
Repurchase, pursuant to which the Company will repurchase 231,520 shares from
Mr. Char for $260,000. The Company also agreed to repay $20,000 of indebtedness
to each of Messrs. Cole-Hatchard and Feinberg upon the consummation of this
offering. The balance of the indebtedness owed to Messrs. Cole-Hatchard and
Feinberg bears interest at the rate of 8% per annum and is repayable at such
time as the Company achieves $1.9 million in pre-tax earnings, but in no event
sooner than two years from the date of this Prospectus. See "Certain
Transactions."
In August 1997, the Company borrowed $60,000 from Mr. Cole-Hatchard bearing
interest at the rate of 9.25% per annum. The Company repaid $30,000 of such
indebtedness in December 1997. The balance will be repaid from proceeds of the
offering directly to Mr. Cole-Hatchard's lender, Provident Savings Bank.
See "Certain Transactions."
In December 1997, the Company consummated a private placement pursuant to
which it issued (i) $150,000 principal amount of promissory notes and (ii)
warrants to purchase 300,000 shares of Common Stock at an exercise price of
$5.00 per share. The notes bear interest at the rate of 9% per annum and are
payable on the earlier of the consummation of this offering or December 22,
1999. The Company intends to use a portion of the proceeds of this offering to
repay such indebtedness. See "Certain Transactions."
In March 1998, the Company borrowed an aggregate of $65,000 from Provident
Savings Bank. The loan bears interest at the rate of 9% per annum and is
repayable on the earlier of (i) the consummation of this offering or (ii) June
1998. The Company intends to use a portion of the proceeds of this offering to
repay such indebtedness, and an additional $30,000 to Provident Bank on behalf
of Mr. Cole-Hatchard. See "Certain Transactions."
The capital requirements relating to implementation of the Company's
business plan will be significant. During the twelve months following the
consummation of this offering, the Company intends to purchase computer
equipment in connection with the establishment of additional POPs, upgrade its
existing POPs and hire additional technical and support personnel. Other than as
described above, as of the date of this Prospectus, the Company has no material
commitments for capital expenditures.
18
<PAGE>
The Company's independent public accountants have included an explanatory
paragraph in their report on the Company's financial statements stating that
certain factors raise substantial doubt about the Company's ability to continue
as a going concern. This offering is an integral part of the Company's plan to
continue as a going concern. See Note 1 to Notes to Financial Statements.
The Company is dependent on the proceeds of this offering or other
financing in order to continue in business and to fully implement its proposed
plan of operation. Based on currently proposed plans and assumptions relating to
the implementation of its business plans (including the timetable of, and costs
associated with, establishing additional POPs), the Company believes that the
proceeds of this offering will be sufficient to satisfy its contemplated cash
requirements for at least twelve months following the consummation of this
offering. In the event that the Company's plans change, its assumptions change
or prove to be inaccurate or if the proceeds of this offering prove to be
insufficient to implement its business plans, the Company would be required to
seek additional financing sooner than currently anticipated. There can be no
assurance that the proceeds in this offering will be sufficient to permit the
Company to implement its proposed business plan or that any assumptions relating
to the implementation of such plan will prove to be accurate. To the extent that
the proceeds of this offering are not sufficient to enable the Company to
generate meaningful revenues or achieve profitable operations, the inability to
obtain additional financing will have a material adverse effect on the Company.
There can be no assurance that any such financing will be available to the
Company on commercially reasonable terms, or at all.
Recent Accounting Pronouncements
During June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income", which establishes standards for reporting
and display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements.
During June, 1997, the Financial Accounting Standards Board issued SFAS No.
131 "Disclosures about Segments of an Enterprise and Related Information", which
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise" establishes standards for the way that public enterprises report
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosures
regarding products and services, geographical areas and major customers. SFAS
No. 131 defines operating segments as components of an enterprise about which
separate financial information is available that is evaluated regularly by
Management in deciding how to allocate resources and in assessing performance.
Both SFAS Nos. 130 and 131 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. The adoption of SFAS No. 130 is not expected
to have a material effect on the Company's financial position or results of
operations. The Company is currently reviewing the effect of SFAS No. 131 but
has yet been unable to fully evaluate the impact, if any, it may have on future
financial statement disclosures.
Year 2000
The Company utilizes software and related technologies throughout its
business that will be affected by the date change in year 2000. System
modifications or replacements are underway or planned which should make all
significant computer systems at the Company compliant with the year 2000
requirement. Anticipated spending for these modifications will be expensed as
incurred and are not expected to have a material impact on the Company's ongoing
results of operations.
19
<PAGE>
BUSINESS
The Company is an Internet service provider that offers "dial-up" Internet
access primarily to individual subscribers. The Company provides subscribers
with direct access to a wide range of Internet applications and resources,
including electronic mail, world wide web sites and regional and local
information and data services. The Company believes that its low subscriber to
modem ratio, its technical and customer support and ancillary services position
the Company to capitalize on the emerging and expanding markets for Internet
services.
The Company was incorporated under the laws of the State of Delaware in
February 1997 as successor to the business of the Predecessor Companies, Hobbes,
INET and Sara Girl, limited liability companies organized in May and August 1995
and July 1996, respectively, to own and operate POPs. In May 1997, the Company
effected the Reorganization, pursuant to which: (i) each of the Predecessor
Companies transferred all of its assets, subject to all of its liabilities, to
the Company; (ii) the members of the Predecessor Companies exchanged their
interests in the Predecessor Companies for promissory notes; and (iii) each of
the Predecessor Companies was dissolved. At the time of the Reorganization, the
Predecessor Companies operated an aggregate of four POPs.
See "Certain Transactions."
Market Trends
In recent years, the Internet has experienced a rapid increase in the
number of users. Industry sources estimate that the number of online households
in the United States was approximately 9.6 million at the end of 1995, 15.2
million at the end of 1996, 19.2 million at the end of 1997 and project that the
number of online households will exceed 40 million by the year 2000. The Company
believes that the following key trends will contribute favorably to expected
continued popularity of the Internet:
o Continuing Penetration of Computers and Modems in the Home: An increasing
percentage of computer owners also own modems, which are now pre-installed
in a growing number of new computers. According to Software Publishers
Association, more than 33.9 million or 34% of households in the United
States owned a personal computer at the end of 1995, of which approximately
70% also owned a modem. The Company believes that this growth is
accompanied by increasing use of computers for communications such as
facsimile transmissions and electronic mail.
o Growth of the Informational, Entertainment and Commercial Applications of
the Internet: Use of the Internet has grown rapidly since its
commercialization in the early 1990s. An increasing number of servers and
websites are being connected to the Internet, making available text,
graphics, audio and video information which may be accessed by consumers.
Through an Internet connection, users can access commercial, educational
and governmental databases, entertainment software, photographs and videos,
newspapers, magazines, library card catalogs, industry newsletters, weather
updates and other information. Traditional and emerging Internet
applications, including electronic mail, the World Wide Web and USENET news
groups, are also increasing in popularity.
o Increasing Availability of User-friendly Navigational Tools: Internet use
is also being promoted by the development of software tools that simplify
access to the Internet's applications and resources. As users become more
familiar with the Internet and the Internet increasingly becomes a medium
for entertainment and personal communication, the Company believes that
demand by individuals for competitively priced, direct, high speed access
to personal home pages, interactive multimedia games and entertainment will
continue to grow.
Company Strategy
The Company's objective is to expand its network of POPs rapidly in
selected geographic markets. The Company's strategy is to aggressively build its
subscriber base by:
Providing Internet Access to Individuals. The Company is primarily focused on
providing access services to individual subscribers, one of the fastest
growing segments of the Internet market. The Company seeks to establish brand
identity by offering high speed access service and highly responsive customer
support.
20
<PAGE>
The Company believes that its low subscriber to modem ratio helps prevent
busy signals which is attractive to subscribers. The Company also offers
Internet access to business and other commercial users, many of which often
require access to a dedicated Internet connection to maintain a competitive
position.
Offering Competitive Pricing. The Company has established a simple pricing
structure of charging subscribers a flat monthly fee of $19.95 for unlimited
access. The Company believes that this structure encourages usage by
eliminating subscribers' concern about incurring significant hourly charges,
which may increase subscriber retention rates. The Company believes that its
pricing structure will help attract new subscribers and facilitate continued
market penetration. The Company also intends to implement alternative price
plans, permitting subscribers and customers to select hourly or other special
billing features.
Continuing Network Expansion. The Company is aggressively expanding its high
speed, digital network. The Company believes that rapid expansion is
necessary to build its subscriber base and to promote regional brand name
recognition. The Company plans to augment the capacity of existing POPs to
satisfy increased subscriber demand. The Company currently supports 14.4,
28.8 and 36.6 Kbps modems at each of its POPs and has introduced X2 56K and
ISDN technologies into its network for dial-up accounts. The Company
continually evaluates alternative technologies, including satellite
television delivery systems and cable modems.
Targeting Suburban Markets. The Company intends to target suburban markets
with attractive demographic characteristics similar to the Company's existing
POPs. To achieve its goal, the Company will seek to cluster POPs for
operational efficiency and to share certain marketing, financial, customer
service and management personnel. By targeting suburban markets which will
initially be subject to less intensive competition than in large metropolitan
areas, the Company believes it will be able to reduce competition from large
Internet service providers. The Company will also seek to capitalize a demand
for Internet access by offering subscriber service which combines the
capabilities typically provided by large companies with the flexibility and
responsiveness of a small Internet service provider.
Pursuing Selective Acquisitions. Consistent with its strategy, the Company
intends to pursue opportunities by making selective acquisitions of
subscriber bases which the Company believes will enhance its prospects and
maximize revenues. The Company believes that it operates in a highly
fragmented segment of the Internet connectivity industry and that selective
acquisitions will enhance penetration in new and existing markets.
The Company's strategy and future marketing plans are subject to change as
a result of a number of factors, including progress or delays in the Company's
expansion efforts, changes in market conditions, the nature of possible
acquisitions which may become available to it in the future and technological
and competitive factors. There can be no assurance that the Company will be able
to successfully implement its business strategy or otherwise successfully expand
its operations.
Internet Services
The Company provides a variety of competitively priced Internet access
services. The Company's primary focus is on individuals who connect to the
Internet via a modem (referred to as "dial-up" accounts). Dial-up subscribers
can access the Internet by calling the Company's local POPs. The Company bills
its subscribers on a monthly or quarterly basis, in advance, typically through
pre-authorized credit card accounts.
Dial-Up Accounts: The Company believes that dial-up accounts present an
attractive opportunity for growth. A user can quickly activate an account
with the Company, obtain two Internet E-mail addresses, web space and
establish automatic billing to the user's credit card. Subscriber accounts
are priced from $19.95 per month for unlimited connections and $48 per month
for an unlimited ISDN use account to $4.95 per month for limited use
customers. There is no connect fee, except for a $20 start-up fee for X2 56K
connections. Connections for ISDN services require the customer to obtain an
ISDN line from the local telephone company. The Company's network supports
connectivity software which utilizes standard communication protocols such as
TCP/IP, which enable a user's computer to communicate with other computers
over the Internet. As of the date of this Prospectus, the Company had 1,600
individual and 75 business accounts.
21
<PAGE>
Dedicated Access: The Company also offers high speed, high bandwidth
dedicated leased lines principally for business users who desire to connect
internal computer networks to the Internet, 24 hours a day, seven days a
week. The Company offers leased line accounts to provide Internet services to
businesses at various speeds, including 56K circuits, fractional T-1 and full
T-1 lines, depending on the customer's needs. The Company provides its
customers with dedicated leased lines and bills subscribers on a monthly
basis through a consolidated bill (which includes the phone company's
charges).
Web Design and Hosting Services: Without incurring the expense of setting up
and maintaining a web server, including in-house technical support to design
and maintain a web site, a subscriber can rent space on a server for an
Internet presence. The Company offers web site hosting services for a 24-hour
interactive presence on the Internet. The Company's web servers connect
directly to the Internet via high speed T-1 lines providing maximum
bandwidth. This service includes domain name registration, 24-hour access,
file upload and/or download capability, and statistical logs. The Company
also offers web page design and development services and will seek to expand
the scope of such services in the future.
Co-Location Space: The Company provides a physical location at its facility
for a customer to install equipment and connect directly to the Internet.
This service provides customers with a low cost direct connection to the
Company's router. The Company provides this service under maintenance
agreements with pricing determined by the amount of space occupied and
bandwidth needed.
Subscriber Applications
The Company provides its subscribers with access to the full range of
available Internet applications, including:
Electronic Mail: E-mail is an Internet application by which an Internet user
can exchange messages with any other user who has an E-mail address. Messages
can be sent almost instantly to designated individuals or groups on a mailing
list.
World Wide Web: The World Wide Web is a browsing and searching system
comprised of thousands of computer servers, referred to as home pages, each
linked by a special communications protocol. This open protocol allows
Internet users to view and access text, graphics, digital video and audio
resident on a home page or to connect instantaneously to related and linked
information on the same server or other home pages. Since the Internet is an
open system, any company can create a home page on the World Wide Web in
order to provide users with product or service information. Users can then
solicit more information and, in some cases, make purchases electronically.
Browsers such as Netscape, Mosaic and Microsoft Explorer, which incorporates
its own World Wide Web browser, have helped contribute to the rapid growth of
the World Wide Web. The Company expects the World Wide Web to continue to
grow rapidly as more businesses and consumers become aware of the advantages
of communications on the Internet. As part of its service, the Company
provides each subscriber with one megabyte of web space on the Company's
World Wide Web servers.
USENET News Groups: USENET is a network of thousands of computers attached to
the Internet that provide forums, or news groups, that allow users to
exchange information on a variety of topics of shared interest. Internet
users can seek or provide information on diverse topics ranging from sports
or other hobbies, to job opportunities, to restaurant and travel suggestions.
Databases and Public Domain Software: An increasing number of host computers
are being connected to the Internet, which make available growing amounts of
text, graphics, audio and video information and public domain software. For
example, with an Internet connection, a user can access commercial,
educational and government databases, newspapers, magazines, library card
catalogs, industry newsletters, weather updates, and other information.
File Transfer Protocol: The Internet can be easily used to move electronic
files (including data, programs or text) from one computer to another. This
can be very useful for parties in separate locations that collaborate on data
files. Data transferred over the Internet remains in digital format and does
not need to be re-entered by a receiving party; it can be manipulated and
then re-transmitted to other Internet users.
22
<PAGE>
Network Infrastructure
The Company's operations will depend upon the capacity, reliability and
security of its network infrastructure. The Company currently has limited
network capacity and will be required to continually expand its network
infrastructure to accommodate significant numbers of users and increasing
amounts of information they may wish to access. Expansion of the Company's
network infrastructure will require significant financial, operational and
management resources.
The Company maintains a telecommunications infrastructure that enables it
to provide digital Internet connectivity services to its subscribers. The
Company's network of POPs gives subscribers access to the Internet by means of a
local telephone call. The Company's network is currently comprised of multiple
T-1 lines which are connected directly to seven of the Company's POPs (three of
the Company's POPs are connected via T-1 to the Company's Nyack, New York
facility).
The Company closely monitors data traffic on its network and expects to
expand the capacity of its network by the addition of POPs and POP expansion at
existing locations as demand increases. POPs are monitored by management
software at the Company's computer facilities in Nyack and Pearl River, New
York. In order to build its subscriber base, the Company intends to continue to
expand the number of its POPs. As of the date of this Prospectus, the Company
had a total of ten POP locations in suburban areas servicing Rockland, Orange,
Dutchess, Sullivan, Putnam, Ulster and Westchester counties in New York and
Bergen County in New Jersey. The Company intends to continue its expansion of
POPs in the greater New York metropolitan area, including in Morris and Passaic
counties in New Jersey and New Haven and Fairfield counties in Connecticut.
The number of POPs will be dependent upon, among other things, market
acceptance and demand in target geographic markets and the technical
effectiveness of alternative delivery technologies. Certain new network services
known as "display virtual private networks" may permit the Company to establish
a presence in particular geographic markets without establishing additional POPs
by permitting the Company to connect its existing POPs to such networks.
The Company maintains a telecommunications center at its Nyack facility and
Pearl River headquarters. Through these centers, the Company's technical staff
constantly monitors network utilization and security, including equipment at
individual POPs to ensure reliable Internet connectivity service. The Company is
subject to significant risks from a natural disaster or other unanticipated
event at these sites, and any damage or failure that causes interruptions in the
Company's operations could have a material adverse effect on the Company. The
Company currently maintains $1,000,000 of general liability insurance which
includes coverage for business interruption and property damage. The Company
plans to connect all of its POPs to its Pearl River facility in the future.
Internet Access Providers and Suppliers
The Company currently relies on a sole supplier to provide Internet access
via leased telecommunications lines on a cost-effective and continuous basis.
The Company has not entered into an interconnect agreement with such supplier.
Although the Company believes that it currently has sufficient access to
telecommunications networks on favorable terms and believes that its
relationship with such supplier is satisfactory, any increase in rates charged
by such supplier would materially adversely affect the Company's operating
margins. Failure to obtain continuing access to such networks would also have a
material adverse effect on the Company, including possibly requiring the Company
to significantly curtail or cease its operations.
The Company also is dependent on third-party manufacturers of hardware
components. Certain components used by the Company in providing its networking
services are acquired from only one source, including high performance routers
manufactured by Cisco Systems, Inc. and remote access servers manufactured by
3Com (formerly U.S. Robotics, Inc). The Company has not entered into agreements
with any equipment manufacturer and purchases equipment components pursuant to
purchase orders placed from time to time in the ordinary course of business.
Although the Company believes that network equipment is currently available from
numerous sources, failure by manufacturers to deliver quality products on a
timely basis or the inability to develop alternative sources if and as required,
could result in delays which could materially adversely affect the Company's
business and limit the Company's ability to expand its operations.
23
<PAGE>
Marketing and Sales
The Company's primary focus is on providing Internet services to
individuals who subscribe to the Company's dial-up service. The Company
currently sells its Internet access services through its executive officers
responding to inbound calls and E-mail, largely generated by referrals from
other subscribers. The Company anticipates that it will hire up to three sales
personnel during the twelve months following this offering to market the
Company's services and respond to subscription inquiries.
The Company is seeking to build its regional brand identity. The Company
engages in marketing and advertising activities, including advertising of its
services in specialty and regional publications, and participates in computer
trade shows. The Company also engages in various local promotional programs,
primarily to support newly opened POPs. The Company recently retained the
services of a marketing and advertising firm in order to develop a sales and
marketing program to complement the Company's planned expansion activities. The
agreement provides for payments of $1,500 per month and may be terminated upon
90 days' notice.
Customer Support
The Company believes that it is important to provide prompt and effective
assistance to its subscribers and customers. The Company provides network
monitoring and emergency subscriber assistance services 24 hours a day, seven
days a week. The Company provides regular support and technical assistance 16
hours per day, 7 days per week. In house technical personnel respond to
telephone inquiries, and are dedicated to responding to E-mail inquiries. There
can be no assurance, however, that the Company's customer support resources will
be sufficient to manage any expansion in the Company's subscriber base. Any
failure to adequately match customer support resources to projected increases in
subscribers could adversely affect the Company.
Competition
The market for Internet access services is highly competitive. There are no
substantial barriers to entry, and the Company expects that competition will
intensify in the future. The Company believes that its ability to compete
successfully will be significantly affected by numerous factors, including
price, ease of use, reliability, customer support, geographic coverage and
industry and general economic trends (particularly unfavorable economic
conditions adversely affecting consumer discretionary spending). The Company's
competitors include many large companies that have substantially greater market
presence and financial, technical, marketing and other resources than the
Company, including (i) international, national and regional commercial Internet
service providers, such as Performance Systems International, Inc., Bolt Beranek
& Newman, Inc. and UUNET Technologies, Inc. ("UUNET"); (ii) established on-line
services companies that currently offer Internet access, such as America Online,
Inc. ("AOL"), CompuServe Incorporated, Prodigy Services Company, Earthlink, and
Delphi Internet Services; (iii) computer hardware and software and other
technology companies, such as IBM and Microsoft Corp. ("Microsoft"); (iv)
national long distance carriers, such as AT&T Corp., MCI Communications Corp.
and Sprint Corp.; (v) regional telephone companies; and (vi) cable operators,
such as Tele-Communications, Inc.
New competitors, including large computer hardware and software, media,
cable and telecommunications companies, have increased their focus on the
Internet access market, resulting in even greater competition for the Company.
Increased competition has resulted and could continue to result in significant
price competition, which in turn could result in significant reductions in the
average selling price of the Company's services. In addition, increased
competition for new subscribers could result in increased sales and marketing
expenses and related subscriber acquisition costs, which could materially
adversely affect the Company's potential profitability. There can be no
assurance that the Company will be able to offset the effects of any such
competition or resulting price reductions through an increase in the number of
its subscribers, higher revenue from enhanced services or cost reductions or
that the Company will have the financial resources, technical expertise or
marketing and support capabilities to compete successfully.
Most of the established on-line services companies and telecommunications
companies currently offer Internet access. In addition, new competitors,
including large computer hardware and software, media and telecommunications
companies, have increased their focus on the Internet access market, resulting
in even greater
24
<PAGE>
competition for the Company. In particular, Microsoft has introduced an Internet
access solution, including front-end software and an on-line service, called
"Microsoft Network." The application software for this on-line service is
bundled with Microsoft's Windows 95 operating system, which may give the service
a significant advantage over other on-line and Internet services. Microsoft has
undertaken a strategic alliance with UUNET that provides Microsoft customers
access to the Internet through UUNET's POPs. Microsoft has also purchased an
interest in Comcast, a leading cable operator, to converge software and cable
networks to deliver Internet access. In addition, IBM's most recent version of
its OS/2 operating system software includes Internet utilities, and IBM offers
Internet access through its own private communications network. AOL is offering
direct Internet access. The ability of these competitors or others to bundle
services and products with Internet connectivity services could place the
Company at a significant competitive disadvantage.
The market for Internet access is characterized by rapidly changing
technology, evolving industry standards, emerging competition and frequent new
software and service introductions. There can be no assurance that the Company
can successfully identify new product and service opportunities as they arise
and develop and bring new products and services to market in a timely manner or
that software, services or technologies developed by others will not render the
Company's services or technologies noncompetitive, obsolete or less marketable.
The Company currently does not have any proprietary applications software.
Employees
As of December 31, 1997, the Company had five employees in addition to its
executive officers. Of such employees, two are engaged in customer support, two
in accounting and one in administration. The Company engages part-time employees
from time to time. None of the Company's employees is represented by a union.
The Company considers its employee relations to be good.
Properties
The Company's executive offices are located in Pearl River, New York, where
the Company leases approximately 5,525 square feet under a lease that expires in
June 2002. The annual rental is $96,000. The Company also leases space
(typically, less than 100 square feet) in various geographic locations to house
the telecommunications equipment for each of its POPs. Leased facilities for
POPs have various expiration dates ranging from November 1997 through April
2002. Aggregate annual rentals for POPs are approximately $20,000 over the next
twelve months. The Company does not anticipate difficulties in obtaining future
leased space for its POPs.
Legal Proceedings
The Company is not a party to any legal proceedings.
25
<PAGE>
MANAGEMENT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Stephen J. Cole-Hatchard .......... 40 Chairman of the Board, Chief Executive Officer and
President
Nicko Feinberg .................... 26 Chief Information Officer, Vice President of Technology
and Director
Michael Olbermann ................. 41 Chief Operating Officer, Vice President and Director
Ronald C. Signore ................. 37 Director
Ronald Shapss ..................... 51 Director
</TABLE>
Stephen J. Cole-Hatchard has been Chairman, Chief Executive Officer and
President of the Company since August 1997. Mr. Cole-Hatchard was Vice
President of Finance of the Company from February 1997 to August 1997 and has
been a director of the Company since February 1997. Mr. Cole-Hatchard will
devote approximately forty hours a week of his business time to the Company's
affairs. Mr. Cole-Hatchard has been a director and executive officer of Hudson
Technologies, Inc., a publicly-traded company engaged in providing refrigerant
management services, since January 1993. Mr. Cole-Hatchard is a member of the
bar of the State of New York and is employed as a detective with the
Clarkstown, New York Police Department, Legal Division.
Nicko Feinberg has been a director and Vice President of Technology of the
Company since November 1996 and Chief Information Officer since August 1997.
From April 1994 to October 1996, Mr. Feinberg was a Sales Manager and, from
April 1991 to April 1994, a Sales Account Executive for Microage Computer
Outlet, Inc., a company engaged in computer sales and training. From September
1989 to March 1991, Mr. Feinberg owned and operated Creative Images, Inc., a
pre-press service bureau. Creative Images, Inc. filed for protection under
Chapter 7 of the United States Bankruptcy Code in 1991.
Michael Olbermann has been Chief Operating Officer since September 1997 and
a director of the Company since February 1997. Mr. Olbermann was also Vice
President of Business Development from February 1997 until September 1997. Mr.
Olbermann has owned and operated Rock House Construction Co., Inc., a company
engaged in commercial and residential construction, since 1986.
Ronald C. Signore has been a director of the Company since December 1997.
Mr. Signore has been a partner in the accounting firm of Robert Gray & Co.,
LLP, for more than the past five years.
Ronald Shapss has been a director of the Company since December 1997. Mr.
Shapss is the founder of Ronald Shapss Corporate Services, Inc., a company
engaged in consolidating fragmented industries since 1992.
All directors hold office until the next annual meeting of stockholders for
the ensuing year or until their successors have been duly elected and qualified.
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board. The Company has established an Audit Committee of the
Board of Directors consisting of Messrs, Signore and Shapss.
The Company has agreed, for a period of three years from the effective date
of this Prospectus, if so requested by the Representative, to recommend and use
its best efforts to elect a designee of the Representative as a non-voting
advisor to the Company's Board of Directors. The Representative has not yet
exercised its right to designate such a person.
The Company intends to obtain "key man" life insurance on the life of each
of Nicko Feinberg and Stephen J. Cole-Hatchard in the amount of $1,000,000.
Executive Compensation
The following table sets forth the compensation paid to the Company's Chief
Executive Officer for the fiscal year ended December 31, 1997. No executive
officer of the Company received aggregate compensation which exceeded $100,000
during such year.
26
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards($)
--------------------------------------------- --------------------------
Securities
Restricted Underlying
Other Annual Stock Options/
Name and Principal Position Year Salary($) Bonus ($) Compensation($) Award SARs(#)
- ---------------------------- ------ ----------- ----------- ----------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Stephen J. Cole-Hatchard, Chief
Executive Officer ............ 1997 $-- $-- $-- -- --
</TABLE>
Employment Agreements
The Company has entered into three-year employment agreements with each of
Messrs. Feinberg, Cole-Hatchard and Olbermann which provide for an annual base
compensation of $88,000, $45,000, and $88,000, respectively, and such
bonuses as the Board of Directors may, in its sole discretion, from time to time
determine. The employment agreements provide for employment on a full-time basis
(except for the Company's agreement with Mr. Cole-Hatchard) and contain a
provision that the employee will not compete or engage in a business competitive
with the current or anticipated business of the Company during the term of the
employment agreement and for a period of two years thereafter. A state court may
determine not to enforce such provision or to partially enforce such provision.
Director Compensation
The Company does not currently pay its directors any fees for attending
Board meetings. The Company anticipates that following this offering it will pay
non-employee directors $3,000 per annum for attending Board Meetings.
In December 1997, the Company entered into a consulting agreement with Mr.
Shapss which provides for Mr. Shapss to assist the Company with mergers and
acquisitions. In consideration of such services, the Company issued to Mr.
Shapss 100,000 shares of Common Stock and non-plan options to purchase 80,000
shares of Common Stock at an exercise price of $2.00 per share. The Company also
agreed to pay to Mr. Shapss $2,000 per month during a one year period following
the consummation of this offering.
Indemnification of Directors and Officers
The Company's Certificate of Incorporation provides for the Company to
indemnify each director and officer of the Company to the fullest extent
permitted by the Delaware General Corporation Law. The foregoing provision may
reduce the likelihood of derivative litigation against directors and may
discourage or deter stockholders or management from suing directors for breaches
of their duty of care, even though such an action, if successful, might
otherwise benefit the Company and its stockholders.
Liability Insurance
The Company intends to procure and maintain a policy of insurance under
which the directors and officers of the Company will be insured, subject to the
limits of the policy, against certain losses arising from claims made against
such directors and officers by reason of any acts or omissions covered under
such policy in their respective capacities as directors or officers, including
liabilities under the Securities Act.
1997 Stock Option Plan
In February 1997, the Board of Directors and stockholders of the Company
adopted the 1997 Stock Option Plan (the Plan ), pursuant to which 500,000 shares
of Common Stock are reserved for issuance upon exercise of options. The Plan is
designed to serve as an incentive for retaining qualified and competent
employees, directors and consultants.
27
<PAGE>
The Company's Board of Directors, or a committee thereof, administers the
Plan and is authorized, in its discretion, to grant options thereunder to all
eligible employees of the Company, including officers and directors (whether or
not employees) of, and consultants to, the Company. The Plan provides for the
granting of both "incentive stock options" (as defined in Section 422 of the
Internal Revenue Code of 1986, as amended) and non-qualified stock options.
