<PAGE> 1
As filed with the Securities and Exchange Commission on January 8, 1998
REGISTRATION NO. 333-39425
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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C2I SOLUTIONS, INC.
(Name of small business issuer in its charter)
Delaware 7379 33-0775687
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification No.)
organization)
JOHN ANTHONY WHALEN, JR.
President and Chief Executive Officer
4747 Morena Blvd., Suite 101
San Diego, CA 92117
(619) 490-1555
(Name, address and telephone number of agent for service, principal executive
offices and principal place of business)
Copies to:
DOUGLAS J. REIN, ESQ. ROBINSON MARKEL, ESQ.
GRAY CARY WARE & FREIDENRICH L.L.P. PIPER & MARBURY L.L.P.
4365 Executive Drive, Suite 1600 1251 Avenue of the Americas, 29th Floor
San Diego, CA 92121-2189 New York, NY 10020-1104
(619) 677-1400 (212) 835-6262
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
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If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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]
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.
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<PAGE> 2
PROSPECTUS SUBJECT TO COMPLETION, DATED JANUARY 8, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
C2I SOLUTIONS, INC.
1,000,000 SHARES OF COMMON STOCK
1,000,000 REDEEMABLE WARRANTS
The securities offered hereby by C2i Solutions, Inc. ("C2i" or the
"Company") consist of shares (the "Shares") of Common Stock, par value $.001 per
share (the "Common Stock") and Redeemable Warrants (the "Warrants"). The Shares
and the Warrants are transferable separately. Each Warrant entitles the holder
to purchase, at an exercise price of $ (125% of the initial Share offering
price) (subject to adjustment), one share of Common Stock. The Warrants are
exercisable during the four year period commencing one year from the date of
this Prospectus. The Warrants are subject to redemption commencing one year from
the date of this Prospectus by the Company for $.01 per Warrant, on not less
than 30 days' written notice, if the last sale price of the Common Stock is at
least 150% of the then current exercise price of the Warrants for 20 consecutive
business days ending on the third day prior to the date on which notice is
given.
Upon completion of this Offering, the officers and directors of the Company
will control approximately 62.4% of the total voting power and will therefore be
able to elect all of the Company's directors and to control the Company.
Prior to this Offering, there has been no public market for the Company's
securities. The initial public offering price of the Shares, which is estimated
to be between $5.25 and $6.00, and the Warrants, which is estimated to be $0.10,
and the exercise prices and other terms of the Warrants have been determined by
negotiation between the Company and Hobbs Melville Securities Corp., the
representative of the several Underwriters (the "Representative"), and are not
necessarily related to the Company's assets, book value, financial condition or
any other recognized criteria of value. The Company has made application to have
the Common Stock and the Warrants included on the Nasdaq SmallCap Market under
the symbols CTWO and CTWOW, respectively.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING 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 ANY SUCH
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Price Underwriting Proceeds
to Discounts and to
Public Commissions(1) Company(2)
------ -------------- ----------
<S> <C> <C> <C>
Per Share...................... $_____ $_____ $_____
Per Warrant.................... $_____ $_____ $_____
Total(3)....................... $_____ $_____ $_____
</TABLE>
(Notes appear on following page)
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The Shares and Warrants offered by this Prospectus are being offered by the
Underwriters on a firm commitment basis subject to prior sale, when, as and if
delivered to and accepted by the Underwriters and subject to the approval of
certain legal matters by its counsel and subject to certain other conditions. It
is expected that delivery of the Shares and Warrants will be made at the offices
of Hobbs Melville Securities Corp., New York, New York, on or about _____, 1998.
--------------------------
HOBBS MELVILLE SECURITIES CORP.
The date of this Prospectus is_______________, 1998
<PAGE> 3
(1) Does not reflect additional compensation to be received by the
Representative in the form of: (i) a non-accountable expense allowance equal
to 3% of the gross proceeds of the Offering; and (ii) warrants (the
"Representative Warrants") to purchase up to 100,000 Shares and 100,000
Warrants (collectively, the "Warrant Securities") issued to the
Representative in exchange for $100 and exercisable for a period of four
years commencing one year from the date of this Prospectus at
$______________ (135% of the initial public offering price per Share). The
Company has also agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of the Offering of $525,000 ($552,000
assuming exercise in full of the Underwriters' Over-Allotment Option)
payable by the Company, including the Representative's non-accountable
expense allowance.