Options can be granted under the Plan on such terms and at such prices as
determined by the Board of Directors, or a committee thereof, except that the
per share exercise price of options will not be less than the fair market value
of the Common Stock on the date of grant. In the case of an incentive stock
option granted to a stockholder who owns stock of the Company possessing more
than 10% of the total combined voting power of all classes of stock ("10%
stockholder"), the per share exercise price will not be less than 110% of such
fair market value. The aggregate fair market value (determined on the date of
grant) of the shares covered by incentive stock options granted under the Plan
that become exercisable by a grantee for the first time in any calendar year is
subject to a $100,000 limit.
Options granted under the Plan will be exercisable during the period or
periods specified in each option agreement. Options granted under the Plan are
not exercisable after the expiration of ten years from the date of grant (five
years in the case of incentive stock options granted to a 10% stockholder) and
are not transferable other than by will or by the laws of descent and
distribution.
As of the date of this Prospectus, the Company has granted options to
purchase an aggregate of 165,600 shares of Common Stock (net of forfeitures)
under the Plan at an exercise price of $2.00 per share. The Company has agreed
not to file a registration statement relating to the Plan for a period of two
years from the date of this Prospectus without the prior consent of the
Representative.
28
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of the date of this
Prospectus, after giving effect to the Stock Repurchase (based on information
obtained from the persons named below), relating to the beneficial ownership of
shares of Common Stock by: (i) each person or entity who is known by the Company
to own beneficially five percent or more of the outstanding Common Stock; (ii)
each of the Company's directors; and (iii) all directors and executive officers
of the Company as a group.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned
----------------------------
Number of Shares
Name of Beneficially Before
Beneficial Owner Owned(1) Offering After Offering
- ------------------------------------ ----------------- ---------- ---------------
<S> <C> <C> <C>
Nicko Feinberg ..................... 256,000 21.7% 9.6%
Stephen J. Cole-Hatchard ........... 256,000(2) 21.7 9.6
Michael Olbermann .................. 188,000 16.0 7.0
Ronald Shapss ...................... 180,000(3) 14.3 6.5
Ronald Signore ..................... 62,400(4) 5.0 2.3
Michael Char (5) ................... 24,480 * *
All directors and executive officers
as a group (five persons) ......... 942,400(6) 71.6% 33.5%
</TABLE>
- ------------
* Less than 1%
(1) The Company believes that all persons named in the table have sole voting
and investment power with respect to all shares of Common Stock beneficially
owned by them.
(2) Includes 144,000 shares held by the Cole-Hatchard Family Limited
Partnership, of which Mr. Cole-Hatchard is the general partner. Does not
include 20,000 shares held by Mr. Cole-Hatchard's mother and brother and
warrants to purchase 64,000 shares held by Mr. Cole-Hatchard's mother.
(3) Includes options to purchase 80,000 shares of Common Stock.
(4) Includes (i) warrants to purchase 39,200 shares of Common Stock held by The
Rough Group, of which Mr. Signore is a general partner, (ii) 3,200 shares of
Common Stock held by The Rough Group and (iii) options to purchase 20,000
shares of Common Stock held by Mr. Signore. Mr. Signore disclaims beneficial
ownership of other securities held by The Rough Group.
(5) Gives effect to the Stock Repurchase.
(6) Includes options and warrants to purchase 139,200 shares of Common Stock.
Messrs. Feinberg and Cole-Hatchard may be deemed to be "promoters" of the
Company as such term is defined in federal securities laws.
29
<PAGE>
CERTAIN TRANSACTIONS
In February 1997, the Company issued 256,000 shares to each of Messrs.
Char, Feinberg and Cole-Hatchard, and issued 188,000 to Mr. Olbermann in
consideration of $.01 per share. In December 1997, the Company issued 100,000
shares of Common Stock to Ronald Shapss, a director of the Company, in
consideration of $.01 per share. The Company agreed to repurchase 231,520 shares
held by Mr. Char upon the consummation of this offering.
During the year ended December 31, 1996, the Company borrowed $37,000 and
$15,000, respectively, from Messrs. Char and Cole-Hatchard. In January 1997, the
Company borrowed an additional $20,000 from Mr. Cole-Hatchard. Pursuant to the
Reorganization, Messrs. Feinberg, Char and Cole-Hatchard exchanged their
respective interests in the Predecessor Companies for promissory notes in the
principal amounts of $141,800 $163,537 and $66,800, respectively (inclusive of
previously outstanding indebtedness of $21,737 and $35,000, respectively, to
Messrs. Char and Cole-Hatchard described above). The Company has agreed to repay
all outstanding indebtedness to Mr. Char and $20,000 of indebtedness to each of
Messrs. Cole-Hatchard and Feinberg upon the consummation of this offering. The
balance of indebtedness owed to Messrs. Cole-Hatchard and Feinberg bears
interest at the rate of 8% per annum and is due at such time as the Company
achieves $1.9 million in pre-tax earnings, but in no event sooner than two years
from the date of this Prospectus.
Mr. Cole-Hatchard's mother and brother purchased 12,000 shares and 8,000
shares, respectively, at $2.00 per share, pursuant to the Company's private
placement in May 1997. The Rough Group, a general partnership of which Mr.
Signore, a director of the Company, is a general partner, purchased 16,000
shares pursuant to the Company's private placement in May 1997. In addition, Mr.
Cole-Hatchard's mother and The Rough Group purchased $40,000 and $85,000,
respectively, principal amount of promissory notes pursuant to the Company's
December 1997 private placement, and received warrants to purchase 64,000 and
196,000 shares, respectively, at an exercise price of $5.00 per share.
In August 1997, the Company borrowed $60,000 from Mr. Cole-Hatchard bearing
interest at the rate of 9.25% per annum (the rate at which Mr. Cole-Hatchard
borrowed such funds from an institutional lender). The Company repaid $30,000 of
such indebtedness in December 1997. The balance will be repaid directly to the
institutional lender from the proceeds of this offering.
The Company believes that each of the foregoing transactions were on terms
no less favorable than those which could have been obtained from unaffiliated
third parties. All future transactions between the Company and its affiliates
will be on terms no less favorable than would be obtained from unaffiliated
third parties.
30
<PAGE>
DESCRIPTION OF SECURITIES
General
The Company is authorized to issue 10,000,000 shares of Common Stock, par
value $.01 per share, and 1,000,000 shares of Preferred Stock, par value $.01
per share. As of the date of this Prospectus, and after giving effect to the
Stock Repurchase, there are 1,176,480 shares of Common Stock outstanding held of
record by 31 persons, and no shares of Preferred Stock outstanding.
Common Stock
The holders of Common Stock are entitled to one vote for each share held of
record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voting for the election of directors can
elect all of the directors then up for election. The holders of Common Stock are
entitled to receive ratably such dividends when, as and if declared by the Board
of Directors out of funds legally available therefor. In the event of
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining which are available
for distribution to them after payment of liabilities and after provision has
been made for each class of stock, if any, having preference over the Common
Stock. Holders of shares of Common Stock, as such, have no conversion,
preemptive or other subscription rights, and there are no redemption provisions
applicable to the Common Stock. All of the outstanding shares of Common Stock
are, and the shares of Common Stock offered hereby, when issued in exchange for
the consideration set forth in this Prospectus, will be, fully paid and
nonassessable.
Preferred Stock
The Company is authorized to issue 1,000,000 shares of Preferred Stock from
time to time in one or more series, in all cases ranking senior to the Common
Stock with respect to payment of dividends and in the event of the liquidation,
dissolution or winding-up of the Company. There are currently no shares of
Preferred Stock outstanding. The Board has the power, without stockholder
approval, to issue shares of one or more series of Preferred Stock, at any time,
for such consideration and with such relative rights, privileges, preferences
and other terms as the Board may determine (including, but not limited to, terms
relating to dividend rates, redemption rates, liquidation preferences and
voting, sinking fund and conversion or other rights). The rights and terms
relating to any new series of Preferred Stock could adversely affect the voting
power or other rights of the holders of the Common Stock or could be utilized,
under certain circumstances, as a method of discouraging, delaying or preventing
a change in control of the Company.
Redeemable Warrants
Each Warrant offered hereby entitles the registered holder thereof (the
"Warrant Holders") to purchase one share of Common Stock at a price of $4.80,
subject to adjustment in certain circumstances, at any time between , 1999 and
5:00 p.m., Eastern Time, on , 2003.
The Warrants are redeemable by the Company at any time commencing , 1999,
upon notice of not less than 30 days, at a price of $.10 per Warrant, provided
that the closing bid quotation of the Common Stock on all 20 trading days ending
on the third day prior to the day on which the Company gives notice has been at
least 150% (currently $7.20, subject to adjustment) of the then effective
exercise price of the Warrants and the Company obtains the written approval of
the Representative to such redemption prior to the Call Date. The Warrant
Holders shall have the right to exercise their Warrants until the close of
business on the date fixed for redemption. The Warrants will be issued in
registered form under a warrant agreement by and among the Company, American
Securities and Transfer & Trust Company, Inc., as warrant agent, and the
Representative (the "Warrant Agreement"). The exercise price and number of
shares of Common Stock or other securities issuable on exercise of the Warrants
are subject to adjustment in certain circumstances, including in the event of a
stock dividend, recapitalization, reorganization, merger or consolidation of the
Company. However, the Warrants are not subject to adjustment for issuances of
Common Stock at prices below the exercise price of the Warrants.
31
<PAGE>
Reference is made to the Warrant Agreement (which has been filed as an exhibit
to the Registration Statement of which this Prospectus is a part) for a complete
description of the terms and conditions therein (the description herein
contained being qualified by reference thereto).
The Warrants may be exercised upon surrender of the Warrant certificate
during the exercise period at the offices of the warrant agent, with the
exercise form on the reverse side of the Warrant certificate completed and
executed as indicated, accompanied by full payment of the exercise price (by
certified check or bank draft payable to the Company) to the warrant agent for
the number of Warrants being exercised. The Warrant Holders do not have the
rights or privileges of holders of Common Stock.
No Warrant will be exercisable unless at the time of exercise the Company
has filed a current registration statement with the Commission covering the
shares of Common Stock issuable upon exercise of such Warrant and such shares
have been registered or qualified or deemed to be exempt from registration or
qualification under the securities laws of the state of residence of the holder
of such Warrant. The Company will use its best efforts to have all such shares
so registered or qualified on or before the exercise date and to maintain a
current prospectus relating thereto until the expiration of the Warrants,
subject to the terms of the Warrant Agreement. While it is the Company's
intention to do so, there can be no assurance that it will be able to do so.
No fractional shares will be issued upon exercise of the Warrants. However,
if a Warrant Holder exercises all Warrants then owned of record by him, the
Company will pay to such Warrant Holder, in lieu of the issuance of any
fractional share which is otherwise issuable, an amount in cash based on the
market value of the Common Stock on the last trading day prior to the exercise
date.
Dividend Policy
To date, the Company has not declared or paid any dividends on its Common
Stock. The payment by the Company of dividends, if any, is within the discretion
of the Board of Directors and will depend on the Company's earnings, if any, its
capital requirements and financial condition, as well as other relevant factors.
The Board of Directors does not intend to declare any dividends in the
foreseeable future, but instead intends to retain earnings, if any, for use in
the Company's business operations.
Delaware Anti-Takeover Law
Upon the consummation of this offering, the Company will be governed by the
provisions of Section 203 of the DGCL. In general, the law prohibits a public
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. "Business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the stockholder. An "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of the corporation's voting stock.
Transfer Agent and Warrant Agent
The transfer agent for the Common Stock and the warrant agent for the
Warrants is American Securities and Transfer & Trust Company, Inc., 1825
Lawrence St., Denver, Colorado, 80202.
Reports to Stockholders
The Company intends to file a registration statement with the Securities
and Exchange Commission to register its Common Stock and Warrants under the
provisions of Section 12(g) of the Exchange Act prior to the date of this
Prospectus and has agreed with the Representative that it will use its best
efforts to continue to maintain such registration. Such registration will
require the Company to comply with periodic reporting, proxy solicitation and
certain other requirements of the Exchange Act.
32
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, the Company will have 2,676,480
shares of Common Stock outstanding (assuming no exercise of Warrants). All
1,500,000 shares of Common Stock being offered hereby will be immediately
tradable without restriction or further registration under the Securities Act.
The remaining 1,176,480 shares of Common Stock outstanding are deemed to be
"restricted securities," as that term is defined under Rule 144 promulgated
under the Securities Act, in that such shares were acquired by the stockholders
of the Company in transactions not involving a public offering, and, as such,
may only be sold pursuant to a registration statement under the Securities Act,
in compliance with the exemption provisions of Rule 144, or pursuant to another
exemption under the Securities Act. The 1,176,480 restricted shares of Common
Stock will become eligible for sale under Rule 144, subject to the volume
limitations prescribed by the Rule and the contractual restrictions described
below on various dates commencing 90 days following the date of this Prospectus.
In general, under Rule 144 a person (or persons who may be deemed to be
"affiliates" of the Company as that term is defined under the Securities Act),
is entitled to sell within any three-month period a number of restricted shares
beneficially owned for at least one year that does not exceed the greater of (i)
1% of the then outstanding Common Stock, or (ii) an amount equal to the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
requirements as to the manner of sale, notice and the availability of current
public information about the Company. However, a person who is not deemed an
affiliate and has beneficially owned such shares for at least two years is
entitled to sell such shares without regard to the volume or other resale
requirements.
Under Rule 701 of the Securities Act, persons who purchase shares upon
exercise of options granted prior to the date of this Prospectus are entitled to
sell such shares after the 90th day following the date of this Prospectus in
reliance on Rule 144, without having to comply with the holding period
requirements of Rule 144 and, in the case of non-affiliates, without having to
comply with the public information, volume limitation or notice provisions of
Rule 144. Affiliates are subject to all Rule 144 restrictions after this 90-day
period, but without a holding period.
The Company's officers, directors and all of the Company's securityholders,
other than the holders of 160,000 shares purchased pursuant to the Company's
private placement in May 1997, have agreed not to sell or otherwise dispose of
any securities of the Company beneficially owned by them for a period of at
least twelve months from the date of this Prospectus, without the prior written
consent of the Representative. The holders of 160,000 shares issued in the
private placement have agreed not to sell such shares for a period of six months
from the date of this Prospectus. Messrs. Feinberg, Olbermann, Cole-Hatchard and
Char, who hold an aggregate of 624,480 shares of Common Stock, have agreed not
to sell or otherwise dispose of any securities of the Company beneficially owned
by them until the Company achieves $1.9 million in pre-tax earnings, but in no
event sooner than two years from the date of this Prospectus.
Prior to this offering, there has been no market for the Common Stock and
no prediction can be made as to the effect, if any, that public sales of shares
of Common Stock or the availability of such shares for sale will have on the
market prices of the Common Stock and the Warrants prevailing from time to time.
Nevertheless, the possibility that substantial amounts of Common Stock may be
sold in the public market may adversely affect prevailing market prices for the
Common Stock and the Warrants and could impair the Company's ability in the
future to raise additional capital through the sale of its equity securities.
33
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting
Agreement, the Company has agreed to sell to each of the Underwriters named
below, for whom Werbel-Roth Securities, Inc. is acting as Representative, and
each of the Underwriters has agreed to purchase from the Company the respective
number of shares of Common Stock and Warrants set forth opposite its name below.
Number of Shares
Underwriter of Common Stock and Warrants
----------- -----------------------------
Werbel-Roth Securities, Inc .........
Total ............................ 1,500,000
=========
The Underwriters are committed to purchase and pay for all of the Common
Stock and Warrants offered hereby if any of such securities are purchased. The
Common Stock and Warrants are being offered by the Underwriters, subject to
prior sale, when, as and if delivered to and accepted by the Underwriters and
subject to approval of certain legal matters by counsel and to certain other
conditions.
The Underwriters have advised the Company that they propose to offer the
Common Stock and Warrants to the public at the public offering prices set forth
on the cover page of this Prospectus. The Underwriters may allow to certain
dealers who are members of the National Association of Securities Dealers, Inc.
(the "NASD") concessions, not in excess of $ per share of Common Stock and $ per
Warrant, of which not in excess of $ per share of Common Stock and $ per Warrant
may be reallowed to other dealers who are members of the NASD. The offering
prices, reallowances and concessions will not be changed until after this
offering has been completed.
The Company has granted to the Underwriters an option, exercisable for 45
days from the date of this Prospectus, to purchase up to 225,000 additional
shares of Common Stock and/or 225,000 additional Warrants at the public offering
prices set forth on the cover page of this Prospectus, less the underwriting
discounts and commissions. The Underwriters may exercise this option in whole
or, from time to time, in part, solely for the purpose of covering
over-allotments, if any, made in connection with the sale of the shares of
Common Stock and/or Warrants offered hereby.
The Company has agreed to pay the Representative a nonaccountable expense
allowance of 3% of the gross proceeds of this offering, of which $15,000 has
been paid as of the date of this Prospectus. Additional amounts of $10,000 and
$15,000 were paid to Adams Stevens, Inc., and Parker Bromley, Ltd.,
respectively. The Company has also agreed to pay all expenses in connection with
qualifying the shares of Common Stock and Warrants offered hereby for sale under
the laws of such states as the Representative may designate, including expenses
of counsel retained for such purpose by the Representative.
The Company has agreed to sell to the Representative and its designees for
an aggregate of $100, warrants (the "Representative's Warrants") to purchase up
to 150,000 shares of Common Stock at an exercise price of $6.00 per share (150%
of the public offering price per share) and up to 150,000 Warrants (each
exercisable to purchase one share of Common Stock at a price of $7.20 per share)
at an exercise price of $.15 per Warrant (150% of the public offering price per
Warrant). The Representative's Warrants may not be sold, transferred, assigned
or hypothecated for one year from the date of this Prospectus, except to the
officers and partners of the Representative and members of the underwriting
syndicate and selling group and are exercisable at any time and from time to
time, in whole or in part, during the five-year period commencing on the date of
this Prospectus (the "Warrant Exercise Term"). During the Warrant Exercise Term,
the holders of the Representative's Warrants are given, at nominal cost, the
opportunity to profit from a rise in the market price of the Common Stock. To
the extent that the Representative's Warrants are exercised, dilution to the
interests of the Company's stockholders will occur. Further, the terms upon
which the Company will be able to obtain additional equity capital may be
adversely affected since the holders of the Representative's Warrants can be
expected to exercise them at a time when the Company would, in all likelihood,
be able to obtain any needed capital on terms more favorable to the Company than
those provided in the Representative's Warrants. Any profit realized by the
Underwriter on the sale of the Representative's Warrants, the underlying shares
of Common Stock or the underlying warrants, or the shares of Common Stock
issuable upon exercise of such underlying warrants may be deemed additional
34
<PAGE>
underwriting compensation. The Company has agreed, at the request of the holders
of a majority of the Representative's Warrants, at the Company's expense, to
register the Representative's Warrants, the shares of Common Stock and warrants
underlying the Representative's Warrants, and the shares of Common Stock
issuable upon exercise of the underlying warrants under the Securities Act on
one occasion during the Warrant Exercise Term and to include the
Representative's Warrants and all such underlying securities in any appropriate
registration statement which is filed by the Company during the seven years
following the date of this Prospectus.
The Company has also agreed, for a period of three years from the date of
this Prospectus, if so requested by the Representative, to elect a designee of
the Representative as a non-voting advisor to the Company's Board of Directors.
The Representative has not yet exercised its right to designate such a person.
In addition, the Company has agreed to enter into a consulting agreement to
retain the Representative as a financial consultant for a period of two years
from the consummation of this offering at a fee equal to 2% of the gross
proceeds of this offering (including the over-allotment option) payable in full,
in advance. The consulting agreement will not require the consultant to devote a
specific amount of time to the performance of its duties thereunder.
The Company has agreed, in connection with the exercise of the Warrants
pursuant to solicitation (commencing one year from the date of this Prospectus),
to pay to the Representative a fee of 5% of the exercise price for each Warrant
exercised; provided, however, that the Representative will not be entitled to
receive such compensation in Warrant exercise transactions in which (i) the
market price of Common Stock at the time of exercise is lower than the exercise
price of the Warrants; (ii) the Warrants are held in any discretionary account;
(iii) disclosure of compensation arrangements is not made, in addition to the
disclosure provided in this Prospectus, in documents provided to holders of
Warrants at the time of exercise; (iv) the exercise of the Warrants is
unsolicited by the Representative; or (v) the solicitation of exercise of the
Warrants was in violation of Regulation M promulgated under the Exchange Act.
The Underwriters have advised the Company that they do not expect sales
made to discretionary accounts to exceed 1% of the securities offered hereby.
The Company has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act. Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers or controlling persons of the Company, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Prior to this offering, there has been no public trading market for the
Common Stock or Warrants. Consequently, the initial public offering price of the
Common Stock and Warrants and the exercise price of the Warrants have been
determined by negotiations between the Company and the Representative. Among the
factors considered in determining these prices were the Company's financial
condition and prospects, market prices of similar securities of comparable
publicly-traded companies and the general condition of the securities market.
In order to facilitate the offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the prices of the
Common Stock and Warrants. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Common Stock
and/or Warrants for their own account. In addition, to cover over-allotments or
to stabilize the price of the Common Stock and Warrants, the Underwriters may
bid for, and purchase, shares of Common Stock and Warrants in the open market.
The Underwriters may also reclaim selling concessions allowed to a dealer for
distributing the Common Stock and Warrants in the offering, if the Underwriters
repurchase previously distributed Common Stock and Warrants in transactions to
cover short positions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Common Stock and
Warrants above independent market levels. The Underwriters have not required to
engage in these activities, and may end any of these activities at any time.
35
<PAGE>
EXPERTS
The financial statements of the Company included in this Prospectus have
been audited by BDO Seidman LLP, independent certified public accountants, to
the extent and for the periods set forth in their report (which contains an
explanatory paragraph regarding the Company's ability to continue as a going
concern) appearing elsewhere herein and is included in reliance upon such report
given upon the authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
The legality of the securities offered by this Prospectus will be passed
upon for the Company by Tenzer Greenblatt LLP, New York, New York. Lester Morse,
P.C., Great Neck, New York, has acted as counsel to the Underwriters in
connection with this offering.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 (the "Registration
Statement") under the Securities Act with respect to the securities offered by
this Prospectus. This Prospectus, filed as a part of such Registration
Statement, does not contain all of the information set forth in, or annexed as
exhibits to, the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and this offering, reference is made to
the Registration Statement, including the exhibits filed therewith, which may be
inspected without charge at the Office of the Commission, 450 Fifth Street,
N.W., Washington D.C. 20549; and at the following regional offices: Midwest
Regional Office, Northwestern Atrium Center, 500 West Madison, Suite 1400,
Chicago, Illinois 60661-2511, and the Northeast Regional Office, 7 World Trade
Center, 13th Floor, New York, New York 10048. Copies of the Registration
Statement may be obtained from the Commission at its principal office upon
payment of prescribed fees. This Prospectus contains a complete summary of the
material terms of the contracts or other documents filed as exhibits to the
Registration Statement.
As of the date of this Prospectus, the Company will become subject to the
reporting requirements of the Exchange Act and, in accordance therewith, will
file reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities of the Commission set forth above, and copies of
such materials can be obtained from the Commission's Public Reference Section at
prescribed rates. The Company intends to furnish its stockholders with annual
reports containing audited financial statements and such other periodic reports
as the Company deems appropriate or as may be required by law. The Registration
Statement, including all exhibits, and such reports and other information may
also be accessed electronically by means of the Commission's site on the World
Wide Web at http://www.sec.gov.
36
<PAGE>
GLOSSARY
<TABLE>
<CAPTION>
<S> <C>
Dial-up Accounts .................. Accounts with an Internet connectivity provider that utilize
a telephone call to a modem rather than a dedicated data
line.
E-mail ............................ Electronic mail. An application that allows a user to send
or receive text messages to or from any other user with an
Internet address, commonly termed an E-mail address.
FTP ............................... File Transfer Protocol. A protocol that allows file transfer
between a host and a remote computer.
ISDN .............................. Integrated Services Digital Network. An information trans-
fer standard for transmitting digital voice and data over
telephone lines at speeds up to 128 Kbps.
Internet .......................... A worldwide network of computer networks that are inter-
connected at certain points and utilize a common commu-
nications protocol, TCP/IP.
Kbps .............................. Kilobits per second. A measure of digital information trans-
mission rates. One kilobit equals 1,000 bits of digital infor-
mation.
Mbps .............................. Megabits per second. A measure of digital information
transmission rates. One megabit equals 1,000 Kbps.
On-line Service Providers ......... Commercial information services that offer a computer user
access through a modem to a specified slate of information,
entertainment and communications menus. These services
are generally closed systems and many offer limited, if any,
Internet access.
OEM ............................... Original Equipment Manufacturer.
POP ............................... Point-of-Presence. An interlinked group of modems, rout-
ers and other computer equipment, located in a particular
city or metropolitan area, that allows a nearby subscriber to
access the Internet through a local telephone call.
T-1 ............................... A data communications line capable of transmission speeds
of 1.54 Mbps.
TCP/IP ............................ Transmission Control Protocol/Internet Protocol. A compi-
lation of network- and transport-level protocols that allow
computers with different architectures and operating sys-
tem software to communicate with other computers on the
Internet.
World Wide Web .................... A network of servers that uses a special communications
protocol to link different servers throughout the Internet
and permits communication of graphics, video and sound.
X2 56K ............................ A new transmission technique which supplies 56 Kbps
"downstream" for transmissions from service providers.
</TABLE>
37
<PAGE>
Frontline Communications Corporation
Contents
<TABLE>
<CAPTION>
Page
-----------
<S> <C>
Report of independent certified public accountants .......... F-2
Financial statements:
Balance sheets ........................................... F-3
Statements of operations ................................. F-4
Statements of stockholders' deficit ...................... F-5
Statements of cash flows ................................. F-6
Notes to financial statements ............................ F-7 - F-13
</TABLE>
F-1
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors of
Frontline Communications Corporation
We have audited the accompanying balance sheets of Frontline Communications
Corporation (the "Company") as of December 31, 1996 and 1997, and the related
statements of operations, stockholders' deficit and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 the Company as of December 31,
1996 and 1997, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
The financial statements referred to above have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements. the Company has suffered losses. has a capital deficit and
has negative working capital. These conditions raise substantial doubt as to the
Company's ability to continue as a going concern. While the Company plans to
raise additional capital, there can be no assurance that such efforts will be
successful. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
BDO Seidman, LLP
Valhalla, New York
March 16, 1998
F-2
<PAGE>
Frontline Communications Corporation
Balance Sheets
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
-------------- ---------------
<S> <C> <C>
Assets
Current:
Cash ............................................................ $ 2,303 $ 39,725
Accounts receivable, less allowance for doubtful accounts of
$16,666 in 1997 ................................................ 506 10,404
Prepaid expenses and other ...................................... 3,048 8,527
Deferred registration costs ..................................... -- 231,071
--------- ------------
Total current assets ......................................... 5,857 289,727
Equipment, net (Note 4) ............................................ 46,760 178,506
Deposits ........................................................... 1,613 17,967
--------- ------------
$ 54,230 $ 486,200
========= ============
Liabilities and Stockholders' Deficit
Current:
Notes payable (Note 5) .......................................... $ 15,266 $ 329,537
Accounts payable and accrued expenses (Note 3) .................. 58,358 359,174
Deferred revenue ................................................ 24,385
------------
Total current liabilities .................................... 73,624 713,096
Notes payable--long term portion (Note 5) .......................... 36,737 218,052
--------- ------------
Total liabilities ............................................ 110,361 931,148
--------- ------------
Commitments and contingencies (Notes 6, 7 and 10)
Stockholders' deficit
Preferred stock, $.01 par value, 1,000,000 authorized, 0 issued
and outstanding ................................................ -- --
Common stock, $.01 par value, 10,000,000 shares authorized,
1,408,000 issued and outstanding ............................... -- 14,080
Additional paid-in capital ...................................... 6,000 1,646,520
Accumulated deficit ............................................. (62,131) (2,099,548)
Stock subscriptions receivable .................................. -- (6,000)
--------- ------------
Total stockholders' deficit .................................. (56,131) (444,948)
--------- ------------
$ 54,230 $ 486,200
========= ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
Frontline Communications Corporation
Statements of Operations
<TABLE>
<CAPTION>
Year ended Year ended
December December
31, 1996 31, 1997
------------ ---------------
<S> <C> <C>
Revenues .............................................. $ 98,699 $ 321,706
Cost of revenues ...................................... 67,582 251,928
--------- ------------
Gross profit ........................................ 31,117 69,778
Operating expenses:
Selling, general and administrative .................. 81,220 540,883
Non-cash compensation charge (Notes 1 and 8) ......... -- 1,537,000
--------- ------------
Loss from operations .................................. (50,103) (2,008,105)
Other income (expense):
Interest ............................................. (6,677) (28,421)
Other ................................................ 2,574 (891)
--------- ------------
Net loss .............................................. $ (54,206) $ (2,037,417)
========= ============
Loss per share of common stock -- basic ............... (.11) (1.67)
========= ============
Weighted average number of shares outstanding ......... 512,000 1,218,000
========= ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
Frontline Communications Corporation
Statements of Stockholders' Deficit
<TABLE>
<CAPTION>
Common Stock Additional
-------------------------- Paid-in
Shares Amount Capital
------------- ----------- --------------
<S> <C> <C> <C>
Balance, January 1, 1996 ........... -- $ -- $ --
Officer salary contributed to
capital ........................... -- -- 6,000
Net loss ........................... -- -- --
-- -------- ----------
Balance, December 31, 1996 ......... -- -- 6,000
Frontline reorganization
(See Note 2) ...................... 640,000 6,400 (325,000)
Shares issued as compensation
(See Note 8) ...................... 100,000 1,000 199,000
Shares issued as compensation
(See Note 1) ...................... 820,000 8,200 1,230,000
Officer salary contributed to
capital ........................... -- -- 3,000
Private placement sale of shares
at $2 per share.................... 200,000 2,000 398,000
Common stock options issued
for services (See Note 8) ......... -- -- 108,000
Warrants issued to debtholders
(See Note 5) ...................... -- -- 24,000
Recapitalization (4 for 5
reverse split) .................... (352,000) (3,520) 3,520
Net loss ........................... -- -- --
-------- -------- ----------
Balance, December 31
1997 .............................. 1,408,000 $ 14,080 $1,646,520
========= ======== ==========
Stock Total
Accumulated Subscriptions Stockholders'
Deficit Receivable Deficit
--------------- --------------- ---------------
Balance, January 1, 1996 ........... $ (7,925) $ -- $ (7,925)
Officer salary contributed to
capital ........................... -- -- 6,000
Net loss ........................... (54,206) -- (54,206)
------------ -------- -------------
Balance, December 31, 1996 ......... (62,131) -- (56,131)
Frontline reorganization
(See Note 2) ...................... -- -- (318,600)
Shares issued as compensation
(See Note 8) ...................... -- -- 200,000
Shares issued as compensation
(See Note 1) ...................... -- (6,000) 1,232,200
Officer salary contributed to
capital ........................... -- -- 3,000
Private placement sale of shares
at $2 per share.................... -- -- 400,000
Common stock options issued
for services (See Note 8) ......... -- -- 108,000
Warrants issued to debtholders
(See Note 5) ...................... -- -- 24,000
Recapitalization (4 for 5
reverse split) .................... -- -- --
Net loss ........................... (2,037,417) -- (2,037,417)
------------ -------- -------------
Balance, December 31
1997 .............................. $ (2,099,548) $ (6,000) $ (444,948)
============ ======== =============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
Frontline Communications Corporation
Statements of Cash Flows
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
Year ended Year ended
December 31, December 31.
1996 1997
-------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ......................................................... $ (54,206) $ (2,037,417)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization .................................. 9,962 44,558
Officer salary contributed to capital .......................... 6,000 3,000
Non cash compensation charge ................................... -- 1,537,000
Allowance for doubtful accounts ................................ -- 16,666
Accounts receivable write-off .................................. -- 8,605
Changes in assets and liabilities:
Accounts receivable ........................................... 175 (35,169)
Prepaid expenses and other .................................... (1,661) (5,479)
Other assets .................................................. (3,000) (16,354)
Accounts payable and accrued expenses ......................... 55,249 300,816
Interest due on stockholders loans ............................ -- 19,452
Deferred revenue .............................................. -- 24,385
--------- ------------
Net cash provided by (used in) operating activities ......... 12,519 (139,937)
--------- ------------
Cash flows from investing activities:
Acquisitions of equipment ........................................ (55,114) (176,304)
--------- ------------
Cash flows from financing activities:
Deferred registration costs ...................................... -- (231,071)
Repayments of stockholder loans .................................. (4,400) (45,266)
Proceeds from stockholder loans, net ............................. 37,470 230,000
Proceeds from sale of common stock ............................... -- 400,000
--------- ------------
Net cash provided by financing activities ................... 33,070 353,663
--------- ------------
Net increase (decrease) in cash ................................... (9,525) 37,422
Cash, beginning of period ......................................... 11,828 2,303
--------- ------------
Cash, end of period ............................................... $ 2,303 $ 39,725
========= ============
Supplemental disclosure of cash flow information:
Cash paid for interest ........................................... $ 6,600 $ 10,451
Non-cash investing and financing activities:
Common stock issued for reduction of stockholder loans ........... $ -- $ 9,600
Notes payable to stockholders issued as distributions ............ $ -- $ 325,000
Common stock subscriptions ....................................... $ -- $ 6,000
========= ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
Frontline Communications Corporation
Notes to Financial Statements
December 31, 1997 and 1996
1. Summary of Significant Accounting Policies
Business
Frontline Communications Corporation ("Frontline" or the "Company") is an
internet service provider that provides subscribers with direct access to a wide
range of internet applications and resources including electronic mail, world
wide web sites and regional and local information and data services.
Going Concern
The Company's financial statements have been prepared assuming that the
Company will continue as a going concern. The company has suffered losses since
inception, and has a negative working capital. The Company has relied on its
capital and related party advances to sustain its working capital needs. The
predominant use of cash has been for the expansion of its internet service
network. Management believes that the proceeds of the contemplated initial
public offering (See Note 11) will be sufficient to meet its cash flow needs for
the coming year. However, there can be no assurance that the offering will be
completed. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Reorganization
The financial statements include the accounts of Hobbes & Co., LLC
("Hobbes"), INET Communications Company, LLC ("INET") and Sara Girl & Co., LLC
("Sara Girl"), (collectively the "Predecessor Companies") and Frontline
Communications Corporation. As described more fully in Note 2, on May 30, 1997,
Frontline acquired the net assets of the Predecessor Companies. For accounting
purposes, the business combination has been accounted for as if the acquirer is
Hobbes. With respect to the acquisition of INET, the acquisition has been
accounted for as a combination of entities under common control in a manner
similar to a pooling of interests and reflects the combined financial position,
operating results and cash flows of Hobbes and INET as if they had been combined
for all periods presented. With respect to Sara Girl and Frontline, the business
combination has been accounted for using purchase accounting, which resulted in
the recording of a special non-cash charge of $1,230,000. The non-cash charge
represents the estimated fair market value of the Company's 820,000 shares of
common stock issued to certain founding shareholders in February 1997 for
current and future services. The Predecessor Companies were dissolved and
Frontline is the continuing legal entity. All intercompany accounts and
transactions have been eliminated.
Equipment and Depreciation
Equipment is stated at cost, less accumulated depreciation. Depreciation is
computed over the estimated useful lives of the assets using the straight-line
method for book purposes and accelerated methods for income tax purposes.
The following estimated useful lives are applied in the computation of
depreciation:
Years
-----
Computer equipment ................................ 3-5
===
Upon retirement or sale, the cost and related accumulated depreciation are
removed from the accounts and any resulting gains or losses are included in the
statement of operations.
Revenue Recognition
Online service revenues (including monthly subscription and dedicated
access service) are recognized on a straight-line basis over the period the
services are provided. Other revenues, consisting principally of data network
services are recognized as services are rendered.
F-7
<PAGE>
Frontline Communications Corporation
Notes to Financial Statements -- (Continued)
December 31, 1997 and 1996
1. Summary of Significant Accounting Policies -- (Continued)
Income Taxes
Deferred income taxes are provided on differences between the financial
reporting and income tax bases of assets and liabilities based upon statutory
tax rates enacted for future periods.
Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade accounts receivable. The Company's cash investments are placed with
high credit quality financial institutions and may exceed the amount of federal
deposit insurance. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Company's customer base.
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Use of Estimates
In preparing the financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Financial Instruments
The carrying amounts of financial instruments including cash, accounts
receivable, due to stockholders and accounts payable approximated fair value as
of December 31, 1996 and 1997, because of the relatively short maturity of these
instruments. The carrying value of notes payable to stockholders cannot be
determined because of the nature of their terms.
Loss Per Share of Common Stock
During February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128 "Earning Per
Share," which replaces the presentation of primary earnings per share ("EPS"),
with basic EPS. It also requires dual presentation of basic and diluted EPS. The
Company adopted SFAS 128 as of January 1, 1997. The 1996 loss per share has been
restated, giving retroactive effect to the 4 to 5 reverse stock split (See Note
11) and to conform to SFAS No. 128. Loss per common share is computed on the
weighted average number of shares, less treasury stock. If dilutive, common
equivalent shares (common shares assuming exercise of options and warrants)
utilizing the treasury stock method are considered in presenting diluted
earnings per share. Options to purchase 165,600 shares of common stock at $2.00
per share and warrants to purchase 300,000 shares of common stock were not
included in the computation of diluted loss per share because the effect was
anti-dilutive due to the net loss. The options and warrants, were outstanding at
the end of 1997.
Deferred Registration Costs
Costs incurred in connection with the Company's anticipated public offering
are deferred and will be charged against stockholders' equity upon successful
completion of the offering. If the offering is not consummated, deferred costs
will be charged to expense.
Recent Accounting Pronouncements
During June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income", which establishes standards for reporting
and display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
F-8
<PAGE>
Frontline Communications Corporation
Notes to Financial Statements -- (Continued)
December 31, 1997 and 1996
1. Summary of Significant Accounting Policies -- (Continued)
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements.
During June, 1997, the Financial Accounting Standards Board issued SFAS No.
131 "Disclosures about Segments of an Enterprise and Related Information", which
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise" establishes standards for the way that public enterprises report
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosures
regarding products and services, geographical areas and major customers. SFAS
No. 131 defines operating segments as components of an enterprise about which
separate financial information is available that is evaluated regularly by
Management in deciding how to allocate resources and in assessing performance.
Both SFAS Nos. 130 and 131 are effective for financial statements for
periods beginning after December 15, 1997 and require comparative information
for earlier years to be restated. The adoption of SFAS No. 130 is not expected
to have a material effect on the Company's financial position or results of
operations. The Company is currently reviewing the effect of SFAS No. 131 but
has yet been unable to fully evaluate the impact, if any, it may have on future
financial statement disclosures.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 121 "Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of " ("SFAS No.
121"). SFAS No. 121 requires, among other things, impairment losses on assets to
be held and gains or losses from assets that are expected to be disposed of be
included as a component of income from continuing operations before taxes on
income. The Company adopted SFAS No. 121 as of January 1, 1996 and its
implementation did not have a material effect on the financial statements.
Stock-Based Compensation
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes a fair value method for accounting for
stock-based compensation plans either through recognition or disclosure. The
Company adopted the employee stock-based compensation provisions of SFAS No. 123
by disclosing the pro forma net income and pro forma net income per share
amounts assuming the fair value method as of January 1, 1995. The adoption of
this standard did not impact the Company's results of operations, financial
position or cash flows. Stock arrangements with non-employees, if applicable,
are recorded at fair value.
Advertising
All costs associated with advertising services are expensed in the period
incurred. Advertising expense was approximately $19,000 and $28,000 for the
years ended December 31, 1996 and 1997, respectively.
2. Reorganization
On May 30, 1997, the Predecessor Companies were acquired by the Company by
issuing three notes aggregating $325,000 (excluding $47,137 of certain advances)
(See Note 5) for all the membership interest in the
F-9
<PAGE>
Frontline Communications Corporation
Notes to Financial Statements -- (Continued)
December 31, 1997 and 1996
2. Reorganization -- (Continued)
Predecessor Companies. For accounting purposes Hobbes has been considered to be
the acquirer. As a result, the business combination of Hobbes and INET has been
accounted for as a combination of entities under common control in a manner
similar to a pooling of interests. The business combination with Sara Girl and
Frontline have been accounted for as purchases. The net assets and operations of
Sara Girl and Frontline are not material to the Company's financial statements.
Notes payable to the members of the Predecessor Companies are accounted for as
distributions in the accompanying statement of stockholders' equity.
3. Accounts Payable and Accrued Expenses
Accrued expenses were approximately $13,000 and $192,000 at December 31,
1996 and December 31, 1997, respectively. Accrued expenses consisted of various
items including telephone charges, professional fees, rent and supplies.
4. Equipment
Equipment consist of the following:
December 31, December 31,
1996 1997
-------------- -------------
Computer equipment .................... $56,722 $233,026
------- --------
Less accumulated depreciation ......... 9,962 54,520
------- --------
Equipment, net ........................ $46,760 $178,506
======= ========
5. Notes Payable
Notes payable consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1997
--------- -----------
<S> <C> <C>
Notes payable issued in connection with the reorganization (a) ......... $ -- $372,137
Bridge loan financing (b) .............................................. -- 126,000
Working capital loan (c) ............................................... 52,003 30,000
Accrued interest ....................................................... -- 19,452
------- --------
52,003 547,589
less: current portion .................................................. 15,266 329,537
------- --------
$36,737 $218,052
======= ========
</TABLE>
a) On May 30, 1997, the Company issued notes aggregating $372,137 to three of
its stockholders related to the reorganization discussed in Note 2, and
certain advances made to the Company since inception. The notes bear interest
at 8%. A portion of the notes ($163,537) is due on the earlier of the initial
public offering or May 1, 1998. Of the remaining portion ($208,600), $40,000
is payable at the initial public offering and $168,600 will be deferred until
such time as the Company achieves $1.9 million in pre-tax earnings, but in no
event sooner than two years from the date of this Prospectus.
b) In December 1997, the Company issued notes aggregating $150,000 and 300,000
warrants in connection with a bridge loan financing. The warrants are
exercisable at $5.00 per share and have a five year term. The notes bear
interest at 9% and are payable at the earlier of the initial public offering
or December 22, 1999. Related parties of an affiliate were issued 26.6% of
the notes. The notes were discounted for the value of the warrants ($24,000)
which was included as a component of stockholder's equity and is being
amortized as additional interest.
c) Working capital loans from stockholders bear interest at 9.25% and are
payable at such time as the Company achieves $1.9 million in pre-tax
earnings, but in no event sooner than two years from the date of this
Prospectus.
F-10
<PAGE>
Frontline Communications Corporation
Notes to Financial Statements -- (Continued)
December 31, 1997 and 1996
6. Commitments and Contingencies
Leases
The Company rents office space and equipment under operating leases.
Future minimum rental payments required under operating leases as of
December 31, 1997 are as follows:
1998 ................................................. $113,917
1999 ................................................. 120,603
2000 ................................................. 119,200
2001 ................................................. 117,587
2002 ................................................. 57,421
--------
Total ................................................ $528,728
========
Rental expense was $17,475 and $69,981 for the years ended December 31,
1996 and 1997, respectively.
7. Stock Options
Effective March 1, 1997, the Board of Directors (the "Board") approved the
1997 stock option plan (the "Plan"), which authorized the issuance of incentive
options and non-qualified options to purchase up to 500,000 shares of common
stock. The plan has a ten year term. The Board retained the authority to
determine the individuals to whom, and the times at which, stock options would
be made, along with the number of shares, vesting schedule and other provisions
related to the stock options.
For the year ended December 31, 1997, the Company issued 29,600 incentive
stock options (net of forfeitures of 114,400 options) to employees and
non-qualified options to purchase 136,000 shares of common stock to certain
non-employees. These options have a five year term and are exercisable at any
time on or after March 1, 1998 at $2 per share.
The Company applies Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees" and related interpretations by recording
compensation expense for the excess of fair market value over the exercise price
per share as of the date of the grant in accounting for its stock options.
Accordingly, no compensation costs have been recognized for its issuance of
29,600 options to employees since the exercise price exceeded the then fair
market value on the date of the grant. In accordance with SFAS No. 123, the
Company has recognized $108,000 as the fair value of services received for the
136,000 options granted to non-employees.
SFAS No. 123 requires the Company to provide pro forma information
regarding net loss and net loss per share as if compensation cost for the
Company's stock options had been determined in accordance with the fair value
based method prescribed in SFAS No. 123. The Company estimates fair value of
each stock based option at the date of the grant using the Black Scholes
option-pricing model with the following weighted average assumptions used for
options in 1997:
Risk-free interest rate ............................. 6.51%
Expected life ....................................... 5 Years
Expected volatility ................................. 15.00%
Dividend yield .................................... None
F-11
<PAGE>
Frontline Communications Corporation
Notes to Financial Statements -- (Continued)
December 31, 1997 and 1996
7. Stock Options -- (Continued)
Had compensation cost for the issuance of options been determined based on
the fair value at the grant dates consistent with the fair value method of SFAS
No. 123, the Company's net loss would not have changed since employee options at
the grant date were considered to have minimal value.
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Remaining Exercise
Life Shares Price
------------ ---------- ---------
<S> <C> <C> <C>
Outstanding, January 1, 1997 ............................ -- $ --
Granted ................................................. 165,600 2.00
------- -------
Outstanding, December 31, 1997 .......................... 4.17 years 165,600 2.00
======= =======
Options exercisable at end of period .................... -- --
Weighted average fair value of options granted during the
period ................................................. $ --
=======
</TABLE>
During the initial phase-in period of SFAS No. 123, the effects on pro
forma results are not likely to be representative of the effects on pro forma
results in future years since additional awards could be made each year.
8. Common Stock
On May 30, 1997, the Company received $400,000 in connection with a private
placement of shares at $2.00 per share. Related parties of an affiliate
purchased 12.50% of the shares.
In 1997, the Company issued 100,000 shares of common stock valued at $2.00
per share, and 80,000 options valued at $1.00 per option to Ronald Shapss. The
options and shares were issued for current and future services as a consultant
and director of the Company. In addition, the Company issued 56,000 options
valued at $.50 per option to various consultants in 1997 for current and future
services.
9. Income Taxes
The Company had net operating loss carryforwards of approximately $59,000
and $620,000 at December 31, 1996 and 1997, respectively, which expire in 2111
and 2112. A valuation allowance has been provided for these loss carryforwards
since their realization is not considered to be more likely than not.
10. Litigation
In June 1997, Michael Char, a former officer and director of the Company,
had disagreements with other members of management with respect to various
business matters.
In March 1998, the Company settled all disputes with Char. In addition to
payment of $65,000 in March, 1998, the Company will make a payment to Char in
the amount of $435,000 from the proceeds of the initial public offering in
exchange for all debts, notes and claims of Char, which aggregated $240,000, and
the balance will be charged against equity for the 231,520 shares owned by Char.
Char will retain 24,480 shares, subject to a lock-up agreement with the
underwriter.
11. Subsequent Events
The Company has a letter of intent with Werbel-Roth Securities, Inc. in
connection with a proposed offering and sale to the public of one million five
hundred thousand shares of common stock of the Company at a price of $4 per
share and one million five hundred thousand warrants at a price of $.10 per
warrant. Each warrant will be exercisable to purchase one share of common stock
at $4.80 per share.
F-12
<PAGE>
Frontline Communications Corporation
Notes to Financial Statements -- (Continued)
December 31, 1997 and 1996
11. Subsequent Events -- (Continued)
On March 19, 1998, the Board of Directors of the Company declared a 4 for 5
reverse stock split (the "stock split"), effective December 31, 1997 affecting
all shareholders of record at the close of business on December 31, 1997. The
stock split is applicable to all common stock and common stock options. The
Company has restated all per share amounts and numbers of shares to reflect the
stock split.
On March 19, 1998, Mesrs. Feinberg, Cole-Hatchard and Olbermann forfeited
32,000, 32,000, and 50,400 common stock options, respectively, also effective
December 31, 1997.
F-13
<PAGE>
===============================================================================
No dealer, sales person or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or the Underwriters.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any security other than the securities offered by this Prospectus,
or an offer to sell or a solicitation of an offer to buy any securities by
anyone in any jurisdiction in which such offer or solicitation is not authorized
or is unlawful. The delivery of this Prospectus shall not, under any
circumstances, create any implication that the information contained herein is
correct as of any time subsequent to the date hereof.
--------------------------
TABLE OF CONTENTS
Page
-----------
Prospectus Summary ....................... 3
Risk Factors ............................. 6
Use of Proceeds .......................... 13
Dilution ................................. 14
Capitalization ........................... 15
Management's Discussion and Analysis of
Financial Conditions and Results of
Operations ............................ 16
Business ................................. 20
Management ............................... 26
Principal Stockholders ................... 29
Certain Transactions ..................... 30
Description of Securities ................ 31
Shares Eligible for Future Sale .......... 33
Underwriting ............................. 34
Experts .................................. 36
Legal Matters ............................ 36
Additional Information ................... 36
Glossary ................................. 37
Index to Financial Statements ............ F-1
--------------------------
Until , 1998 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities offered hereby, whether or
not participating in this distribution may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
===============================================================================
<PAGE>
===============================================================================
FRONTLINE
COMMUNICATIONS
CORPORATION
1,500,000 Shares of Common Stock
and
Redeemable Warrants to Purchase
1,500,000 Shares of Common Stock
------------
PROSPECTUS
------------
WERBEL-ROTH
SECURITIES, INC.
, 1998
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law (the "DGCL") contains
the provisions entitling the Registrant's directors and officers to
indemnification from judgments, fines, amounts paid in settlement, and
reasonable expenses (including attorney's fees) as the result of an action or
proceeding in which they may be involved by reason of having been a director or
officer of the Registrant. In its Certificate of Incorporation, the Registrant
has included a provision that limits, to the fullest extent now or hereafter
permitted by the DGCL, the personal liability of its directors to the Registrant
or its stockholders for monetary damages arising from a breach of their
fiduciary duties as directors. Under the DGCL as currently in effect, this
provision limits a director's liability except where such director (i) breaches
his duty of loyalty to the Registrant or its stockholders, (ii) fails to act in
good faith or engages in intentional misconduct or a knowing violation of law,
(iii) authorizes payment of an unlawful dividend or stock purchase or redemption
as provided in Section 174 of the DGCL, or (iv) obtains an improper personal
benefit. This provision does not prevent the Registrant or its stockholders from
seeking equitable remedies, such as injunctive relief or rescission. If
equitable remedies are found not to be available to stockholders in any
particular case, stockholders may not have any effective remedy against actions
taken by directors that constitute negligence or gross negligence.
The Certificate of Incorporation also includes provisions to the effect
that (subject to certain exceptions) the Registrant shall, to the maximum extent
permitted from time to time under the law of the State of Delaware, indemnify,
and upon request shall advance expenses to, any director or officer to the
extent that such indemnification and advancement of expenses is permitted under
such law, as may from time to time be in effect. In addition, the By-Laws
require the Registrant to indemnify, to the full extent permitted by law, any
director, officer, employee or agent of the Registrant for acts which such
person reasonably believes are not in violation of the Registrant's corporate
purposes as set forth in the Certificate of Incorporation. At present, the DGCL
provides that, in order to be entitled to indemnification, an individual must
have acted in good faith and in a manner he or she reasonably believed to be in
or not opposed to the Registrant's best interests.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to any charter provision, by-law, contract, arrangement,
statute or otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. See Item 28.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered (other than
underwriting discounts and commissions and the Representative's non-accountable
expense allowance) are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee ................... $ 5,119.71
NASD filing fee ....................................................... 2,235.53
Nasdaq listing fee .................................................... 10,000.00
Underwriter's consulting fee .......................................... 123,000.00
Printing and engraving expenses ....................................... 75,000.00
Legal fees and expenses ............................................... 150,000.00
Accounting fees and expenses .......................................... 124,000.00
Blue sky fees and expenses (including legal fees) ..................... 50,000.00
Transfer agent, warrant agent and registrar fees and expenses ......... 3,500.00
Miscellaneous ......................................................... 7,144.76
------------
Total ..................................................... ......... $ 550,000.00
</TABLE>
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities
In February 1997, the Company issued an aggregate of 1,168,000 shares of
Common Stock for consideration of $.01 per share to the following persons: Nicko
Feinberg, Michael Char, Stephen J. Cole-Hatchard, Stephen Cole-Hatchard Family
Limited Partnership, Michael Olbermann, Vestrco, Inc., Nino Fontana, Michael
Garvey, Jeffrey Cohen, Edward Anderson, Peter Morris and Jay Edward & Partners,
Ltd.
In February 1997, the Company issued options to purchase an aggregate of
165,600 shares of Common Stock (net of forfeitures) to: Nicko Feinberg, Stephen
Cole-Hatchard, Michael Olbermann, Michael Garvey, Jeffrey Cohen, Brad Bogardis,
Peter Morris, Sharon Baker, Ron Signore and Chris Ann Stolecki.
In May 1997, the Company issued an aggregate of 160,000 shares of Common
Stock for consideration of $2.00 per share to the following persons: Allen
Markowitz, William A. Barron, The Rough Group, Robert E. Sullivan and Virginia
M. Sullivan, Richard Baker, William E. Stolecki and James W. Stolecki, Doris
Cole-Hatchard, Patrick Keenan, Douglas J. Cole-Hatchard Jr., James P. Quinn and
Deborah A. Quinn, William J. Collins, Lewis L. Prince, Michael J. Dooling,
Maureen T. Donoghue, Geraldine Garvey, Edwin Kahn and Wilma R. Kahn, Bruce G.
Tracy, Elizabeth M. Dooling, FKF Holding Company, L.P.
In December 1997, the Company issued 100,000 shares of Common Stock to
Ronald Schapss. In addition, 300,000 warrants were issued to Edward Anderson
(40,000), Doris Cole-Hatchard (64,000), and The Rough Group (196,000) in
connection with a private placement.
In connection with the above-referenced issuances, the Company relied on
Section 4(2) under the Securities Act of 1933, as amended, as transactions by an
issuer not involving any public offering.
Each of the above investors had full access to information relating to the
Company and represented to the Company that he or she had the required
investment intent. The Company believes that each of the above investors was
sophisticated in that he or she had such knowledge and experience in financial
and business matters that he is capable of evaluating the merits and rules of
the investment. In addition, the above-referenced securities will bear
appropriate restrictive legends, and stop transfer orders will be placed against
such securities.
Item 27. Exhibits
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement.*
1.2 Form of Agreement Among Underwriters*
1.3 Form of Selected Dealer Agreement*
3.1 Certificate of Incorporation of the Registrant, as amended.
3.2 Bylaws of the Registrant, as amended.
4.1 Form of Underwriter's Warrant Agreement, including Form of Warrant Certificate.*
4.2 Form of Public Warrant Agreement among the Registrant, the
Underwriter and Continental Transfer & Trust Company as Warrant Agent.
4.3 Form of Registrant's Public Warrant Certificate.
5.1 Opinion of Tenzer Greenblatt LLP.
10.1 Exchange Agreement.
10.2 Promissory Note issued by Registrant to Mr. Feinberg, amended.
10.3 Promissory Note issued by Registrant to Mr. Cole-Hatchard, as amended.
10.4 Promissory Note issued by Registrant to Mr. Char.
10.5 1997 Stock Option Plan.
10.6 Office Lease between Registrant and Glorious Sun Robert Martin LLC.
10.7 Employment Agreements with Messrs. Morris, Cole-Hatchard, Feinberg and Olbermann.
10.8 Promissory Note issued to Mr. Cole-Hatchard.
10.9 Form of Lock-up Agreement.
10.10 Consulting Agreement with Representative.*
10.11 Consulting Agreement with Mr. Schapss.*
10.12 Settlement Agreement with Mr. Char.*
23.1 Consent of BDO Seidman LLP, Independent Certified Public Accountants.*
23.2 Consent of Tenzer Greenblatt LLP (filed as Exhibit 5.1).
24.1 A power of attorney relating to the signing of amendments hereto is incorporated in the
signature pages of this Registration Statement.
27 Financial Data Schedule (SEC use only).
</TABLE>
- ------------
* Filed herewith.
II-2
<PAGE>
Item 28. Undertakings.
The undersigned registrant hereby undertakes to:
(1) file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the Securities
Act.
(ii) reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information set forth in the
Registration Statement;
(iii) include any additional or changed material information on the plan
of distribution;
(2) for determining liability under the Securities Act, treat each such
post-effective amendment as a new registration of the securities offered, and
the offering of such securities at that time to be initial bona fide offering;
and
(3) file a post-effective amendment to remove from registration any of the
securities that remain unsold at the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the standby under writing agreement
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for the
purpose of determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this Registration Statement as of the time
the Securities and Exchange Commission declares it effective; and (3) that for
the purpose of determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of Prospectus as a new
Registration Statement for the securities offered in the Registration Statement
therein, and treat the offering of the securities at that time as the initial
bona fide offering of those securities.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized Amendment No. 1 to
this Registration Statement to be signed on its behalf by the undersigned, in
the city of Pearl River, State of New York on April 8, 1998.