(3) The Company has granted the Underwriters a 45-day option to purchase up to
150,000 additional Shares and 150,000 additional Warrants on the same terms
and conditions as set forth above solely to cover over-allotments, if any
(the "Over-Allotment Option"). If such option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to Company will be $_______, $_______ and $_______, respectively. See
"Underwriting."
The following diagram depicts the current service and product offerings of
C2i. Through September 30, 1997, these services and products had not generated
significant revenues for the Company. See "Risk Factors - Limited Operating
History; Limited Experience in Year 2000 Solutions."
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by its independent auditors. The C2i
logo and Tool Shed are trademarks of the Company. All other brand names or
trademarks appearing in this Prospectus are the property of their respective
holders.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AND THE WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. SEE
"UNDERWRITING."
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements appearing elsewhere in this Prospectus,
including information under "Risks Factors." The Securities offered hereby
involve a high degree of risk and investors should carefully consider the
information set forth in "Risk Factors." Unless otherwise indicated, all
information in this Prospectus (i) gives effect to the Company's conversion to a
Delaware corporation in September 1997 and (ii) assumes no exercise of (a) the
Underwriters' Over-Allotment Option, (b) the Representative Warrants, (c) the
Warrants (including Bridge Warrants) or (d) options granted pursuant to existing
stock option agreements or eligible for grant under the stock option plan the
Company anticipates adopting prior to the effective date of this Offering.
THE COMPANY
C2i is a provider of services to address the Year 2000 challenge and to
transition legacy applications effectively and efficiently. C2i employs proven
methodology, advanced tools and the expertise of dedicated professionals to
offer a wide variety of Year 2000 services. From assessment through
implementation and testing, C2i brings together the elements required for cost
effective implementation of solutions to the Year 2000 problem.
The "Year 2000 problem" arises from the widespread use of computer programs
that rely on two-digit date codes to perform computations and decision-making
functions. Many of these computer programs may fail from an inability to
interpret date codes properly. For example, such programs may misinterpret "00"
as the year 1900 rather than 2000. These "date-dependent" programs are found in
computer hardware, software and embedded systems used in many businesses.
The Company's experience in analyzing, and its strategy for resolving, the
Year 2000 problems of business organizations incorporates its access to a number
of tools and approaches, which enables the Company to develop customized
solutions to a client's specific problems. The Company is able to identify,
evaluate and select specific software approaches and tools that would be most
effective in assisting a client with the Year 2000 update process. In addition,
during this process the Company gains knowledge about many areas of the client's
computer environment, positioning it to provide a broad range of computer
consulting services characterized as "Data Re-Engineering," of which the Year
2000 problem is a subset.
The Year 2000 consulting industry consists of a large number and wide
variety of computer consulting and software companies that offer Year 2000
consulting as part of their services. These companies address those aspects of
the Year 2000 problem that cannot be resolved by in-house information services
personnel. The industry is expected to grow rapidly as business organizations
become aware of the Year 2000 problem and accelerate the pace at which they
analyze their computer systems.
The Company's strategy is to focus its resources on business organizations
that process large volumes of automated transactions involving date
computations, to expand both domestically and internationally, and to refine and
enhance its Year 2000 consulting methodology.
Additionally, the Company intends to use the knowledge and relationships
obtained through its Year 2000 consulting services to implement a long-term,
post-2000 strategy of providing a full line of computer consulting services to
current and future clients, based on tools including hardware, software and
consulting services, particularly replacing modified legacy computer software,
replacing closed hardware systems with open systems including client-server
platforms, and providing experienced consulting teams.