FRONTLINE COMMUNICATIONS CORPORATION
By: /s/ Stephen J. Cole-Hatchard
------------------------------------
Stephen J. Cole-Hatchard, Chairman
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Stephen J.Cole-Hatchard Chairman of the Board, President, Chief April 8, 1998
- --------------------------- Executive Officer, and Secretary (Principal
Stephen J. Cole-Hatchard Executive and Accounting Officer)
/s/ Nicko Feinberg Chief Information Officer, Vice President of April 8, 1998
- ------------------------- Technology and Director
Nicko Feinberg
/s/ Michael Olbermann Chief Operating Officer, Vice President and April 8, 1998
- ------------------------- Director
Michael Olbermann
/s/ Ronald Shapss Director April 8, 1998
- -------------------------
Ronald Shapss
/s/ Ronald C. Signore Director April 8, 1998
- -------------------------
Ronald C. Signore
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
- --------- -----------
<S> <C>
1.1 Form of Underwriting Agreement.*
1.2 Form of Agreement Among Underwriters*
1.3 Form of Selected Dealer Agreement*
3.1 Certificate of Incorporation of the Registrant, as amended.
3.2 Bylaws of the Registrant, as amended.
4.1 Form of Underwriter's Warrant Agreement, including Form of Warrant Certificate.*
4.2 Form of Public Warrant Agreement among the Registrant, the Underwriter and Continental
Transfer & Trust Company as Warrant Agent.*
4.3 Form of Registrant's Public Warrant Certificate.
5.1 Opinion of Tenzer Greenblatt LLP.
10.1 Exchange Agreement.
10.2 Promissory Note issued by Registrant to Mr. Feinberg, amended.
10.3 Promissory Note issued by Registrant to Mr. Cole-Hatchard, as amended.
10.4 Promissory Note issued by Registrant to Mr. Char.
10.5 1997 Stock Option Plan.
10.6 Office Lease between Registrant and Glorious Sun Robert Martin LLC.
10.7 Employment Agreements with Messrs. Morris, Cole-Hatchard, Feinberg and Olbermann.
10.8 Promissory Note issued to Mr. Cole-Hatchard.
10.9 Form of Lock-up Agreement.
10.10 Consulting Agreement with Representative
10.11 Consulting Agreement with Mr. Schapss
10.12 Settlement Agreement with Mr. Char
*23.1 Consent of BDO Seidman LLP, Independent Certified Public Accountants.
23.2 Consent of Tenzer Greenblatt LLP (filed as Exhibit 5.1).
24.1 A power of attorney relating to the signing of amendments hereto is incorporated in the
signature pages of this Registration Statement.
27 Financial Data Schedule (SEC use only).
</TABLE>
- ------------
* Filed herewith.
<PAGE>
EXHIBIT 1.1
Frontline Communications Corporation
One Blue Hill Plaza, 6th Floor
Pearl River, New York 10965
UNDERWRITING AGREEMENT
----------------------
Werbel Roth Securities, Inc. _________, 1998
150 E. Palmetto Park Road
Suite 510
Boca Raton, FL 33432
Gentlemen:
Frontline Communications Corporation, a Delaware corporation (the
"Company"), proposes to issue and sell to Werbel Roth Securities, Inc. ("Werbel
Roth" or the "Representative") and to each of the other underwriters named in
Schedule I hereto (the "Underwriters"), for each of whom you are acting as
Representative the following securities: (i) 1,500,000 shares of Common Stock at
a public offering price of $4.00 per share; and (ii) 1,500,000 Common Stock
Purchase Warrants (the "Warrants") at a public offering price of $.10 per
Warrant. Each Warrant shall entitle the holder thereof to purchase one share of
Common Stock for a period of four and one-half years commencing six months from
the Effective Date (as hereinafter defined) at a purchase price of $4.80 per
share. Commencing 13 months from the Effective Date, the Company may redeem the
Warrants at any time upon notice of not less than 30 days, at a price of $.10
per warrant, provided that the closing bid quotation of the Common Stock on all
20 trading days ending on the third day prior to the day on which the Company
gives notice, has been at least 150% of the then effective exercise price of the
Warrants and the Company obtains the prior written approval of the
Representative. The Warrant holders shall have the right to exercise their
Warrants until the close of the date fixed for their redemption. The date the
Registration Statement with respect to the Securities is declared effective by
the Commission is hereinafter referred to as the "Effective Date." The 1,500,000
shares of Common Stock and the 1,500,000 Warrants are hereinafter sometimes
referred to as the "Firm Common Stock," and the "Firm Warrants," respectively.
The Firm Common Stock, and the Firm Warrants are sometimes hereinafter referred
to as the "Firm Securities." Upon the request of the Representative, and as
provided in Section 3 hereof, the Company will also issue and sell to the
Underwriters up to a maximum of an additional 225,000 shares of Common Stock,
and 225,000 Warrants for the purpose of covering over-allotments. Such
additional shares of Common Stock and Warrants are hereinafter sometimes
referred to as the "Optional Common Stock" and the "Optional Warrants,"
respectively. The Optional Common Stock and Optional Warrants are sometimes
hereinafter referred to as the "Optional Securities." Both the Firm Securities
and the Optional Securities are sometimes collectively referred to herein as the
"Securities." All of the securities which are the subject of this Agreement are
more fully described in the
<PAGE>
Prospectus of the Company described below. In the event that the Representative
does not form an underwriting group but decides to act as the sole Underwriter,
then all references to Werbel Roth Securities, Inc. herein as Representative
shall be deemed to be to it as such sole Underwriter and Section 14 hereof shall
be deemed deleted in its entirety.
The Company understands that the Underwriters propose to make a public
offering of the Securities as soon as the Representative deems advisable after
the Registration Statement hereinafter referred to becomes effective. The
Company hereby confirms its agreement with the Representative and the other
Underwriters as follows:
SECTION 1. Description of Securities. The Company's authorized and
outstanding capitalization when the public offering of securities contemplated
hereby is permitted to commence, under the Securities Act of 1933, as amended
(the "Act"), and at the Closing Date (hereinafter defined) and the terms of the
Warrants will be as set forth in the Prospectus (hereinafter defined).
SECTION 2. Representations and Warranties of the Company. The Company
hereby represents and warrants to, and agrees with, the Underwriters as follows:
(a) A Registration Statement on Form SB-2 and amendments
thereto (No. 333-34115) with respect to the Securities, including a form of
prospectus relating thereto, copies of which have been previously delivered to
you, has been prepared by the Company in conformity with the requirements of the
Act, and the rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder, and has been
filed with the Commission under the Act. The Company, subject to the provisions
of Section 6(a) hereof, may file one or more amendments to such Registration
Statement and Prospectus. The Underwriters will receive copies of each such
amendment.
The date on which such Registration Statement is
declared effective under the Act and the public offering of the Securities as
contemplated by this Agreement is therefore authorized to commence, is herein
called the "Effective Date." The Registration Statement and Prospectus, as
finally amended and revised immediately prior to the Effective Date, are herein
called respectively the "Registration Statement" and the "Prospectus." If,
however, a prospectus is filed by the Company pursuant to Rule 424(b) of the
Rules and Regulations which differs from the Prospectus, the term "Prospectus"
shall also include the prospectus filed pursuant to Rule 424(b).
(b) The Registration Statement (and Prospectus), at the time
it becomes effective under the Act, (as thereafter amended or as supplemented if
the Company shall have filed with the Commission an amendment or supplement),
and, with respect to all such documents, on the Closing Date (hereinafter
defined), will in all material respects comply with the provisions of the Act
and the Rules and Regulations, and will not contain an untrue statement of a
material fact and will not omit to state a material fact required to be stated
therein or necessary in order to make the statements therein, in the light of
the
2
<PAGE>
circumstances under which they were made, not misleading; provided, however,
that none of the representations and warranties contained in this subsection (b)
shall extend to the Underwriters in respect of any statements in or omissions
from the Registration Statement and/or the Prospectus, based upon information
furnished in writing to the Company by the Underwriters specifically for use in
connection with the preparation thereof.
(c) The Company has been duly incorporated and is now, and on
the Closing Date will be, validly existing as a corporation in good standing
under the laws of the State of Delaware, having all required corporate power and
authority to own its properties and conduct its business as described in the
Prospectus. The Company is now, and on the Closing Date will be, duly qualified
to do business as a foreign corporation in good standing in all of the
jurisdictions in which it conducts its business or the character or location of
its properties requires such qualifications except where the failure to so
qualify would not materially adversely affect the Company's business, properties
or financial condition. The Company has no subsidiaries, except as are set forth
in the Prospectus.
(d) The financial statements of the Company (audited and
unaudited) included in the Registration Statement and Prospectus present fairly
the financial position and results of operations and changes in financial
condition of the Company at the respective dates and for the respective periods
to which they apply; and such financial statements have been prepared in
conformity with generally accepted accounting principles, consistently applied
throughout the periods involved, and are in accordance with the books and
records of the Company.
(e) BDO Seidman LLP, independent public accountants, who have
given their report on certain financial statements which are included as a part
of the Registration Statement and the Prospectus are independent public
accountants as required under the Act and the Rules and Regulations.
(f) Subsequent to the respective dates as of which information
is given in the Prospectus and prior to the Closing Date and, except as set
forth in or contemplated in the Prospectus, (i) the Company has not incurred,
nor will it incur, any material liabilities or obligations, direct or
contingent, nor has it, nor will it have entered into any material transactions,
in each case not in the ordinary course of business; (ii) there has not been,
and will not have been, any material change in the Company's Certificate of
Incorporation or in its capital stock or funded debt; and (iii) there has not
been, and will not have been, any material adverse change in the business, net
worth or properties or condition (financial or otherwise) of the Company whether
or not arising from transactions in the ordinary course of business.
(g) Except as otherwise set forth in the Prospectus, the real
and personal properties of the Company as shown in the Prospectus and
Registration Statement to be owned by the Company are owned by the Company by
good and marketable title free and clear of all liens and encumbrances, except
those (i) specifically referred to in the Prospectus, which do not materially
adversely affect the use or value of such assets, (ii)
3
<PAGE>
for current taxes not now due, or (iii) are held by the Company by valid leases,
none of which is in default. Except as disclosed in the Prospectus and
Registration Statement, the Company in all material respects has full right and
licenses, permits and governmental authorizations required to maintain and
operate its business and properties as the same are now operated and, to its
best knowledge, none of the activities or business of the Company is in material
violation of, or causes the Company to violate any laws, ordinances and
regulations applicable thereto, the violation of which would have a material
adverse impact on the condition (financial or otherwise), business, properties
or net worth of the Company.
(h) The Company has no material contingent obligations, nor
are its properties or business subject to any material risks, which may be
reasonably anticipated, which are not disclosed in the Prospectus.
(i) Except as disclosed in the Prospectus and Registration
Statement, there are no material actions, suits or proceedings at law or in
equity of a material nature pending, or to the Company's knowledge, threatened
against the Company which are not adequately covered by insurance, which might
result in a material adverse change in the condition (financial or otherwise),
properties or net worth of the Company, and there are no proceedings pending or,
to the knowledge of the Company, threatened against the Company before or by any
Federal or State Commission, regulatory body, or administrative agency or other
governmental body, wherein an unfavorable ruling, decision or finding would
materially adversely affect the business, properties or net worth or financial
condition or income of the Company, which are not disclosed in the Prospectus.
(j) All of the outstanding shares of Common Stock are duly
authorized and validly issued and outstanding, fully paid, non-assessable, and
do not have any and were not issued in violation of any preemptive rights. All
of the Common Stock as described in the Prospectus when paid for shall be duly
authorized and validly issued and outstanding, fully paid, non-assessable, and
will not have any and will not be issued in violation of any preemptive rights.
The Common Stock issuable upon exercise of the Warrants when issued and paid for
in accordance with the Warrant Agreement shall be duly authorized and validly
issued and outstanding, fully paid, non-assessable, and will not have any and
will not be issued in violation of any preemptive rights. The Common Stock and
Warrants will be delivered in accordance with this Agreement and the Warrant
Agreement filed as Exhibit 4.2 to the Registration Statement between the Company
and American Securities Transfer & Trust Company, 1825 Lawrence Street, Denver,
Colorado 80202. The Underwriters will receive good and marketable title to the
Securities purchased by them from the Company, free and clear of all liens,
encumbrances, claims, security interests, restrictions, stockholders' agreements
and voting trusts whatsoever. Except as set forth in the Prospectus, there are
no outstanding convertible preferred stock, options, warrants, or other rights,
providing for the issuance of, and no commitments, plans or arrangements to
issue, any shares of any class of capital stock of the Company, or any security
convertible into, or exchangeable for, any shares of any class of capital stock
of the Company. All of the Securities of the Company to which this Agreement
relates conform to the statements relating to them that are contained in the
Registration Statement and Prospectus.
4
<PAGE>
(k) The certificate or certificates required to be furnished
to the Underwriters pursuant to the provisions of Section 11 hereof will be true
and correct.
(l) The execution and delivery by the Company of this
Agreement has been duly authorized by all necessary corporate action and it is a
valid and binding obligation of the Company, enforceable against it in
accordance with its terms except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other laws pertaining to
creditors rights generally.
(m) Except as disclosed in the Prospectus, no default exists,
and no event has occurred which, with notice or lapse of time, or both, would
constitute a default in the due performance and observance of any material term,
covenant or condition by the Company or any other party, of any material
indenture, mortgage, deed of trust, note or any other material agreement or
instrument to which the Company is a party or by which it or its business or its
properties may be bound or affected, except as disclosed in the Prospectus. The
Company has full power and lawful authority to authorize, issue and sell the
Securities to be sold by it hereunder on the terms and conditions set forth
herein and in the Registration Statement and in the Prospectus. No consent,
approval, authorization or other order of any regulatory authority is required
for such authorization, issue or sale, except as may be required under the Act
or State securities laws. The execution and delivery of this Agreement, the
consummation of the transactions herein contemplated, and compliance with the
terms hereof will not conflict with, or constitute a default under any
indenture, mortgage, deed of trust, note or any other agreement or instrument to
which the Company is now a party or by which it or its business or its
properties may be bound or materially affected; the Certificate of Incorporation
and any amendments thereto; the by-laws of the Company, as amended; or to the
best knowledge of the Company, any law, order, rule or regulation, writ,
injunction or decree of any government, governmental instrumentality, or court,
domestic or foreign, having jurisdiction over the Company or its business or
properties.
(n) No officer or director of the Company has taken, and each
officer and director has agreed that he will not take, directly or indirectly,
any action designed to stabilize or manipulate the price of the Common Stock or
the Warrants in the open market following the Closing Date or any other type of
action designed to, or that may reasonably be expected to cause or result in
such stabilization or manipulation, or that may reasonably be expected to
facilitate the initial sale, or resale, of any of the securities which are the
subject of this Agreement.
(o) The Warrants to purchase Common Stock to be issued at
closing to the Representative (the Representative's Stock Warrants") and the
Warrants to purchase Warrants to be issued at closing to the Representative (the
"Representative's Warrants," which together with the Representative's Stock
Warrants are collectively hereinafter referred to as the "Representative's
Securities") will be, when issued and paid for, duly and validly authorized and
executed by the Company and will constitute valid and binding obligations of the
Company, legally enforceable in accordance with their terms (except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization,
5
<PAGE>
moratorium or other laws pertaining to creditors rights generally), and the
Company will have duly authorized, reserved and set aside the shares of its
Common Stock issuable upon exercise of the Representative's Securities and
underlying Warrants, and such stock, when issued and paid for upon exercise of
the Representative's Securities and underlying Warrants in accordance with the
provisions of the Warrant Agreement will be duly authorized and validly issued,
fully-paid and non-assessable.
(p) The Company represents that it paid $10,000 to Adams
Stevens, Inc. and $15,000 to Parker Bromley Ltd. (net of any refunds of money)
as disclosed in the Underwriting section of the Prospectus and that no other
monies have been paid to any other broker/dealers registered with the NASD in
connection with this Registration Statement or any other matter during the
period commencing February 21, 1996 to the date hereof.
(q) All of the aforesaid representations, agreements, and
warranties shall survive delivery of, and payment for, the Securities.
SECTION 3. Issuance, Sale and Delivery of the Firm Securities, the
Optional Securities and the Representative's Warrants.
(a) Upon the basis of the representations, warranties,
covenants and agreements of the Company herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the several
Underwriters, and the Underwriters, severally and not jointly, agree to purchase
from the Company, the number of the Firm Securities set forth opposite the
respective names of the Underwriters in Schedule I hereto, plus any additional
Securities which such Underwriter may become obligated to purchase pursuant to
the provisions of Section 14 hereof.
The purchase price of the Common Stock and Warrants
to be paid by the several Underwriters shall be $3.60 and $.09, respectively
(the initial public offering price less a ten percent discount).
In addition, and upon the same basis, subject to the
same terms and conditions, the Company hereby grants to you individually and not
as Representative an option to purchase, but only for the purpose of covering
over-allotments, upon not less than two days' notice from you, the Optional
Securities, or any portion thereof, at the same price per share of Common Stock,
and/or Warrant as that set forth in the preceding paragraph. Notwithstanding
anything contained herein to the contrary, you individually and not as
Representative are entitled to purchase all or any part of the Optional
Securities and are not obligated to offer the Optional Securities to the other
Underwriters. The Optional Securities may be exercised at any time, and from
time to time, thereafter within a period of 45 calendar days following the
Effective Date. The time(s) and date(s) (if any) so designated for delivery and
payment for the Optional Securities shall be set forth in the notice to the
Company. Such dates are herein defined as the Additional Closing Date(s).
6
<PAGE>
(b) Payment for the Firm Securities shall be made by certified
or official bank checks in New York Clearing House funds, payable to the order
of the Company, at the offices of the Representative at 150 E. Palmetto Park
Road, Suite 510, Boca Raton, FL 33432, or its clearing agent, or at such other
place as shall be agreed upon by the Representative and the Company, upon
delivery of the Firm Securities to the Representative for the respective
accounts of the Underwriters. In making payment to the Company, the
Representative may first deduct all sums due to it for the balance of the
non-accountable expense allowance and under the Financial Consulting Agreement
(as hereinafter defined). Such delivery and payment shall be made at 9:30 A.M.,
New York City Time on the third business day which may be extended by the
Representative to not later than the fifth business day following the Effective
Date (unless postponed in accordance with the provisions of Section 14 hereof)
or at such other time as shall be agreed upon by the Representative and the
Company. The time and date of such delivery and payment are hereby defined as
the Closing Date. It is understood that each Underwriter has authorized the
Representative, for the account of such Underwriter, to accept delivery of,
receipt for, and make payment of the purchase price for, the Firm Securities
which it has agreed to purchase. You, individually, and not as Representative
may (but shall not be obligated to) make payment of the purchase price for the
Firm Securities to be purchased by any Underwriter whose check shall not have
been received by the Closing Date, for the account of such Underwriter, but any
such payment shall not relieve such Underwriter from its obligations hereunder.
(c) Payment for the Optional Securities shall be made at the
offices of the Representative at 150 Palmetto Park Road, Suite 510, Boca Raton,
FL 33432, or its clearing agent or at such other place as shall be designated by
the Representative, in accordance with the notice delivered pursuant to Section
3(a) which shall be no later than five business days from the expiration of the
forty-five day option period.
(d) Certificates for the Firm Securities and for the Optional
Securities shall be registered in such name or names and in such authorized
denominations as the Representative may request in writing at least two business
days prior to the Closing Date, and the Additional Closing Date(s) (if any). The
Company shall permit the Representative to examine and package said certificates
for delivery at least one full business day prior to the Closing Date and prior
to the Additional Closing Date(s). The Company shall not be obligated to sell or
deliver any of the Firm Securities except upon tender of payment by the
Underwriters for all of the Firm Securities agreed to be purchased by them
hereunder. The Representative, however, shall have the sole discretion to
determine the number of Optional Securities, if any, to be purchased.
(e) At the time of making payment for the Firm Securities, the
Company also hereby agrees to sell to the Representative, Representative's Stock
Warrants to purchase 150,000 shares of Common Stock at any time on or after
Effective Time until five years from the Effective Time, and Representative's
Warrants to purchase 150,000 Warrants at an aggregate purchase price of $100.
The Representative's Stock Warrants will be exercisable at a price of $6.00 per
share. The Representative's Warrants shall be immediately exercisable on or
after the Effective Date at a price of $.15 per Warrant until
7
<PAGE>
five years from the Effective Time, but in no event after the Termination Date
of the public Warrants. The Warrants underlying the Representative's Warrants
shall be identical in all respects to the Warrants sold to the public except
that the underlying Warrants shall be exercisable at 150% of the then effective
exercise price of the public Warrants. From the Effective Date and until one (1)
year thereafter, such Representative Securities and underlying securities may be
transferred only to officers or partners of the Representative and selling group
members and their officers or partners.
SECTION 4. Public Offering. The several Underwriters agree, subject to
the terms and provisions of this Agreement, to offer the Common Stock, and
Warrants to the public as soon as practicable after the Effective Date, at the
initial offering price of $4.00 and $.10, respectively and upon the terms
described in the Prospectus. The Representative may, from time to time, decrease
the public offering price, after the initial public offering, to such extent as
the Representative may determine, however, such decreases will not affect the
price payable to the Company hereunder.
SECTION 5. Registration Statement and Prospectus. The Company will
furnish the Representative, without charge, two signed copies of the
Registration Statement and of each amendment thereto, including all exhibits
thereto and such amount of conformed copies of the Registration Statement and
Amendments as may be reasonably requested by the Representative for distribution
to each of the Underwriters and Selected Dealers.
The Company will furnish, at its expense, as many printed
copies of a Preliminary Prospectus and of the Prospectus as the Representative
may request for the purposes contemplated by this Agreement. If, while the
Prospectus is required to be delivered under the Act or the Rules and
Regulations, any event known to the Company relating to or affecting the Company
shall occur which should be set forth in a supplement to or an amendment of the
Prospectus in order to comply with the Act (or other applicable law) or with the
Rules and Regulations, the Company will forthwith prepare, furnish and deliver
to the Representative and to each of the other Underwriters and to others whose
names and addresses are designated by the Representative, in each case at the
Company's expense, a reasonable number of copies of such supplement or
supplements to or amendment or amendments of, the Prospectus.
The Company authorizes the Underwriters and the selected
dealers, if any, in connection with the distribution of the Securities and all
dealers to whom any of the Securities may be sold by the Underwriters, or by any
Selected Dealer, to use the Prospectus, as from time to time amended or
supplemented, in connection with the offering and sale of the Securities and in
accordance with the applicable provisions of the Act and the applicable Rules
and Regulations and applicable State Securities Laws.
SECTION 6. Covenants of the Company. The Company covenants and agrees
with each Underwriter that:
(a) After the date hereof, the Company will not at any time,
whether before or after the Effective Date, file any amendment to the
Registration Statement or the
8
<PAGE>
Prospectus, or any supplement to the Prospectus, of which the Representative
shall not previously have been advised and furnished with a copy, or to which
the Representative or the Underwriters' counsel, shall have reasonably objected
in writing on the ground that it is not in compliance with the Act or the Rules
and Regulations.
(b) The Company will use its best efforts to cause the
Registration Statement to become effective as promptly as reasonably practicable
and will advise the Representative, (i) when the Registration Statement shall
have become effective and when any amendment thereto shall have become
effective, and when any amendment of or supplement to the Prospectus shall be
filed with the Commission, (ii) when the Commission shall make request or
suggestion for any amendment to the Registration Statement or the Prospectus or
for additional information and the nature and substance thereof, and (iii) of
the issuance by the Commission of an order suspending the effectiveness of the
Registration Statement or of the initiation of any proceedings for that purpose,
and will use every reasonable effort to prevent the issuance of such an order,
or if such an order shall be issued, to obtain the withdrawal thereof at the
earliest possible moment.
(c) The Company will prepare and file with the Commission,
promptly upon the request of the Representative, such amendments, or supplements
to the Registration Statement or Prospectus, in form and substance satisfactory
to counsel to the Company, as in the reasonable opinion of Lester Morse P.C., as
counsel to the Underwriters, may be necessary or advisable in connection with
the offering or distribution of the Securities, and will use its best efforts to
cause the same to become effective as promptly as possible.
(d) The Company will, at its expense, when and as requested by
the Representative, supply all necessary documents, exhibits and information,
and execute all such applications, instruments and papers as may be required or
desirable, in the opinion of the Underwriters' counsel; to qualify the
Securities or such part thereof as the Representative may determine, for sale
under the so-called "Blue Sky" Laws of such states as the Representative shall
designate, and to continue such qualification in effect so long as required for
the purposes of the distribution of the Securities, provided, however, that the
Company shall not be required to qualify as a foreign corporation or to file a
consent to service of process in any state in any action other than one arising
out of the offering or sale of the Securities.
(e) The Company will, at its own expense, file and provide,
and continue to file and provide, such reports, financial statements and other
information as may be required by the Commission, or the proper public bodies of
the States in which the Securities may be qualified for sale, for so long as
required by applicable law, rule or regulation and will provide the
Representative with copies of all such registrations, filings and reports on a
timely basis.
(f) During the period of five years from the Effective Date,
the Company will deliver to the Underwriter a copy of each annual report of the
Company, and will
9
<PAGE>
deliver to the Underwriter (i) within 50 days after the end of each of the
Company's first three quarter-yearly fiscal periods, a balance sheet of the
Company as at the end of such quarter-yearly period, together with a statement
of its income and a statement of changes in its cash flow for such period (Form
10-QSB), all in reasonable detail, signed by its principal financial or
accounting officer, (ii) within 105 days after the end of each fiscal year, a
balance sheet of the Company as at the end of such fiscal year, together with a
statement of its income and statement of changes in cash flow for such fiscal
year (Form 10-KSB), such balance sheet and statement of cash flow for such
fiscal year to be in complete detail and to be accompanied by a certificate or
report of independent public accountants, (who may be the regular accountants
for the Company), (iii) as soon as available a copy of every other report
(financial or other) mailed to the shareholders, and (iv) as soon as available a
copy of every report and financial statement furnished to or filed with the
Commission or with any securities exchange pursuant to requirements by or
agreement with such exchange or the Commission pursuant to the Securities
Exchange Act of 1934, as amended, or any regulations of the Commission
thereunder. If the Company has one or more active subsidiaries, the financial
statements required by (i) and (ii) above shall be furnished on a consolidated
basis in respect of the Company and its subsidiaries. Separate financial
statements shall be furnished for each subsidiary, the accounts of which are not
so consolidated. The financial statements referred to in (ii) shall also be
furnished to all of the shareholders of the Company as soon as practicable after
the 105 days referred to therein.
(g) The Company represents that with respect to the
Securities, it will prepare and file a Registration Statement with the
Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934, as
amended, prior to the Effective Date with a request that such Registration
Statement will become effective on the first day following the Effective Date.
The Company understands that, to register, it must prepare and file with the
Securities and Exchange Commission a General Form of Registration of Securities
(Form 8-A or Form 10). In addition, the Company agrees to qualify its Securities
for listing on the NASDAQ System Small-Cap Issues on the Effective Date and will
take all necessary and appropriate action so that the Securities continue to be
listed for trading in the NASDAQ System Small-Cap Issues for at least ten years
from the Effective Date provided the Company otherwise complies with the
prevailing maintenance requirements of NASDAQ System Small-Cap. In addition, at
such time as the Company qualifies for listing its securities on the National
Market System of NASDAQ, the Company will take all steps necessary to have the
Company's Securities thereof listed on the National Market System of NASDAQ in
lieu of listing as Small-Cap Issues. The Company shall comply with all periodic
reporting and proxy solicitation requirements imposed by the Commission pursuant
to the 1934 Act, and shall promptly furnish you with copies of all material
filed with the Commission pursuant to the 1934 Act or otherwise furnished to
shareholders of the Company.
(h) The Company will make generally available to its security
holders, as soon as practicable, but in no event later than 15 months after the
Effective Date, an earnings statement of the Company (which need not be audited)
in reasonable detail,
10
<PAGE>
covering a period of at least twelve months beginning after the Effective Date,
which earnings statement shall satisfy the provisions of Section 11(a) of the
Act.
(i) The Company shall, on the Effective Date, apply for
listing in Standard and Poor's Corporation Records (requesting coverage in the
Daily News Supplement) and Standard & Poor's Monthly Stock Guide and shall use
its best efforts to have the Company listed in such reports for a period of not
less than ten (10) years from the Closing Date.
(j) For a period of five years from the Effective Date, the
Representative shall receive notice of any regular or special meetings of the
Company's Board of Directors concurrently with the sending of such notice to the
Company's directors and shall have the right to have a representative attend
such meeting (other than executive or closed meetings or portions thereof) as an
observer.
(k) The Company shall employ the services of BDO Seidman LLP
or such other auditing firm acceptable to the Representative in connection with
the preparation of the financial statements required to be included in the
Registration Statement and shall continue to appoint such auditors or such other
auditors as are reasonably acceptable to the Representative for a period of five
(5) years following the Effective Date of the Registration Statement. The
Company shall appoint American Securities Transfer and Trust Company as transfer
agent for the Shares and as Warrant Agent for the Warrants.
(l) Edward Andersen (40,000), Doris Cole-Hatchard (64,000) and
the Rough Group (196,000), the holders of the warrants to purchase 300,000
shares issued in December 1997, have agreed that the Warrants are exercisable at
$5.00 per share and contain no registration rights.
(m) Within ninety (90) days subsequent to the Effective Date,
the Company will furnish "Key Man" Life Insurance in the amount of $1,000,000
each on the lives of Stephen S. Cole-Hatchard, Nicko Feinberg and Michael
Olbermann with the Company as the beneficiary thereof and the Company shall pay
the annual premiums, therefore, for a period of not less than five years from
the Effective Date.
(n) The Company will for a period of five years at its
expense, shall cause its regularly engaged independent certified public
accountants to examine (but not audit) the Company's financial statements for
each of the first three (3) fiscal quarters prior to the announcement of
quarterly financial information, the filing of the Company's Form 10-QSB
quarterly report and the mailing of quarterly financial information to security
holders.
(o) For a period of two years after the date of this
Prospectus, the Company shall not file a Registration Statement on Form S-8 or
any other appopriate form to register shares underlying the Company's Stock
Option Plan without the prior written consent of the Representative.
(p) Until such time as the securities of the Company are
listed on the New York Stock Exchange, the American Stock Exchange, or the
NASDAQ/NMS; the Company
11
<PAGE>
shall cause its legal counsel or an independent firm acceptable to the
Representative to provide the Representative with a survey, to be updated at
least semi-annually, of those states in which the securities of the Company may
be traded in non-issuer transactions under the Blue Sky laws of the states and
the basis for such authority. The first such survey shall be delivered by
Company's counsel at closing; the second such survey shall be delivered by
Company's counsel within five business days of publication of the Company in
Standard & Poor's Corporation Records and, thereafter, on a semi-annual basis on
April 30 and October 31 of each year.
(q) As soon as practicable after the Closing Date, the Company
will deliver to the Representative and its counsel a total of three bound
volumes of copies of all documents relating to the public offering which is the
subject of this Agreement.
(r) The Company will at its cost for a period of five years
after the Effective Date: (i) Distribute an annual report to all stockholders
setting forth tjhe results of operations and the financial position of the
Company; and (ii) Furnish the Representative at the Company's sole cost with a
duplicate copy of the daily transfer sheets prepared by the Transfer Agent, copy
of the weekly sheets prepared by Depository Trust Company and a duplicate copy
of a list of stockholders.
(s) From the proceeds of the offering, the Company shall
repurchase all but 24,480 (post-reverse) shares of Common Stock presently owned
by Michael Char for a sum not to exceed $275,000. The resale of Mr. Char's
remaining 24,480 shares of Common Stock shall be subject to the lock-up
provisions set forth in paragraph 17 herein.
SECTION 7. Expenses of the Company.
------------------------
(a) The Company shall be responsible for and shall bear all expenses
directly and necessarily incurred in connection with the proposed financing,
including: (i) the preparation, printing and filing of the Registration
Statement and amendments thereto, including NASD and SEC filing fees,
preliminary and final Prospectus and the printing of the Underwriting Agreement,
the Agreement Among the Underwriters and the Selected Dealers' Agreement, a Blue
Sky Memorandum and material to be circulated to the Undersriters by us; (ii)
the issuance and delivery of certificates representing the Securities, including
original issue and transfer taxes, if any; (iii) the qualifications of the
Company's Securities (covered by the "firm commitment" offering) under State
Securities or Blue Sky Laws, including counsel fees of Lester Morse P.C.
relating thereto in the sum of Thirty-Five ($35,000) Dollars ($10,000 of which
has been paid, together with appropriate state filing fees) plus disbursements
relating to, but not limited to, long-distance telephone calls, photocopying,
messengers, excess postage, overnight mail and courier services; (iv) the fees
and disbursements of counsel for the Company and the accountants for the
Company;
12
<PAGE>
(v) costs of qualifying the Securities for listing on NASDAQ and (vi) post
closing tombstone advertisements not to exceed $12,000. Upon the commencement of
the necessary state Blue Sky filings by our counsel, the Company shall supply
him at his request, all necessary state filing fees.
(b) In addition, the Company shall bear each of the following costs:
(I) investigative reports (such as Bishop's Reports) of the Company's executive
officers, directors and principal stockholders, as well as travel and other
reasonable due diligence expenses in the aggregate, including without
limitation, informational meetings and presentations in connection with the
offering; and (ii) otherwise unreimbursed postage, including mailing of
preliminary and final prospectuses incurred by or on behalf of the
Representative and the Underwriters in preparation for, or in connection with
the offering and sale and distribution of the Securities on an accountable
basis.
SECTION 8. Payment of Underwriters' Expenses.
----------------------------------
On the Closing Date and Additional Closing Date(s)
(if any) the Company will pay to you an expense allowance equal to three (3%)
percent of the total gross proceeds derived from the public offering
contemplated by this Agreement, $15,000 of which has been paid in advance to the
Representative, for the fees and disbursements of counsel to the Underwriters
and for costs of otherwise unreimbursed advertising, traveling, postage,
telephone and telegraph expenses and other miscellaneous expenses incurred by or
on behalf of the Representative and the Underwriters in preparation for, or in
connection with the offering and sale and distribution of the Securities; and
you shall not be obligated to account to the Company for such disbursements and
expenses. Further, in the event that this Agreement is terminated pursuant to
Section 12 hereof, the Company will be obligated to reimburse the Representative
on an accountable basis for its reasonable out-of-pocket expenses incurred in
connection hereunder, less any amounts previously advanced.
SECTION 9. Indemnification.
----------------
(a) The Company agrees to indemnify and hold harmless each of
the Underwriters, and each person who controls each of the Underwriters within
the meaning of Section 15 of the Act, from and against any and all losses,
claims, damages, expenses, or liabilities, joint or several, to which they or
any of them may become subject under the Act or any other statute or at common
law or otherwise, and to reimburse persons indemnified as above for any
reasonable legal or other expense (including the cost of any investigation and
preparation) incurred by them (as incurred), or any of them, in connection with
investigating, defending against or appearing as a third party witness in
connection with any claim or litigation, whether or not resulting in any
liability, but only insofar as such losses, claims, liabilities, expenses or
litigation arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or the
Prospectus (as amended or supplemented, if amended or supplemented), or in any
"Blue Sky" application, or arising out of or based upon the omission or alleged
omission to state therein a material fact required to be stated therein
13
<PAGE>
or necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading; provided, however, that
the indemnity agreement contained in this subsection (a) shall not apply to
amounts paid in settlement of any such claims or litigation if such settlement
is effected without the consent of the Company, nor shall it apply to the
Underwriters or any person controlling the Underwriters in respect of any such
losses, claims, damages, expenses, liabilities or litigation arising out of, or
based upon, any such untrue statement or alleged untrue statement, or any such
omission or alleged omission, if such statement or omission was made in reliance
upon and in conformity with written information furnished in writing to the
Company by such Underwriter, or on its behalf, specifically for use in
connection with the preparation of the Registration Statement or the Prospectus
or any such amendment thereof or supplement thereto or any such blue sky
application and further provided, however, that the foregoing indemnity
agreement is subject to the condition that, insofar as it relates to any untrue
statement, alleged untrue statement, omission or alleged omission made in any
Preliminary Prospectus but eliminated or remedied in the Prospectus, such
indemnity agreement shall not inure to the benefit of the Underwriters (or the
benefit of any person who controls such Underwriter) if a copy of the Prospectus
was not sent or given to such person with or prior to the confirmation of the
sale of such securities to such person.
(b) Each of the Underwriters severally agrees, in the same
manner and to the same extent as set forth in subsection (a) above, to indemnify
and hold harmless the Company, each of the directors and officers who have
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of Section 15 of the Act, with respect to any
statement in or omission from the Registration Statement, or the Prospectus (as
amended or as supplemented, if amended or supplemented), or in any "Blue Sky"
application, if such statement or omission was made in reliance upon and in
conformity with written information furnished in writing to the Company by such
Underwriter, or on its behalf, specifically for use in connection with the
preparation of the Registration Statement or the Prospectus or any such
amendment thereof or supplement thereto, or any such application. An Underwriter
shall not be liable for amounts paid in settlement of any such claim or
litigation if such settlement was effected without its consent.
(c) Each indemnified party shall give prompt notice to each
indemnifying party of any claim asserted against it and of any action commenced
against it in respect of which indemnity may be sought hereunder. The omission
to so notify an indemnifying party shall relieve such party of its obligation to
indemnify pursuant to this Agreement, but failure to so notify an indemnifying
party shall not relieve it from any liability which it may have otherwise than
on account of this indemnity agreement. In case any such action is brought
against any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate in,
and, to the extent that it may wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, subject to the provisions
herein stated, with counsel reasonably satisfactory to such indemnified party,
and after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section 9 for any
14
<PAGE>
legal or other expenses subsequently incurred by such indemnified party in
connection with the defense thereof other than reasonable costs of
investigation. The indemnified party shall have the right to employ separate
counsel in any such action and to participate in the defense thereof, but the
fees and expenses of such counsel shall not be at the expense of the
indemnifying party if the indemnifying party has assumed the defense of the
action with counsel reasonably satisfactory to the indemnified party; provided
that the fees and expenses of such counsel shall be at the expense of the
indemnifying party if (i) the employment of such counsel has been specifically
authorized in writing by the indemnifying party or (ii) the defendants in any
such action include both the indemnified and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be a conflict
between the positions of the indemnifying party and the indemnified party in
conducting the defense of any such action or that there may be legal defenses
available to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party (in which case the
indemnifying party shall not have the right to assume the defense of such action
on behalf of such indemnified party or parties), it being understood, however,
that the indemnifying party shall not, in connection with any one such action or
separate but substantially similar or related actions in the same jurisdiction
arising out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys for the
indemnified party which firm shall be designated in writing by the indemnified
party.
(d) The respective indemnity agreements between the
Underwriters and the Company contained in subsections (a) and (b) above, and the
representations and warranties of the Company set forth in Section 2 hereof or
elsewhere in this Agreement, shall remain operative and in full force and
effect, regardless of any investigation made by or on behalf of the Underwriters
or by or on behalf of any controlling person of the Underwriters or the Company
or any such officer or director or any controlling person of the Company, and
shall survive the delivery of the Securities. Any successor of the Company, or
of the Underwriters, or of any controlling person of the Underwriters or the
Company, as the case may be, shall be entitled to the benefit of such respective
indemnity agreements.
(e) In order to provide for just and equitable contribution
under the Act in any case in which (i) any person entitled to indemnification
under this Section 9 makes claim for indemnification pursuant hereto but it is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 9 provides for indemnification in
such case, or (ii) contribution under the Act may be required on the part of any
such person in circumstances for which indemnification is provided under this
Section 9, then, and in each such case, the Company and the Underwriters shall
contribute to the aggregate losses, claims, damages, expenses or liabilities to
which they may be subject (after any contribution from others) in such
proportions so that the Underwriters are responsible in the aggregate for the
proportion of such losses, claims, damages or labilities represented by the
percentage that the underwriting discounts and commissions appearing on the
cover page of the Prospectus bears to the public offering price appearing
15
<PAGE>
thereon, and the Company is responsible for the remaining portion; provided,
that, in any such case, no person guilty of a fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
Within twenty days after receipt by any party to
this Agreement (or its representative) of notice of the commencement of any
action, suit or proceeding, such party will, if a claim for contribution in
respect thereof is to be made against another party (the "contributing party"),
notify the contributing party, in writing, of the commencement thereof, but the
omission so to notify the contributing party will not relieve it from any
liability which it may have to any other party other than for contribution
hereunder. In case any such action, suit or proceeding is brought against any
party, and such party so notifies a contributing party or his or its
representative of the commencement thereof within the aforesaid twenty days, the
contributing party will be entitled to participate therein with the notifying
party and any other contributing party similarly notified. Any such contributing
party shall not be liable to any party seeking contribution on account of any
settlement of any claim, action or proceeding effected by such party seeking
contribution without the written consent of such contributing party. The
contribution provisions contained in this Section 9 are in addition to any other
rights or remedies which either party hereto may have with respect to the other
or hereunder.
SECTION 10. Effectiveness of Agreement. This Agreement shall become
effective (i) at 10:00 A.M., New York Time, on the first full business day after
the Effective Date, or (ii) at the time of the initial public offering by the
Underwriters of the Securities whichever shall first occur. The time of the
initial public offering by the Underwriters of the Securities for the purposes
of this Section 10, shall mean the time, after the Registration Statement
becomes effective, of the release by the Representative for publication of the
first newspaper advertisement which is subsequently published relating to the
Securities, or the time, after the Registration Statement becomes effective,
when the Securities are first released by the Representative for offering by the
Underwriters or dealers by letter or telegram, whichever shall first occur. The
Representative agrees to notify the Company immediately after it shall have
taken any action, by release or otherwise, whereby this Agreement shall have
become effective. This Agreement shall, nevertheless, become effective at such
time earlier than the time specified above, after the Effective Date, as the
Representative may determine by notice to the Company.
SECTION 11. Conditions of the Underwriters' Obligations. The
obligations of the several Underwriters to purchase and pay for the Securities
which the Underwriters have agreed to purchase hereunder are subject to: the
accuracy, as of the date hereof and as of the Closing Dates of all of the
representations and warranties of the Company contained in this Agreement; the
Company's compliance with, or performance of, all of its covenants, undertakings
and agreements contained in this Agreement that are required to be complied with
or performed on or prior to each of the Closing Dates and to the following
additional conditions:
16
<PAGE>
(a) On or prior to the Closing Date, no order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceeding for that purpose shall have been instituted or be pending or, to the
knowledge of the Company, shall be threatened by the Commission; any request for
additional information on the part of the Commission (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been complied
with to the satisfaction of the Commission; and neither the Registration
Statement nor any amendment thereto shall have been filed to which counsel to
the Underwriters shall have reasonably objected, in writing.
(b) The Representative shall not have disclosed in writing to
the Company that the Registration Statement or Prospectus or any amendment or
supplement thereto contains an untrue statement of a fact which, in the opinion
of counsel to the Underwriters, is material, or omits to state a fact which, in
the opinion of such counsel, is material and is required to be stated therein,
or is necessary to make the statements therein not misleading.
(c) Between the date hereof and the Closing Date, the Company
shall not have sustained any loss on account of fire, explosion, flood,
accident, calamity or other such cause, of such character as materially
adversely affects its business or property, whether or not such loss is covered
by insurance.
(d) Between the date hereof and the Closing Date, there shall
be no litigation instituted or threatened against the Company, and there shall
be no proceeding instituted or threatened against the Company before or by any
federal or state commission, regulatory body or administrative agency or other
governmental body, domestic or foreign, wherein an unfavorable ruling, decision
or finding would materially adversely affect the business, licenses, permits,
operations or financial condition or income of the Company.
(e) Except as contemplated herein or as set forth in the
Registration Statement and Prospectus, during the period subsequent to the
Effective Date and prior to the Closing Date, (A) the Company shall have
conducted its business in the usual and ordinary manner as the same was being
conducted on the date of the filing of the initial Registration Statement and
(B) except in the ordinary course of its business, the Company shall not have
incurred any material liabilities or obligations (direct or contingent), or
disposed of any of its assets, or entered into any material transaction, and (C)
the Company shall not have suffered or experienced any material adverse change
in its business, affairs or in its condition, financial or otherwise. On the
Closing Date, the capital stock and surplus accounts of the Company shall be
substantially as great as at its last financial report without considering the
proceeds from the sale of the Securities except to the extent that any decrease
is disclosed in or contemplated by the Prospectus.
(f) The authorization of the Common Stock and Warrants, the
Registration Statement, the Prospectus and all corporate proceedings and other
legal matters incident thereto and to this Agreement, shall be reasonably
satisfactory in all respects to counsel to the Underwriters.
17
<PAGE>
(g) The Company shall have furnished to the Representative the
opinions, dated the Closing Date, and Additional Closing Date(s), addressed to
you, of its counsel that:
(i) The Company has been duly incorporated and is a
validly existing corporation in good standing under the laws of the State of
Delaware with full corporate power and authority to own and operate its
properties and to carry on its business as set forth in the Registration
Statement and Prospectus; it has authorized and outstanding capital as set forth
in the Registration Statement and Prospectus; and the Company is duly licensed
or qualified as a foreign corporation in all jurisdictions in which by reason of
maintaining an office in such jurisdiction or by owning or leasing real property
in such jurisdiction it is required to be so licensed or qualified except where
failure to be so qualified or licensed would have no material adverse effect.
(ii) All of the outstanding shares of Common Stock
are duly and validly issued and outstanding, fully paid, and non-assessable, and
do not have any, and were not issued in violation of any, preemptive rights. The
Company will have duly authorized, reserved and set aside shares of Common Stock
issuable upon exercise of the Warrants and any other outstanding options or
warrants and when issued in accordance with such terms contained in the
Prospectus, will be duly and validly authorized and issued, fully paid and
non-assessable.
(iii) All of the Securities of the Company to which
this Agreement relates conform to the statements relating to them that are
contained in the Registration Statement and Prospectus (excluding financial
statements).
(iv) The Underwriters against payment therefor, will
receive good and marketable title to the Securities purchased by them from the
Company in accordance with the terms and provisions of this Agreement.
(v) To the best of the knowledge of such counsel,
except as set forth in the Prospectus, there are no outstanding options,
warrants, or other rights, providing for the issuance of, and, no commitments,
plans or arrangements to issue, any shares of any class of capital stock of the
Company, or any security convertible into, or exchangeable for, any shares of
any class of capital stock of the Company.
(vi) To the best of such counsel's knowledge, no
consents, approvals, authorizations or orders of agencies, officers or other
regulatory authorities are necessary for the valid authorization, issue or sale
of the Securities hereunder, except such as may be required under the Act or
state securities or Blue Sky Laws.
(vii) The Registration Statement has become
effective under the Act and, to the best of the knowledge of such counsel, no
order suspending the effectiveness of the Registration Statement has been issued
and no proceedings for that purpose have been instituted or are pending or
contemplated under the Act, and the Registration Statement and Prospectus, and
each amendment thereof and supplement thereto, comply as to form
18
<PAGE>
in all material respects with the requirements of the Act and the Rules and
Regulations (except that no opinion need be expressed as to financial statements
and financial data contained in the Registration Statement or Prospectus), and
in the course of the preparation of the Registration Statement, nothing has come
to the attention of said counsel to cause them to believe that either the
Registration Statement or the Prospectus or any such amendment or supplement
contains any untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading; and such counsel is familiar with all contracts referred to in
the Registration Statement or in the Prospectus and such contracts are
sufficiently summarized or disclosed therein, or filed as exhibits thereto, as
required, and such counsel does not know of any other contracts required to be
summarized or disclosed or filed; and such counsel does not know of any legal or
governmental proceedings pending or threatened to which the Company is a party,
or in which property of the Company is the subject, of a character required to
be disclosed in the Registration Statement or the Prospectus which are not
disclosed and properly described therein.
(viii) The Representative's Securities to be issued
to the Representative hereunder will be, when issued against payment therefor
duly and validly authorized and executed by the Company and will constitute
valid and binding obligations of the Company, legally enforceable in accordance
with their terms (except as such enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws now or hereafter in
effect relating to creditors' rights generally), and the Company will have duly
authorized, reserved and set aside the shares of its Common Stock issuable upon
exercise of the Representative's Securities and Underlying Warrants, and such
stock, when issued and paid for upon exercise of the Representative's Securities
and Underlying Warrants in accordance with the provisions thereof, will be duly
and validly authorized and issued, fully-paid and non-assessable.
(ix) The Company holds by valid lease, its
properties as shown in the Prospectus, and is in all material respects complying
with all laws, ordinances and regulations applicable thereto.
(x) This Agreement has been duly authorized and
executed by the Company and is a valid and binding agreement of the Company.
(xi) To the best of the knowledge of such counsel,
no default exists, and no event has occurred which, with notice or lapse of
time, or both, would constitute a default in the due performance and observance
of any material term, covenant or condition by the Company or any other party,
of any indenture, mortgage, deed of trust, note or any other agreement or
instrument known to counsel to which the Company is a party or by which it or
its business or its properties may be bound or affected, except as disclosed in
the Prospectus. The Company has full power and lawful authority to authorize,
issue and sell the Securities on the terms and conditions set forth herein and
in the Registration Statement and in the Prospectus. No consent, approval,
authorization or other order of any regulatory authority is required for such
authorization, issue or sale, except as may be required under the Act or State
securities laws. The execution and delivery of this
19
<PAGE>
Agreement, the consummation of the transactions herein contemplated, and
compliance with the terms hereof will not conflict with, or constitute a default
under any indenture, mortgage, deed or trust, note or any other agreement or
instrument known to counsel to which the Company is now a party or by which it
or its business or its properties may be bound or affected; the Articles of
Incorporation and any amendments thereto; the by-laws of the Company; or any
law, order, rule or regulation, writ, injunction or decree of any government,
governmental instrumentality, or court, domestic or foreign, having jurisdiction
over the Company or its business or properties known to counsel.
(xii)To the best of the knowledge of such counsel,
there are no material actions, suits or proceedings at law or in equity of a
material nature pending or to such counsel's knowledge threatened against the
Company which are not adequately covered by insurance and there are no
proceedings pending, or to the knowledge of such counsel threatened, against the
Company before or by any Federal or State Commission, regulatory body, or
administrative agency or other governmental body, wherein an unfavorable ruling,
decision or finding would materially adversely affect the business, business
prospects, franchise, licenses, permits, operation or financial condition or
income of the Company, which are not disclosed in the Prospectus.
(xiii) The description of any statutes, regulations
and laws, applicable to the Company's business contained in the Registration
Statements, is in all respects true and correct.
Such opinion shall also cover such other matters incident to
the transactions contemplated by this Agreement as the Representative shall
reasonably request. In rendering such opinion, such counsel may rely upon
certificates of any officer of the Company or public officials as to matters of
fact.
(h) The Company shall have furnished to the Representative
certificates of the President or Chairman of the Board and the Secretary of the
Company, dated as of the Closing Date, and Additional Closing Date(s), to the
effect that:
(i) Each of the representations and warranties of
the Company contained in Section 2 hereof are true and correct in all material
respects at and as of such Closing Date, and the Company has performed or
complied with all of its agreements, covenants and undertakings contained in
this Agreement and has performed or satisfied all the conditions contained in
this Agreement on its part to be performed or satisfied at the Closing Date;
(ii) The Registration Statement has become effective
and no order suspending the effectiveness of the Registration Statement has been
issued, and, to the best of the knowledge of the respective signers, no
proceeding for that purpose has been initiated or is threatened by the
Commission;
(iii) The respective signers have each carefully
examined the Registration Statement and the Prospectus and any amendments and
supplements
20
<PAGE>
thereto, and to the best of their knowledge the Registration Statement and the
Prospectus and any amendments and supplements thereto and all statements
contained therein are true and correct in all material respects, and neither the
Registration Statement nor the Prospectus nor any amendment or supplement
thereto includes any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading and, since the effective date of the Registration
Statement, there has occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been so set forth except changes which the
Registration Statement and Prospectus indicate might occur.
(iv) Except as set forth or contemplated in the
Registration Statement and Prospectus, since the respective dates as of which,
or periods for which, information is given in the Registration Statement and
Prospectus and prior to the date of such certificate (A) there has not been any
material adverse change, financial or otherwise, in the business, business
prospects, earnings, general affairs or condition (financial or otherwise), of
the Company (in each case whether or not arising in the ordinary course of
business), and (B) the Company has not incurred any liabilities, direct or
contingent, or entered into any transactions, otherwise than in the ordinary
course of business other than as referred to in the Registration Statement or
Prospectus and except changes which the Registration Statement and Prospectus
indicate might occur.
(i) The Company shall have furnished to the Representative on
the Closing Date, such other certificates, additional to those specifically
mentioned herein, as the Representative may have reasonably requested, as to:
the accuracy and completeness of any statement in the Registration Statement or
the Prospectus, or in any amendment or supplement thereto; the representations
and warranties of the Company herein; the performance by the Company of its
obligations hereunder; or the fulfillment of the conditions concurrent and
precedent to the obligations of the Underwriters hereunder, which are required
to be performed or fulfilled on or prior to the Closing Date.
(j) At the time this Agreement is executed, and on the Closing
Date you shall have received a letter BDO Seidman LLP, addressed to the
Representative, as Representative of the Underwriters, and dated, respectively,
as of the date of this Agreement and as of the Closing Date and Additional
Closing Date as the case may be (based upon information not more than five
business days prior to such Effective Date, Closing Date and Additional Closing
Date as the case may be), in form and substance reasonably satisfactory to the
Representative, to the effect that:
(i) They are independent public accountants with
respect to the Company within the meaning of the Act and the applicable
published Rules and Regulations of the Commission;
(ii) In their opinion, the financial statements and
related schedules of the Company included in the Registration Statement and
Prospectus and covered by their reports comply as to form in all material
respects with the applicable accounting
21
<PAGE>
requirements of the Act and the published Rules and Regulations of the
Commission issued thereunder;
(iii) On the basis of limited procedures, not
constituting an audit, including a review of the latest interim unaudited
financial statements of the Company on the basis specified by the American
Institute of Certified Public Accountants for a review of interim financial
information, a reading of the minutes of meetings of the boards of directors,
and stockholders of the Company, inquiries of officials of the Company
responsible for financial and accounting matters and such other inquiries and
procedures as may be specified in such letter, nothing came to their attention
which caused them to believe:
(A) that at the date of the latest balance sheet
read by them and at a subsequent specified date not more than five business days
prior to the date of such letter, there was any change in the capital stock or
increase in long-term debt of the Company as compared with amounts shown in the
most recent balance sheet included in the Prospectus, except for changes which
the Prospectus discloses have occurred or may occur or which are described in
such letter;
(B) that at the date of the latest balance sheet
read by them and at a subsequent specified date not more than five business days
prior to the date of such letter, there were any decreases, as compared with
amounts shown in the most recent balance sheet included in the Prospectus, in
total assets, net current assets or stockholder's equity of the Company except
for decreases which the Prospectus discloses have occurred or may occur or which
are described in such letter; or
(C) that for the period from the date of the most
recent financial statements in the Registration Statement to a subsequent
specified date not more than five business days prior to the date of such
letter, there were any decreases, as compared with the corresponding period of
the preceding year, in gross profit or the total or per share amounts of net
income of the Company except for decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter.
(iv) In addition to the audit referred to in their
report included in the Registration Statement and the Prospectus and the limited
procedures referred to in clause (iii) above, they have carried out certain
specified procedures, not constituting an audit, with respect to certain
amounts, percentages and financial information which are derived from the
general accounting records of the Company which appear in the Prospectus under
the captions "Summary Financial Data," "Capitalization", "Management",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Certain Transactions", Summary of Financial Data", "Dilution" and
"Risk Factors," as well as such other financial information as may be specified
by the Representative, and that they have compared such amounts, percentages and
financial information with the accounting records of the Company and have found
them to be in agreement.
22
<PAGE>
All the opinions, letters, certificates and evidence
mentioned above or elsewhere in this Agreement shall be deemed to be in
compliance with the provisions hereof only if they are in form and substance
reasonably satisfactory to counsel to the Representative, whose approval shall
not be unreasonably withheld, conditioned or delayed.
If any of the conditions specified in this Section
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, this Agreement and all obligations of the Underwriters hereunder may
be terminated and canceled by the Representative by notifying the Company of
such termination and cancellation in writing or by telegram at any time prior
to, or on, the Closing Date and any such termination and cancellation shall be
without liability of any party hereto to any other party, except with respect to
the provisions of Sections 7 and 8 hereof. The Representative may, of course,
waive, in writing, any conditions which have not been fulfilled or extend the
time for their fulfillment.
SECTION 12. Termination.
------------
(a) This Agreement may be terminated by the Representative by
written or telegraphic notice to the Company at any time before it becomes
effective pursuant to Section 10.
(b) This Agreement may be terminated by the Representative by
written or telegraphic notice to the Company, at any time after it becomes
effective, in the event that the Company, after notice from the Representative
and an opportunity to cure, shall have failed or been unable to comply with any
of the terms, conditions or provisions of this Agreement on the part of the
Company to be performed, complied with or fulfilled within the respective times
herein provided for, including without limitation Section 6(g) hereof, unless
compliance therewith or performance or satisfaction thereof shall have been
expressly waived by the Representative in writing. This Agreement may also be
terminated if (i) qualifications are received or provided by the Company's
independent public accountants or attorneys to the effect of either difficulties
in furnishing certifications as to material items including, without limitation,
information contained within the footnotes to the financial statements, or as
affecting matters incident to the issuance and sale of the securities
contemplated or as to corporate proceedings or other matters or (ii) there is
any action, suit or proceeding, threatened or pending, at law or equity against
the Company, or by any Federal, State or other commission, board or agency
wherein any unfavorable result or decision could materially adversely affect the
business, property, or financial condition of the Company which was not
disclosed in the Prospectus.
(c) This Agreement may be terminated by the Representative by
written or telegraphic notice to the Company at any time after it becomes
effective, if the offering of, or the sale of, or the payment for, or the
delivery of, the Securities is rendered impracticable or inadvisable because (i)
additional material governmental restriction, not in force and effect on the
date hereof, shall have been imposed upon trading in securities generally or
minimum or maximum prices shall have been generally established on the
23
<PAGE>
New York Stock Exchange or trading in securities generally on such exchange
shall have been suspended or a general banking moratorium shall have been
established by Federal or New York State authorities or (ii) a war or other
national calamity shall have occurred involving the United States or (iii) the
condition of the market for securities in general shall have materially and
adversely changed, or (iv) the condition of the Company or its business or
business prospects is materially affected so that it would be undesirable,
impractical or inadvisable to proceed with, or consummate, this Agreement or the
public offering of the Securities.
(d) Any termination of this Agreement pursuant to this Section
12 shall be without liability of any character (including, but not limited to,
loss of anticipated profits or consequential damages) on the part of any party
hereto, except that the Company shall remain obligated to pay the costs and
expenses provided to be paid by it specified in Sections 6, 7 and 8, to the
extent therein provided. In addition, the Representative shall account to the
Company for any advance and shall reimburse the Company for any portion of the
advance not expended for actual out-of-pocket expenses.
SECTION 13. Finder. The Company and the Underwriters mutually represent
that they know of no person who rendered any service in connection with the
introduction of the Company to the Underwriters and that they know of no claim
by anyone for a "finder's fee" or similar type of fee, in connection with the
public offering which is the subject of this Agreement. Each party hereby
indemnifies the other against any such claims by any person known to it, and not
known to the other party hereto, who shall claim to have rendered services in
connection with the introduction of the Company to the Underwriters and/or to
have such a claim.
SECTION 14. Substitution of Underwriters.
-----------------------------
(a) If one or more Underwriters default in its or their
obligations to purchase and pay for Securities hereunder and if the aggregate
amount of such Securities which all Underwriters so defaulting have agreed to
purchase does not exceed 10% of the aggregate number of Securities constituting
the Securities, the non-defaulting Underwriters shall have the right and shall
be obligated severally to purchase and pay for (in addition to the Securities
set forth opposite their names in Schedule I) the full amount of the Securities
agreed to be purchased by all such defaulting Underwriters and not so purchased,
in proportion to their respective commitments hereunder. In such event the
Representative, for the accounts of the several non-defaulting Underwriters, may
take up and pay for all or any part of such additional Securities to be
purchased by each such Underwriter under this subsection (a), and may postpone
the Closing Date to a time not exceeding seven full business days; or
(b) If one or more Underwriters (other than the
Representative) default in its or their obligations to purchase and pay for the
Securities hereunder and if the aggregate amount of such Securities which all
Underwriters so defaulting shall have agreed to purchase shall exceed 10% of the
aggregate number of Securities or if one or more Underwriters for any reason
permitted hereunder cancel its or their obligations to
24
<PAGE>
purchase and pay for Securities hereunder, the non-canceling and non-defaulting
Underwriters (hereinafter called the "Remaining Underwriters") shall have the
right, but shall not be obligated to purchase such Securities in such proportion
as may be agreed among them, at the Closing Date. If the Remaining Underwriters
do not purchase and pay for such Securities at such Closing Date, the Closing
Date shall be postponed for 24 hours and the remaining Underwriters shall have
the right to purchase such Securities, or to substitute another person or
persons to purchase the same or both, at such postponed Closing Date. If
purchasers shall not have been found for such Securities by such postponed
Closing Date, the Closing Date shall be postponed for a further 24 hours and the
Company shall have the right to substitute another person or persons,
satisfactory to you to purchase such Securities at such second postponed Closing
Date. If the Company shall not have found such purchasers for such Securities by
such second postponed Closing Date, then this Agreement shall automatically
terminate and neither the Company nor the remaining Underwriters (including the
Representative) shall be under any obligation under this Agreement (except that
the Company shall remain liable to the extent provided in Paragraph 7 hereof).
As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section 14. Nothing in this
subparagraph (b) will relieve a defaulting Underwriter from its liability, if
any, to the other Underwriters for damages occasioned by its default hereunder
(and such damages shall be deemed to include, without limitation, all expenses
reasonably incurred by each Underwriter in connection with the proposed purchase
and sale of the Securities) or obligate any Underwriter to purchase or find
purchasers for any Securities in excess of those agreed to be purchased by such
Underwriter under the terms of Sections 3 and 14 hereof.
Notwithstanding anything contained herein to the contrary, no
provisions of this Section 14 or any other section of this Underwriting
Agreement are intended to permit an Underwriter to terminate its obligation to
purchase the Firm Securities (as such term is defined in this Underwriting
Agreement) from the Company based upon: (i) the occurrence of non-material
events affecting the Company or the securities market or (ii) the inability to
market the securities.
SECTION 15. Registration of the Representative's Securities and/or the
Underlying Securities. The Company agrees that it will, upon request by any 50%
Holder (as defined below) within the period commencing on the Effective Date,
and for a period of five years thereafter, on one occasion only at the Company's
sole expense, cause the Representative's Securities and/or the underlying
securities issuable upon exercise of the Representative's Securities, to be the
subject of a post-effective amendment, or a new Registration Statement, if
appropriate (hereinafter referred to as the "demand Registration Statement"), so
as to enable the Representative and/or its assigns to offer publicly the
Representative's Securities and/or the underlying securities. The Company agrees
to register such securities expeditiously and, where possible, within forty-five
(45) business days after receipt of such requests. The Company agrees to use its
"best efforts" to cause the post-effective amendment, or new Registration
Statement to become effective and for a period of nine (9) months thereafter to
reflect in the post-effective amendment or the new Registration Statement,
financial statements which are prepared in accordance with
25
<PAGE>
Section 10(a)(3) of the Act and any facts or events arising which, individually
or in the aggregate, represent a fundamental and/or material change in the
information set forth in such post-effective amendment or new Registration
Statement. The holders of the Representative's Securities may demand
registration without exercising such Warrants and, in fact, are never required
to exercise same. The term "50% Holder" as used in this section shall mean the
registered holder of at least a majority of the Representative's Securities
and/or the underlying securities. (The registration rights provided herein apply
to the Representative's Securities in their entirety and do not provide a
separate demand registration right per security.)
The Company understands and agrees that if, at any
time within the period commencing on the Effective Date and ending seven years
after the Effective Date, it should file a registration statement with the
Commission pursuant to the Act, regardless of whether some of the holders of the
Representative's Warrants and underlying securities shall have theretofore
availed themselves of the right above provided, the Company, at its own expense,
will offer to said holders the opportunity to register such securities. This
paragraph is not applicable to a Registration Statement filed by the Company
with the Commission on Form S-8 or any other inappropriate form.
In addition to the rights above provided, the
Company will cooperate with the then holders of the Representative's Securities
and underlying securities in preparing and signing a Registration Statement, on
one occasion only in addition to the Registration Statements discussed above,
required in order to sell or transfer the aforesaid Representative's Securities
and underlying securities and will supply all information required therefor, but
such additional Registration Statement shall be at the then holders' cost and
expense unless the Company elects to register additional shares of the Company's
Shares in which case the cost and expense of such Registration Statement will be
prorated between the Company and the holders of the Representative's Securities
and underlying securities according to the aggregate sales price of the
securities being issued. The holders of the Representative's Securities may
include such Warrants in any such filing without exercising the Representative's
Securities, and in fact, are never required to exercise same.
SECTION 16. Other Agreements.
-----------------
(a) On the Effective Date, the Company will enter into an agreement
retaining the Representative as a financial consultant pursuant to which the
Representative shall receive a consulting fee in an amount equal to $141,450 for
services for two (2) years from the Effective Date, payable in full in advance
on the Closing Date, which shall include, but not be limited to, advising the
Company in connection with possible acquisition opportunities, advising the
Company regarding shareholder relations including the preparation of the annual
report and other releases, assisting in long-term financial planning, advice in
connection with corporate re-organizations and expansion and capital structure,
and other financial assistance.
26
<PAGE>
(b) Commencing twelve months after the Effective Date, the Company will
pay the Representative as its Warrant solicitation agent an amount equal to five
percent (5%) of the aggregate exercise price of each Warrant exercised of which
a portion may be allowed to the dealer who solicited the exercise (which may
also be the Representative); provided: (1) the market price of the Common Stock
on the date the Warrant was exercised was greater than the Warrant exercise
price on that date; (2) exercise of the Warrant was solicited by a member of the
NASD and the NASD member is designated in writing by the Warrant holder; (3) the
Warrant was not held in a discretionary account; (4) disclosure of compensation
arrangements was made both at the time of the offering and at the time of
exercise of the Warrant; and (5) the solicitation of the exercise of the Warrant
was not in violation of Regulation M promulgated under the Securities Exchange
Act of 1934. The Company agrees to pay over to the Representative any fees due
it within five business days after receipt by the Company of Warrant proceeds.
Within ten (10) days of the last day of each month commencing one year from the
Effective Date, the Company will instruct the Warrant Agent to notify the
Representative of each Warrant certificate which has been properly completed and
delivered for exercise by holders of Warrants during each such month. The
Company will instruct the Transfer Agent that the Representative may at any time
during business hours, at its expense, examine the records of the Company and
the Warrant Agent which relate to the exercise of the Warrants. It is understood
that this agreement is on an exclusive basis to solicit the exercise of the
Warrants and that the Company may not engage other broker-dealers to solicit the
exercise of Warrants without the consent of Werbel Roth Securities, Inc. It is
understood that no solicitation fee will be paid where the Warrant exercise was
not solicited by Werbel Roth Securities, Inc. or another member of the NASD.
27
<PAGE>
SECTION 17. Restriction on Securities The Company's officers,
directors and all of the Company's security holders, other than the holders of
shares purchased pursuant to the Company's private placement in May 1997, have
agreed not to sell or otherwise dispose of any securities of the Company
beneficially owned by them for a period of at least twelve months from the
Effective Date, without the prior written consent of the Representative. The
holders of 160,000 shares issued in the private placement have agreed not to
sell such shares for a period of six months from the Effective Date. Messrs.
Feinberg, Olbermann, Cole-Hatchard and Char have agreed not to sell or otherwise
dispose of any securities of the Company (other than the Company's repurchase of
231,520 shares held by Mr. Char at the Closing Date) beneficially owned by them
until such time as the Company achieves $1.9 million in pre-tax earnings, but in
no event sooner than two years after the Effective Date. An appropriate legend
shall be marked on the face of stock certificates representing all of such
securities.
SECTION 18. Notice. Except as otherwise expressly provided in
this Agreement, (A) whenever notice is required by the provisions hereof to be
given to the Company, such notice shall be given in writing, by certified mail,
return receipt requested, addressed to the Company at the address set forth
herein on the first page, copy to Tenzer Greenblatt LLP, The Chrysler building,
405 Lexington Avenue, New York, NY 10774, Att: robert Mittman, Esq.; and (B)
whenever notice is required by the provisions hereof to be given to the
Underwriters, such notice shall be in writing addressed to the Representative at
Werbel Roth Securities, Inc. at the address set forth herein on the first page
copy to Steven Morse, Esq., Lester Morse P.C., Suite 420, 111 Great Neck Road,
Great Neck, NY 11021. Any party may change the address for notices to be sent by
giving written notice to the other persons.
SECTION 19. Representations and Agreements to Survive
Delivery. Except as the context otherwise requires, all representations,
warranties, covenants, and agreements contained in this Agreement shall be
deemed to be representations, warranties, covenants, and agreements as at the
date hereof and as at the Closing Date and the Additional Closing Date(s), and
all representations, warranties, covenants, and agreements of the several
Underwriters and the Company, shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any of the
Underwriters or any of their controlling persons, and shall survive any
termination of this Agreement (whensoever made) and/or delivery of the Firm
Shares and the Optional Shares to the several Underwriters.
SECTION 21. Miscellaneous. This Agreement is made solely for the
benefit of the Underwriters and the Company and their respective successors and
assigns, and no other person shall acquire or have any right under or by virtue
of this Agreement. The term "successor" or the term "successors and assigns" as
used in this Agreement shall not include any purchaser, as such, of any of the
Shares.
This Agreement shall not be assignable by any party without
the other party's prior written consent. This Agreement shall be binding upon,
and shall inure to the benefit of, our respective successors and permitted
assigns. The foregoing represents the
28
<PAGE>
sole and entire agreement between us with respect to the subject matter hereof
and supersedes any prior agreements between us with respect thereto. This
Agreement may not be modified, amended or waived except by a written instrument
signed by the party to be charged. The validity, interpretation and construction
of this Agreement, and of each part hereof, shall be governed by the internal
laws of the State of New York, without giving effect to the conflict of laws
provisions thereof.
This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall be deemed to be one and the same instrument.
If a party signs this Agreement and transmits an electronic
facsimile of the signature page to the other party, the party who receives the
transmission may rely upon the electronic facsimile as a signed original of this
Agreement.
If the foregoing is in accordance with your understanding
of our agreement, kindly sign and return to us a counterpart hereof, whereupon
this instrument along with all counterparts will become a binding agreement
between the Company and the Underwriters in accordance with its terms.
Very truly yours,
FRONTLINE COMMUNICATIONS
CORPORATION
By:________________________
(Authorized Officer)
CONFIRMED AND ACCEPTED, as of
the date first above written:
WERBEL ROTH SECURITIES, INC,
By________________________________
(Authorized Officer)
For itself and as the Representative of the
other Underwriters named in Schedule I hereto.
29
<PAGE>
SCHEDULE I
================================================================================
Underwriter Firm Securities to be Purchased
- --------------------------------------------------------------------------------
Number of
Common Number of
Shares Warrants
- --------------------------------------------------------------------------------
Werbel Roth Securities, Inc.
Total 1,500,000 1,500,000
30
<PAGE>
EXHIBIT 1.2
Frontline Communications Corporation
1,500,000 Shares of Common Stock
1,500,000 Common Stock Purchase Warrants
AGREEMENT AMONG UNDERWRITERS
----------------------------
__________, 1998
To each of the Underwriters named in Schedule I
to the attached Underwriting Agreement
Dear Sirs:
1. Underwriting Agreement. Frontline Communications Corporation (the
"Company"), proposes to enter into an underwriting agreement in the form of the
Underwriting Agreement attached hereto as Exhibit "A" (the "Underwriting
Agreement") with the underwriters named in Schedule I to the Underwriting
Agreement (the "Underwriters"), acting severally and not jointly, with respect
to the purchase from the Company of 1,500,000 Shares of Common Stock and
1,500,000 Warrants (collectively referred to as the "Securities"). Such
Securities are hereinafter sometimes referred to as the "Firm Securities." Upon
our request, and as provided in Section 3 of the Underwriting Agreement, the
Company will also issue and sell to the Underwriters up to a maximum of an
additional 225,000 Shares of Common Stock, and 225,000 Warrants. Such additional
Securities are hereinafter sometimes referred to as the "Optional Securities."
Both the Firm Securities and the Optional Securities are sometimes collectively
referred to herein as the "Securities." All of the Securities which are the
subject of this Agreement are more fully described in the Prospectus of the
Company described below. Under the terms of the Underwriting Agreement, each of
the Underwriters will agree, in accordance with the terms thereof to purchase
the aggregate number of Firm Securities set forth opposite its name in said
Schedule I, subject to adjustment pursuant to Section 12 hereof and Section 14
of the Underwriting Agreement.
2. Registration Statement and Prospectus. The Securities are described
in a registration statement and related prospectus which have been filed with
the Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended (the "Act"). An amendment to such registration statement
has been or will be filed in which you have been or will be named as one of the
Underwriters of the Securities. Copies of the registration statement as filed
and as amended have been delivered to you, and you hereby authorize us to
approve on your behalf any further amendments or supplements which may be
necessary or appropriate. The registration statement, as amended at the time it
becomes effective, is called the "Registration Statement" and the
1
<PAGE>
final prospectus relating to the Securities as filed by the Company with the
Commission pursuant to Rule 424(b) under the Act is referred to as the
"Prospectus."
3. Authority of Representative. You authorize us as your Representative
to execute the Underwriting Agreement with the Company in the form attached with
such insertions, deletions or other changes as we may approve (but not as to the
number of, and price of, the Securities to be purchased by you except as
provided herein and therein) and to take such action as in our discretion we may
deem advisable in respect of all matters pertaining to the Underwriting
Agreement, this Agreement, the transactions for the accounts of the several
Underwriters contemplated thereby and hereby, and the purchase, carrying, sale
and distribution of the Securities.
4. Public Offering. In connection with the public offering of the
Securities, you authorize us, in our discretion:
(a) To determine the time and manner of the initial public
offering (after the Registration Statement become effective), the initial public
offering price, and the concessions and reallowances to dealers, to change the
public offering price and such concessions and reallowances after the initial
public offering, to furnish the Company with the information to be included in
the Registration Statement and the Prospectus (and any amendment or supplement
thereto) with respect to the terms of the public offering, and to determine all
matters relating to the public advertisement of the Securities and any
communications with dealers or others;
(b) To reserve all or any part of your Securities for sale to
retail purchasers (including institutions) and to dealers selected by us
("Selected Dealers") among which may be included any Underwriter (including
ourselves) and each of which shall be a member of the National Association of
Securities Dealers, Inc., and each of which shall agree that in making sales to
purchasers in the United States it will conform to the Rules of Fair Practice of
said Association (or, in the case of a foreign dealer not eligible for
membership in such Association, which shall agree not to reoffer, resell or
deliver Securities in the United States, its territories or its possessions, or
to persons whom it has reason to believe are citizens thereof or residents
therein), such reservations for sales to retail purchasers to be as nearly as
practicable in proportion to the respective underwriting obligations of the
Underwriters and such reservations for sales to Selected Dealers to be in such
proportion as we determine, and from time to time to add to the reserved
Securities such Securities retained by you remaining unsold and to release to
you any of your Securities reserved but not sold;
(c) To sell reserved Securities as nearly as practicable in
proportion to the respective reservations to retail purchasers at the public
offering price, and to Selected Dealers at the public offering price less the
Selected Dealer's concession pursuant to the Selected Dealers Agreement in
substantially the form attached; and
2
<PAGE>
(d) To buy Securities for your account from Selected Dealers
at the public offering price less such amount not in excess of the Selected
Dealer's concession as we may determine.
After advice from us that the Securities are released for public
offering, you will offer to the public in conformity with the terms of offering
set forth in the Prospectus, or any amendment or supplement, such of your
Securities as we advise you are not reserved.
You recognize the importance of a broad distribution of the Securities
among bona fide investors and you agree to use your best efforts to obtain such
broad distribution and to that end, to the extent you deem practicable, to give
priority to small orders. In offering the Securities to Selected Dealers we will
take such action as we deem appropriate to effect a broad distribution.
5. Repurchase of Securities Not Effectively Placed for Investment. You
are requested to place for investment those of your Securities which are not
reserved as aforesaid. Any Securities sold by you (otherwise than through us)
which may be delivered to us against a purchase contract made by us for the
account of any Underwriter prior to termination of the provisions referred to in
Section 11 of this Agreement, shall be purchased by you upon demand from us at
the cost of such purchase plus brokerage commissions and transfer taxes on
redelivery. Securities delivered on such repurchase need not be identical to
those purchased by you. In lieu of demand repurchase by you we may in our
discretion (i) sell for your account the Securities so purchased by us, at such
price and upon such terms as we may determine, and debit or credit your account
with the loss and expense or net profit resulting from such sale, or (ii) charge
your account with an amount not in excess of the Selected Dealer's concession
with respect to such Securities plus brokerage commissions and transfer taxes
paid in connection with such purchase.
6. Payment and Delivery. We shall give you at least 24 hours prior
notice of the Closing Date. You agree to deliver to us at or before 9:00 a.m.,
New York City time, on such Closing Date and at or before 9:00 a.m. New York
City time, on the Additional Closing Date referred to in the Underwriting
Agreement if the Optional Securities are purchased, at the office of Werbel Roth
Securities, Inc., 150 E. Palmetto Park Road, Suite 510, Boca Raton, FL 33432 (or
such other office as we may direct), a certified check or bank cashier's check
payable in New York Clearing House funds to the order of Werbel Roth Securities,
Inc., as Representative, for the full purchase price of the Securities which you
shall have agreed to purchase from the Company less the concession to selected
dealers. If you are a member or clear through a member of the Depository Trust
Company ("DTC"), you may, in your discretion, deliver payment and receive
Securities through the facilities of DTC. The proceeds shall be delivered in the
amounts required in each case for payment of the full purchase price by us to
the Company against delivery of the Securities to us for your account. We are
authorized to accept that delivery and to give a receipt therefor. We may in our
discretion make such payment on your behalf with our own funds, in which event
you will reimburse us promptly upon request. You authorize us,
3
<PAGE>
as your custodian, to take delivery of your Securities, registered as we may
direct in order to facilitate deliveries. You also authorize us to hold for your
account such of your Securities as we have reserved for sale to retail
purchasers and to Selected Dealers, and to deliver your reserved Securities
against such sales. We will deliver your unreserved Securities to you promptly
and, after we receive payment for reserved Securities sold by us for your
account, we will remit to you, as promptly as practicable, an amount equal to
the price paid by you for such Securities. As soon as practicable after
termination of Sections 4, 5 and 9 and the first and penultimate sentences of
Section 8 of this Agreement (pursuant to Section 11 hereof) we will deliver to
you any of your Securities reserved but not sold. All Securities delivered to
you pursuant to this Section will be evidenced by certificates in such
denominations as you shall direct by written notice received by us not later
than the second full business day preceding the Closing Date.
7. Authority to Borrow. In connection with the purchase or carrying of
any Securities purchased hereunder for your account, you authorize us, in our
discretion, to advance funds for your account, charging current interest rates,
or to arrange loans for your account, and in connection therewith to execute and
deliver any notes or other instruments and hold or pledge as security any of
your Securities. Any lender may rely on our instructions in all matters relating
to any such loan. Any of your Securities held by us for your account may be
delivered to you for carrying purposes only, and subject to our further
direction.
8. Stabilization and Over-Allotment. To facilitate the distribution of
the Securities, you authorize us during the term of this Agreement, or for such
longer period as may be necessary in our discretion, to make purchases and sales
of the Securities for your account in the open market or otherwise, for long or
short account, on such terms as we deem advisable and, in arranging sales, to
over-allot. You also authorize us to cover any short position incurred pursuant
to this Section on such terms as we deem advisable. Included in the authority
granted to us by you is the authority to exercise the over-allotment option to
purchase the Optional Securities granted by Section 3 of the Underwriting
Agreement for our individual account and not as Representative. All such
purchases and sales (except for purchases and sales of the Optional Securities)
shall be made for the accounts of the several Underwriters as nearly as
practicable in proportion to their respective underwriting obligations. Your net
commitment under this Section shall not, at the end of any business day, exceed
15% of your maximum underwriting obligation. You will on our demand take up at
cost or deliver against payment any Securities purchased or sold for your
account and, if any such other Underwriter defaults in its corresponding
obligation, you will assume your proportionate share of such obligation without
relieving the defaulting Underwriter from liability. You will be obligated in
respect to purchases and sales made for your account hereunder whether or not
the proposed purchase of the Securities is consummated. Upon request you will
advise us of Securities retained by you and unsold and will sell to us for the
account of one or more of the Underwriters such of your unsold Securities as we
may designate, at the public offering price thereof less such amount as we may
determine, but not in excess of the Selected Dealer's concession with
4
<PAGE>
respect thereto. Until the termination of this Agreement pursuant to Section 11
hereof, or prior notification by us, we shall have the sole right to effect
stabilizing transactions in the Securities. You agree that until such time you
will not make any purchases or sales of any of such securities except as
provided in Section 9 hereof. You also agree to timely provide us with the
information required by Rule 17a-2(d) under the Securities Exchange Act of 1934,
as amended (the "1934 Act").
9. Open Market Transactions. You agree not to bid for, purchase,
attempt to induce others to purchase, or sell, directly or indirectly, any
Securities, except as brokers pursuant to unsolicited orders and as otherwise
provided in this Agreement or in the Underwriting Agreement. You further agree
not to offer the Securities for sale until notified by us, as the Representative
of the Underwriters, that they are released for that purpose.
10. Expenses and Settlement. We may charge your account with Selected
Dealer's concessions and all transfer taxes on sales made by us for your account
and with your proportionate share (based upon your underwriting obligation) of
all other expenses incurred by us under the terms of this Agreement or the
Underwriting Agreement, in excess of those reimbursed by the Company pursuant to
Section 8 of the Underwriting Agreement, or in connection with the purchase,
carrying, sale or distribution of the Securities. Our determination of the
amount and allocation of expenses shall be conclusive. As soon as practicable
after termination of the provisions referred to in Section 11, the accounts
hereunder will be settled, but we may reserve from distribution such amount as
we deem advisable to cover possible additional expenses. We may at any time make
partial distribution of credit balances or call for payment of debit balances.
Any of your funds in our hands may be held with our general funds without
accountability for interest. Notwithstanding any settlement, you will pay (i)
your proportionate share (based upon your underwriting obligation) of any
liability which may be incurred by the Underwriters, or any of them, based on
the claim that the Underwriters constitute an association, partnership,
unincorporated business or other separate entity, and of any expenses incurred
by us, or by any other Underwriter with our approval, in contesting any such
liability, and (ii) any transfer taxes which may be assessed and paid after such
settlement on account of any sale or transfer for your account.
11. Termination and Settlement. This Agreement will terminate (a) at
the close of business on the 30th day after the date of the Underwriting
Agreement; or (b) on such earlier or later date, not more than 30 days after the
date specified in (a), as we may determine; or (c) on the date of termination of
the Underwriting Agreement, if the same shall be terminated as provided by its
terms.
Upon termination of this Agreement, all authorizations, rights and
obligations hereunder will cease, except (a) the mutual obligation to settle
accounts hereunder, (b) your obligation to pay any claims referred to in the
last paragraph of this Section, (c) the obligations with respect to indemnity
set forth in Section 15 hereof (all obligations of which
5
<PAGE>
will continue until fully discharged), and (d) your obligation with respect to
purchases which may be made by us from time to time thereafter to cover any
short position with respect to the offering, all of which will continue until
fully discharged, and except our authority with respect to matters to be
determined by us, or by us and the Company, pursuant to the terms of the
Underwriting Agreement, which will survive the termination of this Agreement.
The accounts arising pursuant to this Agreement will be settled and
paid as soon as practicable after termination. The determination by us of the
amounts to be paid to or by you will be final and conclusive.
Notwithstanding any settlement upon the termination of this Agreement,
you will pay your proportionate share of any amount asserted against and
discharged by the Underwriters, or any of them, based upon the claim that the
Underwriters constitute an association, unincorporated business or other
separate entity, or based upon or arising out of a claim that this Agreement or
the Underwriting Agreement is invalid or illegal for any reason, including any
expense incurred in defending against such claim, and will pay any transfer
taxes which may be assessed thereafter on account of any sale or transfer of
Securities for our account.
12. Default by Underwriters. Default by one or more Underwriters
hereunder or under the Underwriting Agreement shall not release the other
Underwriters from their obligations or affect the liability of any defaulting
Underwriter to the other Underwriters for damages resulting from such default.
In case of default under the Underwriting Agreement by one or more Underwriters,
we may arrange for the purchase by others, including non-defaulting
Underwriters, of Securities not taken up by such defaulting Underwriter and you
will, at our request, increase pro rata with the other non-defaulting
Underwriters the aggregate principal amount of Securities which you are to
purchase, or both, by an amount not exceeding one-ninth of your original
underwriting obligations. In the event any such arrangements are made, the
respective Securities to be purchased by non-defaulting Underwriters and by such
others shall be taken as the basis for the underwriting obligations under this
Agreement.
In the event of default by one or more Underwriters in respect of their
obligations under this Agreement, each non-defaulting Underwriter shall assume
its proportionate share of the obligations under this Agreement of each such
defaulting Underwriter (other than, to the extent stated in the first paragraph
of this Section, the purchase obligation of such defaulting Underwriter).
13. Position of Representative. We shall be under no liability to you
for any act or omission except for obligations expressly assumed by us in this
Agreement, but no obligation on our part shall be implied or inferred. Nothing
shall constitute the Underwriters, or any of them, an association, partnership,
unincorporated business or other separate entity and the rights and liability of
ourselves and each of the Underwriters are several and not joint.
6
<PAGE>
14. Compensation to Representative. As compensation for our services as
Representative, you agree to pay us $___ per share of Common Stock and/or $__
per Warrant out of the aggregate underwriting discount attributable to
Securities which you agree to purchase from the Company under the Underwriting
Agreement. We are authorized to charge your account with such an amount.
15. Indemnification. You will indemnify and hold harmless each other
Underwriter and each person, if any, who controls such Underwriter within the
meaning of Section 15 of the Act to the extent and upon the terms by which each
Underwriter agrees to indemnify the Company in the Underwriting Agreement. Such
indemnity agreement shall survive the termination of any of the provisions of
this Agreement.
In the event that at any time any claim shall be asserted against us as
or as a result of our having acted as Representative, or otherwise involving the
Underwriters generally, relating to the Registration Statement or any
preliminary prospectus or the Prospectus, as from time to time amended or
supplemented, the public offering of the Securities or any of the transactions
contemplated by this Agreement, you authorize us to make such investigation, to
retain such counsel and to take such other action as we shall deem necessary or
desirable under the circumstances, including settlement of any claim or claims
if such course of action shall be recommended by counsel retained by us. You
agree to pay to us, on request, your proportionate share (based upon your
underwriting obligation) of all expenses incurred by us (including, but not
limited to, the disbursements and fees of counsel so retained) in investigating
and defending against such claim or claims, and your proportionate share (based
upon your underwriting obligation) of any liability incurred by us in respect of
such claim or claims, whether such liability shall be the result of a judgment
against us or as a result of any such settlement.
16. Blue Sky Matters. We shall not have any responsibility with respect
to the right of any Underwriter or other person to sell Securities in any
jurisdiction, notwithstanding any information we may furnish in that connection.
You hereby authorize us to take such action as may be necessary or advisable to
qualify the Securities for offering and sale in any jurisdiction. We have caused
to be filed Further State Notices respecting the Securities to be offered to the
public in New York in the form required by, and pursuant to, the provisions of
Article 23A of the General Business Law of the State of New York.
17. Title to Securities. The Securities purchased for the respective
accounts of the several Underwriters shall remain the property of those
Underwriters until sold; and no title to such securities shall in any event pass
to us, as Representative, by virtue of any of the provisions of this Agreement.
18. Capital Requirements. Unless the provisions of clause (b) of the
second sentence of the last paragraph of this Agreement are applicable to you,
you confirm that
7
<PAGE>
your commitment hereunder will not result in any violation of Section 8(b) or
15(c) of the 1934 Act or in any violation of any of the rules and regulations
promulgated under the 1934 Act, including, without limitation, Rule 15c3-1, or
any provision of any applicable rules of any securities exchange to which you
are subject or of any restriction imposed upon you by such exchange.
19. Notices and Governing Laws. Any notice from you to us shall be
mailed or transmitted by any standard form of written telecommunication to us at
150 E. Palmetto Park Road, Suite 510, Boca Raton, FL 33432. Any notice from us
to you shall be mailed or transmitted by any standard from of written
telecommunication to you at your address as set forth in your Underwriter's
Questionnaire. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
We represent that we are a member in good standing of the National
Association of Securities Dealers, Inc. You represent that you are (a) a member
in good standing of such Association or (b) a foreign dealer which is not
eligible for membership in such Association, in which event you will make sales
of any Securities only outside the United States and its territories and
possessions to persons who are not citizens or residents of the United States or
its territories or possessions, and that in making any such sales, you will
comply with such Association's Interpretation with respect to Free-Riding and
Withholding. You further represent that: (i) you will notify each of your
customers with respect to whose account you have investment discretion and to
whose account you intend to sell any Securities that you propose to sell
Securities to such account as a principal and you will obtain the customer's
written consent to such sale; and (ii) you will comply with the requirements of
Rule 15c2-8 under the 1934 Act and have distributed or are distributing copies
of a Preliminary Prospectus to all persons to whom you then expected to mail
confirmations of sale, not less than 48 hours prior to the time it is expected
to mail such confirmations.
Very truly yours,
WERBEL ROTH SECURITIES, INC.
By:_______________________________________
As Representative of the several
Underwriters
Confirmed and accepted as of
the date first above written.
___________________________________
Attorney-in-fact for the several
Underwriters named in Schedule I
to the Underwriting Agreement
8
<PAGE>
EXHIBIT 1.3
Werbel Roth Securities, Inc.
150 E. Palmetto Park Road
Suite 510
Boca Raton, FL 33432
Frontline Communications Corporation
1,500,000 Shares of Common Stock
1,500,000 Common Stock Purchase Warrants
SELECTED DEALER AGREEMENT
-------------------------
Dear Sirs: ___________________, 1998
We, as the Underwriter named in the below referred to Prospectus (the
"Underwriter") have agreed, subject to the terms and conditions of the
Underwriting Agreement dated this date (the "Underwriting Agreement") to
purchase from Frontline Communications Corporation (the "Company"), at the
prices set forth on the cover of such Prospectus, the above referred to
1,500,000 Shares of Common Stock and 1,500,000 Warrants and up to an additional
225,000 Shares of Common Stock and 225,000 Common Stock Warrants to cover
over-allotments, collectively being called the "Securities"). The Securities and
certain of the terms on which they are being purchased and offered are more
fully described in the enclosed Prospectus (the "Prospectus"). Additional copies
of the Prospectus will be supplied to you, in reasonable quantities upon
request.
We, as the Underwriter, are offering to certain dealers ("Selected
Dealers"), among whom we are pleased to include you, part of the Securities, at
the public offering price less a concession of $._____ per Share of Common Stock
and $._____ per Warrant. The offering to Selected Dealers is made subject to the
issuance and delivery of the Securities to us and their acceptance by us, to the
approval of legal matters by our counsel, and to the terms and conditions
hereof, and may be made by us on the basis of the reservation of Securities or
an allotment against subscription, or otherwise in our discretion.
The initial public offering prices of the Securities are as set forth
in the Prospectus. With our consent, Selected Dealers may allow a discount of
not in excess of $____ per Share of Common Stock and $_____ per Warrant in
selling the Shares of Common Stock and Warrants to other dealers meeting the
requirements of the specifications set forth in the affirmation of dealers
contained in the attached Acceptance and Order. Upon our request, you will
notify us of the identity of any dealer to whom you allow such a discount and
any Selected Dealer from whom you receive such a discount.
1
<PAGE>
All orders will be strictly subject to confirmation and we reserve the
right in our uncontrolled discretion to reject any order in whole or in part, to
accept or reject orders in the order of their receipt or otherwise, and to
allot. You are not authorized to give any information or make any representation
other than as set forth in the Prospectus in connection with the sale of any of
the Securities. No dealer is authorized to act as agent for the Underwriter, or
for the Company, when offering any of the Securities. Nothing contained herein
shall constitute the Selected Dealers partners with us or with one another.
Upon release by us, you may offer the Securities at the public offering
prices, subject to the terms and conditions hereof. We may, and the Selected
Dealers may, with our consent, purchase Securities from and sell Securities to
each other at the public offering price less a concession not in excess of the
concession to Selected Dealers.
Payment for Securities purchased by you is to be made at our office (or
at such other place as instructed) at the public offering price, on such date as
we may advise, on one day's notice to you, by certified or official bank check
in New York Clearing House funds payable to our order. Delivery to you of
certificates for the Securities will be made as soon as is practicable
thereafter. Unless specifically authorized by us, payment by you may not be
deferred until delivery of certificates to you. The concession payable to you
will be paid as soon as practicable after the closing.
This Agreement shall terminate at the close of business on the 45th day
after the effective date of the Registration Statement. We may terminate this
Agreement at any time prior thereto by notice to you. Notwithstanding the
termination of this Agreement, you shall remain liable for your proportionate
share of any transfer tax or any liability which may be asserted or assessed
against us or Selected Dealers based upon the claim that the Underwriter and the
Selected Dealers, or any of them, constitute a partnership, association,
unincorporated business or other entity, including in each case your
proportionate share of expenses incurred in defending against any such claim or
liability.
In the event that, prior to the termination of this Agreement we
purchase in the open market or otherwise any Securities delivered to you, you
agree to repay to us for the account of the Underwriter the amount of the above
concession to Selected Dealers plus brokerage commissions and any transfer taxes
paid in connection with such purchase; which amounts can be withheld from the
concession otherwise payable to you hereunder. Certificates for Securities
delivered on any such purchase need not be the identical certificates originally
issued to you.
At any time prior to the termination of this Agreement, you will, upon
our request, report to us the number of Securities purchased by you under this
Agreement which then remain unsold and will, upon our request, sell to us for
the account of the Underwriter the number of such unsold Securities that we may
designate, at the public offering price less an amount to be determined by us
not in excess of the concession allowed you.
2
<PAGE>
We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the offering, including,
without limitation, stabilization and over-allotment. We shall be under no
liability to you except for our lack of good faith and for obligations assumed
by us in this Agreement, except that you do not waive any rights that you may
have under the Securities Act of 1933 (the "1933 Act") or the rules and
regulations thereunder.
Upon application to us, we will inform you of the states and other
jurisdictions of the United States in which it is believed that the Securities
are qualified for sale under, or are exempt from the requirements of, their
respective securities laws, but we assume no responsibility with respect to your
right to sell Securities in any jurisdiction. We have filed Further State
Notices with respect to the Securities with the Department of State of the State
of New York.
You confirm that you are familiar with Rule 15c2-8 under the Securities
Exchange Act of 1934 (the "1934 Act"), relating to the distribution of
preliminary and final prospectuses, and confirm that you have complied and will
comply therewith (whether or not the Company is subject to the reporting
requirements of Section 13 or 15(d) of the 1934 Act). We will make available to
you, to the extent made available to us by the Company such number of copies of
the Prospectus as you may reasonably request for purposes contemplated by the
1933 Act, the 1934 Act, and the rules and regulations thereunder.
Your attention is directed to Rule 10b-6 under the 1934 Act, which
contains certain prohibitions against trading by a person interested in a
distribution until such person has completed its participation in the
distribution. You confirm that you will at all times comply with the provisions
of such Rule in connection with this offering.
Any notice from us shall be deemed to have been duly given if
telephoned, and subsequently mailed or transmitted by any standard form of
written tele-communication to you at the address to which this Agreement is
mailed, or if so mailed or transmitted in the first instance.
Please advise us promptly by telephone or any standard form of written
telecommunication of the principal amount of Securities ordered by you and
confirm your agreement hereto by signing the Acceptance and Order on the
enclosed duplicate hereof and returning promptly such signed duplicate copy to
Werbel Roth Securities, Inc., 150 E. Palmetto Park Road, Suite 510, Boca Raton,
FL 33432.
Upon receipt thereof, this instrument and such signed duplicate copy
will evidence the agreement between us.
Very truly yours,
WERBEL ROTH SECURITIES, INC.
By:_________________________________
3
<PAGE>
ACCEPTANCE AND ORDER
Werbel Roth Securities, Inc.
150 E. Palmetto Park Road
Suite 510
Boca Raton, FL 33432
Dear Sirs:
We hereby enter our order for ______ Shares of Common Stock and/or
_______ Warrants of Frontline Communications Corporation under the terms and
conditions of the foregoing Agreement.
We agree to all the terms and conditions stated in the foregoing
Agreement. We acknowledge receipt of the Prospectus relating to the above
Securities and we further state that in entering this order we have relied upon
said Prospectus and no other statements whatsoever, written or oral. We affirm
that we are either (i) a member in good standing of the National Association of
Securities Dealers, Inc. (the "NASD") or (ii) a dealer with its principal place
of business located outside the United States, its territories, or possessions
and not registered under the Securities Exchange Act of 1934 and not eligible
for membership in the NASD, who hereby agrees to make no sales within the United
States, its territories or its possessions or to persons who are nationals
thereof or residents therein, and in making any sales, to comply with the NASD's
interpretation with respect to free-riding and withholding, as well as all other
pertinent interpretations of the NASD that may be applicable to us. We also
affirm and agree that we will promptly re-offer any Securities purchased by us
in conformity with the terms of the offering and in conformity with the Rules of
Fair Practice of the NASD, (including, without limitation, Sections 8, 24, 25
and 36 Article III thereof) and all applicable Rules and Regulations promulgated
under the Securities Exchange Act of 1934.
Date: ___________, 1998 _______________________________
(Name of Selected Dealer)
By:___________________________
(Authorized Signature)
Address:______________________
______________________________
4
<PAGE>
EXHIBIT 4.1
No sale, offer to sell or transfer of the securities represented by this
certificate or any interest therein shall be made unless a registration
statement under the Federal Securities Act of 1933, as amended, with respect to
such transaction is then in effect, or the issuer has received an opinion of
counsel satisfactory to it that such transfer does not require registration
under that Act.
This Warrant will be void after 5:00 p.m. New York time on
____________, 2003 (i.e. five years from the effective date of the Registration
Statement).
REPRESENTATIVE'S STOCK WARRANT
WARRANT NO. 1
To Subscribe for and Purchase Shares of
Frontline Communications Corporation
(Transferability Restricted as Provided in Paragraph 8 Below)
THIS CERTIFIES THAT, for value received, _______________ or
registered assigns, is entitled to subscribe for and purchase from FRONTLINE
COMMUNICATIONS CORPORATION, incorporated under the laws of the State of Delaware
(the "Company") up to ______ fully paid and non-assessable shares of Common
Stock (the "Shares") of the Company, as hereinafter defined, at the "Purchase
Price" and during the period hereinafter set forth, subject, however, to the
provisions and upon the terms and conditions hereinafter set forth. This Warrant
is one of an issue of the Company's Common Stock Purchase Warrants (herein
called the "Warrants"), identical in all respects except as to the names of the
holders thereof and the number of Shares purchasable thereunder, representing on
the original issue thereof rights to purchase up to 150,000 Shares.
1. As used herein:
(a) "Common Stock" or "Common Shares" shall initially refer to
the Company's Common Stock, $.01 par value, per share as more fully set forth in
Section 5 hereof.
(b) "Purchase Price" shall be $6.00 per share (150% of the
public offering price per share) which is subject to adjustment pursuant to
Section 4 hereof.
(c) "Underwriter" or "Representative" shall refer to WERBEL
ROTH SECURITIES, INC.
<PAGE>
(d) "Underwriting Agreement" shall refer to the Underwriting
Agreement dated as of ___________. 1998 between the Company and the Underwriter.
(e) "Warrants" or "Representative's Stock Warrants" shall
refer to Warrants to purchase an aggregate of up to 150,000 Shares issued to the
Underwriter or its designees by the Company pursuant to the Underwriting
Agreement, as such may be adjusted from time to time pursuant to the terms of
Section 4 and including any Warrants represented by any certificate issued from
time to time in connection with the transfer, partial exercise, exchange of any
Warrants or in connection with a lost, stolen, mutilated or destroyed Warrant
certificate, if any, or to reflect an adjusted number of Shares.
(f) "Underlying Securities" shall refer to and include the
Common Shares issuable or issued upon exercise of the Representative's Stock
Warrants.
(g) "Holders" shall mean the registered holder of such
Representative's Stock Warrants or any issued Underlying Securities.
(h) "Effective Date" shall refer to the effective date of the
Form SB-2 Registration Statement File No. 333-34115.
(i) Warrant Agreement shall refer to the agreement dated as of
____________, 1998 by and among the Company, the Representative and Continental
Stock Transfer & Trust Company.
(j) "Representative's Warrants" shall refer to Warrants to
purchase up to 150,000 Warrants identical to the Warrants being offered to the
public (except for the exercise price of the Warrants) and which are covered by
a separate Warrant. The "Representative's Stock Warrants" and "Representative's
Warrants" collectively shall be referred to as the "Representative's
Securities." The term "underlying securities" when used in connection with the
registration rights of the holder of this Warrant shall refer to any securities
issuable upon exercise of the Representative's Securities.
2. The purchase rights represented by this Warrant may be exercised by
the holder hereof, in whole or in part at any time, and from time to time,
during the period commencing on the Effective Date until ___________, 2003 (the
"Expiration Date"), by the presentation of this Warrant, with the purchase form
attached duly executed, at the Company's office (or such office or agency of the
Company as it may designate in writing to the Holder hereof by notice pursuant
to Section 14 hereof), and upon payment by the Holder to the Company in cash, or
by certified check or bank draft of the Purchase Price for such Shares of Common
Stock. The Company agrees that the Holder hereof shall be deemed the record
owner of such Underlying Securities as of the close of business on the date on
which this Warrant shall have been presented and payment made for such Shares as
aforesaid. Certificates for the Underlying Securities so purchased shall be
delivered to the Holder hereof within a reasonable time, not exceeding five (5)
days, after the rights represented by this Warrant shall have been so exercised.
If this Warrant shall be exercised in part only, the Company shall, upon
surrender of this Warrant for cancellation,
2
<PAGE>
deliver a new Representative's Stock Warrant evidencing the rights of the Holder
hereof to purchase the balance of the Shares which such Holder is entitled to
purchase hereunder. Exercise in full of the rights represented by this Warrant
shall not extinguish the rights granted under Section 9 hereof.
3. Subject to the provisions of Section 8 hereof, (i) this Warrant is
exchangeable at the option of the Holder at the aforesaid office of the Company
for other Representative's Stock Warrants of different denominations entitling
the Holder thereof to purchase in the aggregate the same number of Shares of
Common Stock as are purchasable hereunder; and (ii) this Warrant may be divided
or combined with other Representative's Stock Warrants which carry the same
rights, in either case, upon presentation hereof at the aforesaid office of the
Company together with a written notice, signed by the Holder hereof, specifying
the names and denominations in which new Representative's Stock Warrants are to
be issued, and the payment of any transfer tax due in connection therewith.
4. Subject and pursuant to the provisions of this Section 4, the
Purchase Price and number of Common Shares subject to this Warrant shall be
subject to adjustment from time to time as set forth hereinafter.
(A) If the Company shall, at any time, subdivide its
outstanding Common Shares by recapitalization, reclassification, split up
thereof, or other such issuance without additional consideration, the
appropriate Purchase Price immediately prior to such subdivision shall be
proportionately decreased, and if the Company shall at any time combine the
outstanding Common Shares by recapitalization, reclassification or combination
thereof, the Purchase Price immediately prior to such combination shall be
proportionately increased. Any such adjustment to the Purchase Price or the
corresponding adjustment to the Purchase Price shall become effective at the
close of business on the record date for such subdivision or combination. No
adjustment to the Purchase Price and the number of shares issuable upon exercise
of this Warrant shall be required if such adjustment provides the holders of
this Warrant with disproportionate rights, privileges and economic benefits
which are not provided to the public shareholders.
(B) In the event that prior to the Representative's Stock
Warrant's expiration date the Company adopts a resolution to merge, consolidate,
or sell percentages in all of its assets, each Warrant holder upon the exercise
of his Representative's Stock Warrant will be entitled to receive the same
treatment as a holder of any other share of Common Stock. In the event the
Company adopts a resolution for the liquidation, dissolution, or winding up of
the Company's business, the Company will give written notice of such adoption of
a resolution to the registered holders of the Representative's Stock Warrants.
Thereupon all liquidation and dissolution rights under this Warrant will
terminate at the end of thirty (30) days from the date of the notice to the
extent not exercised within those thirty (30) days.
(C) If any capital reorganization or reclassification of the
capital stock of the Company or consolidation or merger of the Company with
another corporation, shall
3
<PAGE>
be effected in such a way that holders of Common Stock shall be entitled to
receive stock, securities, cash or assets with respect to or in exchange for
Common Stock, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, the Company or such successor or purchasing
corporation, as the case may be, shall execute with the Warrant Agent a
supplemental Warrant Agreement providing that each registered holder of a
Representative's Stock Warrant shall have the right thereafter and until the
expiration date to exercise such Warrant for the kind and amount of stock,
securities, cash or assets receivable upon such reorganization,
reclassification, consolidation, merger or sale by a holder of the number of
shares of Common Stock for the purchase of which such Warrant might have been
exercised immediately prior to such reorganization, reclassification,
consolidation, merger or sale, subject to adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Section
4.
(D) In case at any time the Company shall declare a dividend
or make any other distribution upon any stock of the Company payable in Common
Stock, then such Common Stock issuable in payment of such dividend or
distribution shall be deemed to have been issued or sold without consideration.
(E) Upon any adjustment of the appropriate respective Purchase
Price as hereinabove provided, the number of Common Shares issuable upon
exercise of each class of Warrant shall be changed to the number of shares
determined by dividing (i) the aggregate Purchase Price payable for the purchase
of all shares issuable upon exercise of that class of Warrant immediately prior
to such adjustment by (ii) the appropriate Purchase Price per share in effect
immediately after such adjustment.
(F) No adjustment in the Purchase Price shall be required
under Section 4 hereof unless such adjustment would require an increase or
decrease in such price of at least 1% provided, however, that any adjustments
which by reason of the foregoing are not required at the time to be made shall
be carried forward and taken into account and included in determining the amount
of any subsequent adjustment, and provided further, however, that in case the
Company shall at any time subdivide or combine the outstanding Common Shares as
a dividend, said amount of 1% per share shall forthwith be proportionately
increased in the case of a combination or decreased in the case of a subdivision
or stock dividend so as to appropriately reflect the same.
(G) On the effective date of any new Purchase Price the number
of shares as to which this Warrant may be exercised shall be increased or
decreased so that the total sum payable to the Company on the exercise of this
Warrant shall remain constant.
(H) The form of Representative's Stock Warrant need not be
changed because of any change pursuant to this Article, and Representative's
Stock Warrants issued after such change may state the Purchase Price and the
same number of shares as is stated in the Representative's Stock Warrants
initially issued pursuant to this Warrant. However, the Company may at any time
in its sole discretion (which shall be conclusive) make any change in the form
of Representative's Stock Warrant that the Company may deem appropriate and that
does not affect the substance thereof, and any
4
<PAGE>
Representative's Stock Warrant thereafter issued or countersigned, whether in
exchange or substitution for an outstanding Warrant or otherwise, may be in the
form as so changed.
5. For the purposes of this Warrant, the terms "Common Shares"
or "Common Stock" shall mean (i) the class of stock designated as the Common
Stock, $.01 par value, of the Company on the date set forth on the first page
hereof or (ii) any other class of stock resulting from successive changes or
re-classifications of such Common Stock consisting solely of changes in par
value, or from no par value to par value, or from par value to no par value. If
at any time, as a result of an adjustment made pursuant to Section 4, the
securities or other property obtainable upon exercise of this Warrant shall
include shares or other securities of the Company other than Common Shares or
securities of another corporation or other property, thereafter, the number of
such other shares or other securities or property so obtainable shall be subject
to adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Shares contained in
Section 4 and all other provisions of this Warrant with respect to Common Shares
shall apply on like terms to any such other shares or other securities or
property. Subject to the foregoing, and unless the context requires otherwise,
all references herein to Common Shares shall, in the event of an adjustment
pursuant to Section 4, be deemed to refer also to any other securities or
property then obtainable as a result of such adjustments.
6. The Company covenants and agrees that:
(a) During the period within which the rights represented by
the Representative's Stock Warrant may be exercised, the Company shall, at all
times, reserve and keep available out of its authorized capital stock, solely
for the purposes of issuance upon exercise of this Warrant, such number of its
Common Shares as shall be issuable upon the exercise of this Warrant and at its
expense will obtain the listing thereof on all national securities exchanges on
which the Common Shares are then listed; and if at any time the number of
authorized Common Shares shall not be sufficient to effect the exercise of this
Warrant, the Company will take such corporate action as may be necessary to
increase its authorized but unissued Common Shares to such number of shares as
shall be sufficient for such purpose; the Company shall have analogous
obligations with respect to any other securities or property issuable upon
exercise of this Warrant.
(b) All Common Shares which may be issued upon exercise of the
rights represented by this Warrant will, upon issuance be validly issued, fully
paid, nonassessable and free from all taxes, liens and charges with respect to
the issuance thereof.
(c) All original issue taxes payable in respect of the
issuance of Common Shares upon the exercise of the rights represented by this
Warrant shall be borne by the Company but in no event shall the Company be
responsible or liable for income taxes or transfer taxes upon the transfer of
any Representative's Stock Warrants.
5
<PAGE>
7. Until exercised, this Warrant shall not entitle the Holder hereof to
any voting rights or other rights as a shareholder of the Company, except that
the Holder of this Warrant shall be deemed to be a shareholder of this Company
for the purpose of bringing suit on the ground that the issuance of shares of
stock of the Company is improper under the New York Corporation Law.
8. This Warrant and the Underlying Securities shall not be sold,
transferred, assigned or hypothecated for a period of twelve (12) months from
the Effective Date, except to officers or partners of the Representative, and/or
the other underwriters and/or selected dealers who participated in such
offering, or the officers or partners of such underwriters and/or selected
dealers. In no event shall this Warrant and the Underlying Securities be sold,
transferred, assigned or hypothecated except in conformity with the applicable
provisions of the Securities Act of 1933, as then in force (the "Act"), or any
similar Federal statute then in force, and all applicable "Blue Sky" laws.
9. The Holder of this Warrant, by acceptance hereof, agrees that, prior
to the disposition of this Warrant or of any Underlying Securities theretofore
purchased upon the exercise hereof, under circumstances that might require
registration of such securities under the Act, or any similar Federal statute
then in force, such Holder will give written notice to the Company expressing
such Holder's intention of effecting such disposition, and describing briefly
such Holder's intention as to the disposition to be made of this Warrant and/or
the Underlying Securities theretofore issued upon exercise hereof. Promptly upon
receiving such notice, the Company shall present copies thereof to its counsel
and the provisions of the following subdivisions shall apply:
(a) If, in the opinion of such counsel, the proposed
disposition does not require registration under the Act, or any similar Federal
statute then in force, of this Warrant and/or the securities issuable or issued
upon the exercise of this Warrant, the Company shall, as promptly as
practicable, notify the Holder hereof of such opinion, whereupon such holder
shall be entitled to dispose of this Warrant and/or such Underlying Securities
theretofore issued upon the exercise hereof, all in accordance with the terms of
the notice delivered by such Holder to the Company.
(b) If, in the opinion of such counsel, such proposed
disposition requires such registration or qualification under the Act, or
similar Federal statute then in effect, of this Warrant and/or the Underlying
Securities issuable or issued upon the exercise of this Warrant, the Company
shall promptly give written notice of such opinion to the Holder hereof and to
the then holders of the securities theretofore issued upon the exercise of this
Warrant at the respective addresses thereof shown on the books of the Company.
The registration rights contained in Section 15 of the Underwriting Agreement
are incorporated by reference as if set forth in their entirety herein.
10. The Company agrees to indemnify and hold harmless the holder of
this Warrant, or of securities issuable or issued upon the exercise hereof, from
and against any claims and liabilities caused by any untrue statement of a
material fact, or omission to state a material fact required to be stated, in
any such registration statement, prospectus,
6
<PAGE>
notification or offering circular under Regulation A, except insofar as such
claims or liabilities are caused by any such untrue statement or omission based
on information furnished in writing to the Company by such holder, or by any
other such holder affiliated with the holder who seeks indemnification, as to
which the holder hereof, by acceptance hereof, agrees to indemnify and hold
harmless the Company.
11. If this Warrant, or any of the securities issuable pursuant hereto,
require qualification or registration with, or approval of, any governmental
official or authority (other than registration under the Act, or any similar
Federal statute at the time in force), before such securities may be issued on
the exercise hereof, the Company, at its expense, will take all requisite action
in connection with such qualification, and will use its best efforts to cause
such securities and/or this Warrant to be duly registered or approved, as may be
required.
12. This Warrant is exchangeable, upon its surrender by the registered
holder at such office or agency of the Company as may be designated by the
Company, for new Representative's Stock Warrants of like tenor, representing, in
the aggregate, the right to subscribe for and purchase the number of Common
Shares that may be subscribed for and purchased hereunder, each of such new
Representative's Stock Warrants to represent the right to subscribe for and
purchase such number of Common Shares as shall be designated by the registered
holder at the time of such surrender. Upon receipt of evidence satisfactory to
the Company of the loss, theft, destruction or mutilation of this Warrant, and,
in the case of any such loss, theft or destruction, upon delivery of a bond of
indemnity satisfactory to the Company, or in the case of such mutilation, upon
surrender or cancellation of this Warrant, the Company will issue to the
registered holder a new Representative's Stock Warrant of like tenor, in lieu of
this Warrant, representing the right to subscribe for and purchase the number of
Common Shares that may be subscribed for and purchased hereunder. Nothing herein
is intended to authorize the transfer of this Warrant except as permitted under
Paragraph 8.
13. Every holder hereof, by accepting the same, agrees with any
subsequent holder hereof and with the Company that this Warrant and all rights
hereunder are issued and shall be held subject to all of the terms, conditions,
limitations and provisions set forth in this Warrant, and further agrees that
the Company and its transfer agent may deem and treat the registered holder of
this Warrant as the absolute owner hereof for all purposes and shall not be
affected by any notice to the contrary.
14. All notices required hereunder shall be given by first-class mail,
postage prepaid; if given by the holder hereof, addressed to the Company at One
Blue Hill Plaza, 6th Floor, Pearl River, NY 10965 or such other address as the
Company may designate in writing to the holder hereof; and if given by the
Company, addressed to the holder at the address of the holder shown on the books
of the Company.
15. The validity, construction and enforcement of this Warrant shall be
governed by the laws of the State of New York and jurisdiction is hereby vested
in the Courts of said State in the event of the institution of any legal action
under this Warrant.
7
<PAGE>
IN WITNESS WHEREOF, FRONTLINE COMMUNICATIONS CORPORATION has
caused this Warrant to be signed by its duly authorized officers under its
corporate seal, to be dated as of _________________, 1998.
Frontline Communications Corporation
By:_________________________________
Stephen J. Cole-Hatchard,
Chief Executive Officer
Attest:
___________________________
Michael Olbermann,
Chief Operating Officer
(Corporate Seal)
8
<PAGE>
PURCHASE FORM
To Be Executed
Upon Exercise of Warrant
The undersigned hereby exercises the right to purchase Common Shares evidenced
by the within Warrant, according to the terms and conditions thereof, and
herewith makes payment of the purchase price in full. The undersigned requests
that certificates for such shares shall be issued in the name set forth below.
Dated:______,19 _____________________________________
Signature
_____________________________________
Print Name of Signatory
_____________________________________
Name to whom certificates are to
be issued if different from above
Address:_____________________________
_____________________________________
Social Security No. or other
identifying number______________
If said number of shares shall not be all the shares purchasable under
the within Warrant, the undersigned requests that a new Warrant for the
unexercised portion shall be registered in the name of :
_____________________________________
(Please Print)
Address:_____________________________
_____________________________________
Social Security No. or other
identifying number: _____________
_____________________________________
Signature
9
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED , hereby
sells assigns and transfers to , Soc. Sec. No.
[ ] the within Warrant, together with all rights, title and interest therein,
and does hereby irrevocably constitute and appoint attorney to transfer such
Warrant on the register of the within named Company, with full power of
substitution.
__________________________________
Signature
Dated:________,19
Signature Guaranteed:
___________________________________
10
<PAGE>
EXHIBIT 4.2
No sale, offer to sell or transfer of the securities represented by this
certificate or any interest therein shall be made unless a registration
statement under the Federal Securities Act of 1933, as amended, with respect to
such transaction is then in effect, or the issuer has received an opinion of
counsel satisfactory to it that such transfer does not require registration
under that Act.
This Warrant will be void after 5:00 p.m. New York time on the earlier
of __________, 2003 (i.e. five years from the effective date of the Registration
Statement) or the Warrant Expiration Date of the Warrants as defined in the
Warrant Agreement.
REPRESENTATIVE'S WARRANT TO PURCHASE
COMMON STOCK PURCHASE WARRANT
WARRANT NO. 1
To Subscribe for and Purchase
Common Stock Purchase Warrants of
FRONTLINE COMMUNICATIONS CORPORATION
(Transferability Restricted as Provided in Paragraph 8 Below)
THIS CERTIFIES THAT, for value received, ____________________
or registered assigns, is entitled to subscribe for and purchase from Frontline
Communications Corporation, incorporated under the laws of the State of Delaware
(the "Company") up to __________ fully paid Common Stock Purchase Warrants of
the Company, as hereinafter defined, at the "Purchase Price" and during the
period hereinafter set forth, subject, however, to the provisions and upon the
terms and conditions hereinafter set forth. This Warrant is one of an issue of
the Company's Representative's Warrants (as defined herein) to purchase Common
Stock Purchase Warrants, identical in all respects except as to the names of the
holders thereof and the number of Common Stock Purchase Warrants purchasable
thereunder, representing on the original issue thereof rights to purchase up to
150,000 Common Stock Purchase Warrants.
1. As used herein:
(a) "Common Stock" or "Common Shares" shall initially refer to
the Company's Common Stock, $.01 par value, as more fully defined in the Warrant
Agreement.
(b) "Purchase Price" shall be $.15 per Warrant which is
subject to adjustment pursuant to Section 4 hereof.
<PAGE>
(c) "Underwriter" or "Representative" shall refer to WERBEL
ROTH SECURITIES, INC..
(d) "Underwriting Agreement" shall refer to the Underwriting
Agreement dated as of ___________, 1998 between the Company and the Underwriter.
(e) "Representative's Warrants" or "this Warrant" shall refer
to Warrants to purchase an aggregate of up to 150,000 Common Stock Purchase
Warrants issued to the Underwriter or its designees by the Company pursuant to
the Underwriting Agreement, as such may be adjusted from time to time pursuant
to the terms of Section 4 and including any Representative's Warrants
represented by any certificate issued from time to time in connection with the
transfer, partial exercise, exchange of any Representative's Warrants or in
connection with a lost, stolen, mutilated or destroyed Representative's Warrant
certificate, if any, or to reflect an adjusted number of Representative's
Warrants.
(f) "Common Stock Purchase Warrants" issuable upon exercise of
the Representative's Warrants shall be identical in all respects to the Common
Stock Purchase Warrants sold to the public in the Form SB-2 Registration
Statement File No. 333-34115 and covered by the Warrant Agreement, except that
the exercise price of such Warrants shall be $7.20 per share.
(g) "Holders" shall mean the registered holder of the
Representative's Warrants or any Common Stock Purchase Warrants issued upon
exercise of same.
(h) "Effective Date" shall refer to the effective date of the
Form SB-2 Registration Statement File No. 333-34115.
(i) Warrant Agreement shall refer to the agreement dated as of
_________, 1998 by and among the Company, the Representative and Continental
Stock Transfer & Trust Company.
(j) "Representative's Stock Warrants shall refer to Warrants
to purchase up to 150,000 shares of Common Stock which are covered by a separate
Warrant. The "Representative's Stock Warrants" and "Representative's Warrants"
collectively shall be referred to as the "Representative's Securities." The term
"underlying securities" when used in connection with the registration rights of
the holder of this Warrant shall refer to any securities issuable upon exercise
of the Representative's Securities.
2. The purchase rights represented by this Warrant may be exercised by
the holder hereof, in whole or in part at any time, and from time to time,
during the period commencing on the Effective Date until the earlier __________,
2003 or the Warrant Expiration Date of the Common Stock Purchase Warrants as
defined in the Warrant Agreement (the "Expiration Date"), by the presentation of
this Warrant, with the purchase form attached duly executed, at the Company's
office (or such office or agency of the
2
<PAGE>
Company as it may designate in writing to the Holder hereof by notice pursuant
to Section 14 hereof), and upon payment by the Holder to the Company in cash, or
by certified check or bank draft of the Purchase Price for such Common Stock
Purchase Warrants. The Company agrees that the Holder hereof shall be deemed the
record owner of such Common Stock Purchase Warrants as of the close of business
on the date on which this Warrant shall have been presented and payment made for
such Common Stock Purchase Warrants as aforesaid. Certificates for the Common
Stock Purchase Warrants so purchased shall be delivered to the Holder hereof
within a reasonable time, not exceeding five (5) days, after the rights
represented by this Warrant shall have been so exercised. If this Warrant shall
be exercised in part only, the Company shall, upon surrender of this Warrant for
cancellation, deliver a new Representative's Warrant evidencing the rights of
the Holder hereof to purchase the balance of the Common Stock Purchase Warrants
which such Holder is entitled to purchase hereunder. Exercise in full of the
rights represented by this Warrant shall not extinguish the rights granted under
Section 9 hereof.
3. Subject to the provisions of Section 8 hereof, (i) this Warrant is
exchangeable at the option of the Holder at the aforesaid office of the Company
for other Representative's Warrants of different denominations entitling the
Holder thereof to purchase in the aggregate the same number of Common Stock
Purchase Warrants as are purchasable hereunder; and (ii) this Warrant may be
divided or combined with other Representative's Warrants which carry the same
rights, in either case, upon presentation hereof at the aforesaid office of the
Company together with a written notice, signed by the Holder hereof, specifying
the names and denominations in which new Representative's Warrants are to be
issued, and the payment of any transfer tax due in connection therewith.
4. The Purchase Price and number of Common Stock Purchase Warrants
purchasable upon exercise of this Warrant are subject to adjustment by the Board
of Directors of the Company as deemed appropriate by them acting in good faith
in order to protect the holder on a similar basis as the anti-dilution
provisions contained in the Warrant Agreement applicable to the Common Stock
Purchase Warrants. Notwithstanding anything contained herein to the contrary, no
adjustment will be made to the Purchase Price or number of Common Stock Purchase
Warrants where no adjustment has been made pursuant to the terms of the Warrant
Agreement to the number of Common Stock Purchase Warrants held by the public
Warrant holders.
The exercise price of the Common Stock Purchase Warrants
underlying this Warrant and securities issuable upon exercise of the Common
Stock Purchase Warrants are subject to adjustment pursuant to the terms and
conditions contained in the Warrant Agreement.
5. For the purposes of this Warrant, the term "Common Stock Purchase
Warrants" shall mean any other class of Common Stock Purchase Warrants resulting
from successive changes or re-classifications of such Warrants. If at any time,
as a result of an
3
<PAGE>
adjustment made pursuant to Section 4, the securities or other property
obtainable upon exercise of this Warrant shall include securities of the Company
other than Common Stock Purchase Warrants or securities of another corporation
or other property, thereafter, the number of such securities or property so
obtainable shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Stock Purchase Warrants contained in Section 4 and all other provisions
of this Warrant with respect to Common Stock Purchase Warrants shall apply on
like terms to any such other securities or property. Subject to the foregoing,
and unless the context requires otherwise, all references herein to Common Stock
Purchase Warrants shall, in the event of an adjustment pursuant to Section 4, be
deemed to refer also to any other securities or property then obtainable as a
result of such adjustments.
6. The Company covenants and agrees that:
(a) During the period within which the rights represented by
the Representative's Warrant may be exercised, the Company shall, at all times,
reserve and keep available out of its authorized capital stock, solely for the
purposes of issuance upon exercise of the Common Stock Purchase Warrants, such
number of its Common Shares as shall be issuable upon the exercise of the Common
Stock Purchase Warrants and at its expense will obtain the listing thereof on
all national securities exchanges on which the Common Shares are then listed;
and if at any time the number of authorized Common Shares shall not be
sufficient to effect the exercise of the Common Stock Purchase Warrants, the
Company will take such corporate action as may be necessary to increase its
authorized but unissued Common Shares to such number of shares as shall be
sufficient for such purpose; the Company shall have analogous obligations with
respect to any other securities or property issuable upon exercise of the Common
Stock Purchase Warrants.
(b) All securities which may be issued upon exercise of the
rights represented by this Warrant and the Common Stock Purchase Warrant will,
upon issuance be validly issued, fully paid, nonassessable and free from all
taxes, liens and charges with respect to the issuance thereof; and,
(c) All original issue taxes payable in respect of the
issuance of Common Stock Purchase Warrants upon the exercise of the rights
represented by this Warrant shall be borne by the Company but in no event shall
the Company be responsible or liable for income taxes or transfer taxes upon the
transfer of any Representative's Warrants and/or Common Stock Purchase Warrants.
7. Until the Common Stock Purchase Warrants are exercised, this Warrant
shall not entitle the Holder hereof to any voting rights or other rights as a
shareholder of the Company, except that the Holder of this Warrant and/or the
Common Stock Purchase Warrants shall be deemed to be a shareholder of this
Company for the purpose of bringing
4
<PAGE>
suit on the ground that the issuance of shares of stock of the Company is
improper under the New York Corporation Law.
8. This Warrant and the Common Stock Purchase Warrants shall not be
sold, transferred, assigned or hypothecated for a period of twelve (12) months
from the Effective Date, except to officers or partners of the Representative,
and/or the other underwriters and/or selected dealers who participated in such
offering, or the officers or partners of such underwriters and/or selected
dealers. In no event shall this Warrant and the Common Stock Purchase Warrants
be sold, transferred, assigned or hypothecated except in conformity with the
applicable provisions of the Securities Act of 1933, as then in force (the
"Act"), or any similar Federal statute then in force, and all applicable "Blue
Sky" laws.
9. The holder of this Warrant, by acceptance hereof, agrees that, prior
to the disposition of this Warrant or of any securities theretofore purchased
upon the exercise hereof, under circumstances that might require registration of
such securities under the Act, or any similar Federal statute then in force,
such holder will give written notice to the Company expressing such holder's
intention of effecting such disposition, and describing briefly such holder's
intention as to the disposition to be made of this Warrant and/or the securities
theretofore issued upon exercise hereof. In this event, the provisions of the
following subdivisions shall apply:
(a) If, in the opinion of company counsel, the proposed
disposition does not require registration under the Act or qualification
pursuant to Regulation A promulgated under the Act, or any similar Federal
statute then in force, of this Warrant and/or the securities issuable or issued
upon the exercise of this Warrant, the Company shall, as promptly as practicable
after the receipt of written opinion of counsel to the holder of this Warrant to
such effect, notify the holder hereof of such opinion, whereupon such holder
shall be entitled to dispose of this Warrant and/or such securities theretofore
issued upon the exercise hereof, all in accordance with the terms of the notice
delivered by such holder to the Company.
(b) If, in the opinion of either such counsel, such proposed
disposition requires such registration or qualification under the Act, or
similar Federal statute then in effect, of this Warrant and/or the Common Stock
Purchase Warrants issuable or issued upon the exercise of this Warrant, the
Company shall promptly give written notice to all then holders of the
Representative's Warrants and/or Common Stock Purchase Warrants at the
respective addresses thereof shown on the books of the Company. The registration
rights contained in Section 15 of the Underwriting Agreement are incorporated by
reference as if set forth in their entirety herein.
10. The Company agrees to indemnify and hold harmless the holder of
this Warrant and/or the Common Stock Purchase Warrants issuable or issued upon
the exercise hereof, from and against any claims and liabilities caused by any
untrue statement of a
5
<PAGE>
material fact, or omission to state a material fact required to be stated, in
any such registration statement, prospectus, notification or offering circular
under Regulation A, except insofar as such claims or liabilities are caused by
any such untrue statement or omission based on information furnished in writing
to the Company by such holder, or by any other such holder affiliated with the
holder who seeks indemnification, as to which the holder hereof, by acceptance
hereof, agrees to indemnify and hold harmless the Company.
11. If this Warrant and/or the Common Stock Purchase Warrants require
qualification or registration with, or approval of, any governmental official or
authority (other than registration under the Act, or any similar Federal statute
at the time in force), before such securities may be issued on the exercise
hereof, the Company, at its expense, will take all requisite action in
connection with such qualification, and will use its best efforts to cause this
Warrant to be duly registered or approved, as may be required.
12. This Warrant is exchangeable, upon its surrender by the registered
holder at such office or agency of the Company as may be designated by the
Company, for new Representative's Warrants of like tenor, representing, in the
aggregate, the right to subscribe for and purchase the number of Common Stock
Purchase Warrants that may be subscribed for and purchased hereunder, each of
such new Representative's Warrants to represent the right to subscribe for and
purchase such number of Common Stock Purchase Warrants as shall be designated by
the registered holder at the time of such surrender. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant, and, in the case of any such loss, theft or destruction, upon
delivery of a bond of indemnity satisfactory to the Company, or in the case of
such mutilation, upon surrender or cancellation of this Warrant, the Company
will issue to the registered holder a new Representative's Warrant of like
tenor, in lieu of this Warrant, representing the right to subscribe for and
purchase the number of Common Stock Purchase Warrants that may be subscribed for
and purchased hereunder. Nothing herein is intended to authorize the transfer of
this Warrant except as permitted under Paragraph 8.
13. Every holder hereof, by accepting the same, agrees with any
subsequent holder hereof and with the Company that this Warrant and all rights
hereunder are issued and shall be held subject to all of the terms, conditions,
limitations and provisions set forth in this Warrant, and further agrees that
the Company and its transfer agent may deem and treat the registered holder of
this Warrant as the absolute owner hereof for all purposes and shall not be
affected by any notice to the contrary.
14. All notices required hereunder shall be given by first-class mail,
postage prepaid; if given by the holder hereof, addressed to the Company at One
Blue Hill Plaza, 6th Floor, or such other address as the Company may designate
in writing to the holder hereof; and if given by the Company, addressed to the
holder at the address of the holder shown on the books of the Company.
6
<PAGE>
15. The validity, construction and enforcement of this Warrant shall be
governed by the laws of the State of New York and jurisdiction is hereby vested
in the Courts of said State in the event of the institution of any legal action
under this Warrant.
IN WITNESS WHEREOF, Frontline Communications Corporation has caused
this Warrant to be signed by its duly authorized officers under its corporate
seal, to be dated as of __________, 1998.
FRONTLINE COMMUNICATIONS
CORPORATION
By:___________________________________
Stephen J. Cole-Hatchard
Chief Executive Officer
Attest:
______________________________
Michael Olbermann,
Chief Operating Officer
(Corporate Seal)
7
<PAGE>
PURCHASE FORM
To Be Executed
Upon Exercise of Warrant
The undersigned hereby exercises the right to purchase Common Stock Purchase
Warrants evidenced by the within Representative's Warrant, according to the
terms and conditions thereof, and herewith makes payment of the purchase price
in full. The undersigned requests that certificates for such Common Stock
Purchase Warrants shall be issued in the name set forth below.
Dated:_____,19 Signature
____________________________________
Print Name of Signatory
____________________________________
Name to whom certificates are to
be issued if different from above
Address:____________________________
____________________________________
Social Security No. or other
identifying number______________
If said number of Common Stock Purchase Warrants shall not be all the
Common Stock Purchase Warrants purchasable under the within Warrant, the
undersigned requests that a new Representative's Warrant for the unexercised
portion shall be registered in the name of :
____________________________________
(Please Print)
Address:_____________________________
_____________________________________
Social Security No. or other
identifying number: ________
_____________________________________
Signature
8
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED , hereby
sells assigns and transfers to , Soc. Sec. No.
[ ] the within Representative's Warrant, together with all rights, title and
interest therein, and does hereby irrevocably constitute and appoint attorney to
transfer such Representative's Warrant on the register of the within named
Company, with full power of substitution.
______________________________________
Signature
Dated:_________, 19
Signature Guaranteed:
__________________________________
9
<PAGE>
EXHIBIT 10.10
Frontline Communications Corporation
One Blue Hill Plaza, 6th Floor
Pearl River, NY 10965
Werbel Roth Securities, Inc. __________, 1998
l50 E. Palmetto Park Road
Suite 510
Boca Raton, FL 33432
Gentlemen:
In connection with an initial public offering ("IPO") of Frontline
Communications Corporation (the "Company"), which offering is being underwritten
by Werbel Roth Securities, Inc. ("Werbel Roth"), the following sets forth our
understanding with respect to Werbel Roth providing financial advisory services
for the Company.
1. For a period of two (2) year commencing on the date hereof, Werbel
Roth will render financial consulting services to the Company as such services
shall be required but in no event shall such services require more than two
business days per month. Your services shall include the following:
(a) to advise and assist in matters pertaining to the
financial requirements of our corporation and to assist, as and when required,
in formulating plans and methods of financing;
(b) to prepare and present financial reports required by us
and to analyze proposals relating to obtaining funds for our business, mergers
and/or acquisitions;
(c) to assist in our general relationship with the financial
community including brokers, stockholders, financial analysts, investment
bankers, and institutions; and
(d) to assist in obtaining financial management, and technical
and advisory services, and financial and corporate public relations, as may be
requested or advisable.
2. All services required to be performed hereunder shall be requested
by the Company in writing and upon not less than seven business days notice,
unless such notice is waived by you. Such notice shall be to the address
specified above or to such other place as you shall designate to us in writing.
3. For Werbel Roth's services to be performed hereunder, and for Werbel
Roth's continued availability to perform such services, the Company will pay
Werbel Roth a fee in an amount equal to $141,450 for services for two (2) years
from the date hereof
<PAGE>
Frontline Communications Corporation
Page 2
hich sum is payable in full in advance on the closing date of the IPO. Further,
we will reimburse Werbel Roth for such reasonable out-of-pocket expenses as may
be incurred by Werbel Roth on the Company's behalf, but only to the extent
authorized by the Company.
4. This Agreement has been duly approved by the Company's Board of
Directors.
5. Werbel Roth shall have no authority to bind the Company to any
contract or commitment, inasmuch as Werbel Roth's services hereunder are
advisory in nature.
6. Werbel Roth will maintain in confidence all proprietary,
non-published information obtained by you with respect to the Company during the
course of the performance of your services hereunder and Werbel Roth shall not
use any of the same for your own benefit or disclose any of the same to any
third party, without the Company's prior written consent, both during and after
the term of this Agreement.
7. This Agreement shall not be assignable by either party without the
other party's prior written consent.
8. This Agreement shall be binding upon, and shall inure to the benefit
of the Company's and Werbel Roth's respective successors and permitted assigns.
9. The foregoing represents the sole and entire agreement between us
with respect to the subject matter hereof and supersedes any prior agreements
between us with respect thereto. This Agreement may not be modified, amended or
waived except by a written instrument signed by the party to be charged. This
Agreement shall be governed by and construed in accordance with the internal
laws of the State of New York, without regard to the principles of conflicts of
laws of such State.
Please signify your agreement to the foregoing by signing and returning
to us the enclosed copy of this Agreement which will thereupon constitute an
agreement between us.
Very truly yours,
FRONTLINE COMMUNICATIONS
CORPORATION
BY_________________________
Agreed and Consented to:
WERBEL ROTH SECURITIES, INC.
BY__________________________
<PAGE>
Ronald Shapss Corporate Services, Inc.
MERGERS AND ACQUISITIONS
75 MONTEBELLO ROAD
SUFFERN, N.Y. 10901-3746
-----
(914) 368-3449
FAX (914) 368-3432
December 11, 1997
Mr. Stephen J. Cole-Hatchard
Frontline Communications Corp.
One Blue Hill Plaza -- PO Box 1548
Pearl River, N.Y. 10965
Dear Steve:
The following represents our understanding of terms and conditions for my
consulting with Frontline Communications Corp., ("FCC").
1. As compensation for the first twelve months of mergers and acquisition
consulting services hereunder, FCC will sell to Shapss, for the price of $0.01
per share, 100,000 shares of FCC and, at no cost to Shapss, 100,000 options to
purchase an additional 100,000 shares at Two Dollars per share, subject to any
reasonable recapitalization requirements directed by the underwriter. If for any
reason the Company is unable to issue said options, an amount equal to the value
of said options will be paid in Shapss in either stock or cash at the Company's
choice. FCC shall pay to Shapss Two Thousand ($2,000.00) Dollars per month
during the term of this Agreement.
2. Upon renewal or expiration of this agreement, Shapss shall retain all shares,
options and monetary fees.
3. FCC will pay all reasonable business, travel and entertainment expenses of
Shapss to offset the above specified business expenses incurred related to his
fulfilling the provisions hereof.
For the discussed equity participation, Shapss will perform the following:
1) Assist FCCI with viable merger targets and to accomplish the growth strategy
of the Company as a consolidator of regional Internet providers.
2) Provide follow-up assistance via phone, visits and in writing as is
necessary. FCC would expect approximately 25% to 50% of Shapss' time during the
term of this agreement The term of the agreement shall be twelve months.
<PAGE>
3) Assist FCC in understanding the consolidation concept and aiding in the
preparation of a business plan, documentation, meetings and presentations.
4) Provide advice and help in drafting of mergers and acquisition documents for
the Company.
5) Accept and fulfill the position of Director on the Board of Directors of the
Company for a term of not less than one (1) year.
6) Shapss will not transfer any rights hereunder other than to family members
and/or employees without the prior approval of FCC.
If this letter accurately outlines our understanding, we may either enter into a
formal Agreement or an officer of FCC may execute this letter as our
understanding. Alternatively, kindly make any necessary changes that reflect our
discussion and we will make the appropriate modifications.
Yours truly,
/s/ Ronald L. Shapss
- ------------------------
RONALD L. SHAPSS
Agreed and Accepted
this 11th day of December, 1997.
FRONTLINE COMMUNICATIONS CORP.
By: /s/ XXXXXXXXXXXXXXXXX
-----------------------------
Title: President/CEO
--------------------------
<PAGE>
AGREEMENT by and between Frontline Communications corporation, formerly
known as Easy Street OnLine, Inc. ("Frontline"), and Michael Char ("Char").
WHEREAS Char was formerly an officer and director of Frontline and
currently owns 320,000 fully paid and non-assignable shares of common stock of
Frontline (the "Char Shares");
WHEREAS several disputes arose as between Frontline and Char which
Frontline and Char hereto wish to resolve;
WHEREAS pursuant to this Agreement, the parties intend to resolve all
controversies and claims as between them and to release each other as well as
other persons affiliated with Frontline and Char with respect to all possible
claims as between them and to terminate their relationships;
WHEREAS, as part of such resolution Frontline and Char entered into
an escrow agreement dated March 6, 1998 which is incorporated herein and
Frontline has delivered $65,000 to the Escrow Agent in accordance with such
Escrow Agreement;
WHEREAS, the parties have agreed to effect and finalize such settlement
upon the consummation of a proposed initial public offering of securities of
Frontline (the "Closing").
NOW, THEREFORE, in consideration of the acts, covenants and agreements
hereinafter discussed, the parties hereto agree as follows:
<PAGE>
1. Upon execution of this Agreement, Frontline shall deliver to the
Escrow Agent to hold in escrow for delivery to Char at the Closing the following
a. a duplicate executed original of this Agreement obligating
Frontline to pay to Char at the Closing the sum of $435,000
representing payment for the purchase and retirement by Frontline
of all the Char Shares except for 24,480 Char Shares which Char
shall retain; (the Char Shares to be sold to Frontline by Char
pursuant to this Agreement shall hereinafter be referred to as
the "Char Sold Shares");
b. executed general releases running from Frontline, Nicko Feinberg,
Stephen J. Cole-Hatchard, Michael Olbermann and Peter Morris in
favor of Char;
2. Char hereby represents with respect to the Char Sold Shares he is
selling to Frontline that; (a) now and at the time of the Closing he is the sole
owner of such Char Sold Shares and such Char Sold Shares are fully-paid and
non-assessable shares of common stock, par value $.01 per share of Frontline
and Char has full power and authority to dispose of such Shares; (b) he has not
and at the time of the Closing has not sold, otherwise transferred, pledged or
encumbered the Char Sold Shares by any means; and (c) no third party now or at
the time of the Closing has any right, title or interest in the Char Sold
Shares.
-2-
<PAGE>
3. Char agrees upon execution of this Agreement to waive all claims
and rights to the Char Sold Shares, and deliver to the escrow agent an executed
lock up agreement as relating to the unsold shares.
4. By this agreement, Char ratifies and affirms that he has resigned
from and is no longer an officer, director or employee of Frontline.
5. Upon execution of this Agreement, Char shall deliver to the Escrow
Agent for delivery to Frontline at the Closing;
(a) executed general release running from Char, Wearableart, Bazookie
& Company LLC and Bazookie & Company LLC, d/b/a Wearableart to
Frontline Communications Corp., East Street Online, Inc., Hobbs & Co.
LLC, Hobbs & Co. LLC d/b/a Inet Communication, Co., Inet
Communications Co., LLC, Sara Girl & Co. LLC, Nicko Feinberg, Stephen
J. Cole-Hatchard, Michael Olbermann, Peter Morris, Tanzer Greenblatt
LLP, Kenneth Selterman and Lawrence M. Rosenstock.
(b) Executed Stipulations of discontinuance, with prejudice,
discontinuing certain actions initiated by Michael Char entitled
"Michael Char V. Nicko Feinberg" in the Supreme Court, State of New
York, Rockland County, Index. No. 6647/97, and "Michael Char V.
Frontline Communications Company," in the Supreme Court, State of New
York, Rockland County, Index No. 6646/97.
-3-
<PAGE>
6. Upon the delivery of a duplicate original of this executed
Agreement, and the stipulations, and releases as set forth herein, and as listed
in Schedule "A" attached hereto, to the Escrow Agent, the Escrow Agent shall
deliver from the Escrow Fund a check payable to Char in the sum of $50,000 in
satisfaction of all obligations of Frontline to Char for any credit card debts
of Char and a check payable to Slavet & Lefkowitz LLP and Rosenblatt, Slavet &
Radesky CPA (collectively the "Slavet Parties") in the sum of $15,000 for all
monies due the Slavet parties by Frontline. Such checks shall be delivered by
the Escrow Agent only on condition that simultaneously therewith there shall be
delivered to Frontline (a) an executed stipulation of Discontinuance,
discontinuing with prejudice, the action by the Slavet Parties against Frontline
in the Civil Court of the City of New York, County of New York entitled "Slavet
& Lefkowitz, RLLP and Rosenblatt. Slavet & Radezky, CPA, P.C. plaintiff against
Frontline Communications Corp., defendant, Index No. 33977/97 (b) a release by
Char releasing Frontline of all obligation to pay any credit card or other
obligation of Char, and (c) general releases from the Slavet Parties to
Frontline.
7. Char agrees that with respect to the 24,480 Char Shares not sold to
Frontline at the Closing ("Unsold Shares") that he will not sell or otherwise
transfer the Unsold Shares until the longer of two years from the date of the
Closing or Frontline reporting $1.9 million in pre-tax earnings in a calendar
year, and such, restrictions shall be placed on such
-4-
<PAGE>
Unsold Shares upon delivery of such shares by the transfer agent at the closing.
8. Upon the Closing Frontline shall make the payments provided for in
paragraph 1a and the documents in escrow shall be released and exchanged as
provided for herein and each party shall take all steps and sign all other
documents as required by this Agreement to carry out its terms.
9. This Agreement will only become effective upon the delivery of all
executed documents to the Escrow Agent required by this Agreement as specified
in Schedule "A" attached hereto, until which time the escrow agreement
previously executed by the parties remains in full force and affect.
10. This agreement is binding upon the parties hereto, their
successors, heirs and assigns and parties aligned in interest.
11. Char agrees that he will not disparage or take any steps to
interfere with or disrupt the business and/or financial affairs of Frontline
Communication Corp., or its officers or directors.
12. This agreement and the documents to be executed and delivered
herewith constitute the entire agreement between the parties and there are no
other representations or warranties, except as expressly set forth herein and in
the documents and agreements being exchanged and executed herewith and expressly
referred to in this agreement.
-5-
<PAGE>
13. This agreement is governed by the laws of the State of New York.
MICHAEL CHAR FRONTLINE COMMUNICATIONS CORP.
- -------------------------------------
MICHAEL CHAR
By: Stephen J. Cole-Hatchard
-------------------------------
President
<PAGE>
EXHIBIT 23.1
Consent of Independent
Certified Public Accountants
Frontline Communications, Corp.
Pearl River, New York
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated March 16, 1998, relating to the
financial statements of Frontline Communications Corp., which is contained in
the Prospectus. Our report contains an explanatory paragraph regarding the
Company's ability to continue as a going concern.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman, LLP
-------------------------
Valhalla, New York
April 7, 1998