C2i was formed as a limited liability company in California in September
1996 under the name Challenge 2000 International, LLC, and it reorganized as a
Delaware corporation in September 1997 and changed its name to C2i Solutions,
Inc. The Company's principal executive offices are located at 4747 Morena Blvd.,
Suite 101, San Diego, CA 92117 and the telephone number is (619) 490-1555.
3
<PAGE> 5
THE OFFERING
Securities Offered.......... 1,000,000 shares of Common Stock and 1,000,000
Warrants. Each Warrant entitles the holder to
purchase, at an exercise price of $______ (125% of
the initial Share offering price) (subject to
adjustment), one share of Common Stock during the
four year period commencing one year after the date
of this Prospectus. The exercise price of the
Warrants is subject to adjustment and the Warrants
are subject to redemption in certain circumstances.
See "Description of Securities--Warrants."
Capital Stock Outstanding
Prior to this Offering.... 2,391,338 shares of Common Stock(1)
After this Offering....... 3,391,338 shares of Common Stock(2)
Warrants Outstanding:
Prior to this Offering.... 600,000(3)
After this Offering....... 1,600,000 (4)
Use of Proceeds............. Repayment of $600,000 Bridge Notes, plus accrued
interest of approximately $15,000, capital
expenditures estimated at $400,000 with the balance
being used for working capital and general
corporate purposes. See "Use of Proceeds."
Risk Factors................ This Offering involves a high degree of risk and
immediate substantial dilution and should not be
made by investors who cannot afford the loss of
their entire investment. See "Risk Factors" and
"Dilution."
Proposed Nasdaq Symbols(5):
Common Stock............. CTWO
Warrants................. CTWOW
(1) Does not include (i) 82,500 shares of Common Stock reserved for issuance
under the Company's proposed 1997 Stock Option Plan; (ii) 625,000 shares of
Common Stock reserved for issuance on exercise of options issued to
employees, directors and consultants of the Company; and (iii) 600,000
shares of Common Stock issuable upon exercise of the warrants issued in
connection with the Company's Bridge Financing. See "Capitalization-Bridge
Financing," "Management-Stock Plans," "Description of Securities" and
"Underwriting."
(2) Represents the shares of Common Stock included in the securities offered
hereby and currently outstanding Common Stock, and does not include: (i)
200,000 shares of Common Stock issuable upon exercise of the Representative
Warrants and the underlying Warrant Securities; (ii) 82,500 shares of
Common Stock reserved for issuance under the Company's proposed 1997 Stock
Option Plan; (iii) 625,000 shares of Common Stock reserved for issuance
upon exercise of options issued to employees, directors and consultants of
the Company, and (iv) 600,000 shares of Common Stock issuable upon exercise
of the warrants issued in connection with the Company's Bridge Financing.
See "Capitalization-Bridge Financing," "Management-Stock Plans,"
"Description of Securities" and "Underwriting."
(3) Represents 600,000 warrants issued in connection with the Company's Bridge
Financing. See "Capitalization-Bridge Financing".
(4) Does not include 100,000 Warrants included in the Warrant Securities.
(5) Notwithstanding initial quotation on Nasdaq, there can be no assurance that
an active trading market for the Company's securities will develop or, if
developed, that it will be sustained.
4
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SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
Period from September 17,
1996 (inception) to Nine Months Ended
December 31, September 30,
1996 1997
---------------------- -----------------
<S> <C> <C>
STATEMENTS OF
OPERATIONS DATA:
Revenues ................... $ 9,798 $ 79,283
Gross profit ............... 3,498 32,389
Operating loss ............. (44,338) (1,433,294)
Net loss ................... (44,338) (1,434,894)
Pro forma net loss per share $ (0.02) $ (0.50)
Shares used in computing pro
forma net loss per share(6). 2,874,255 2,874,255
September 30, 1997
------------------
BALANCE SHEET DATA: As
Actual Adjusted(7)
------ -----------
Cash.................................. $ 65,863 $ 4,899,043
Working capital....................... (40,471) 4,807,709
Total assets.......................... 242,638 5,075,818
Total liabilities..................... 151,254 136,254
Total stockholders' equity............ 91,384 4,939,564
</TABLE>
- ----------
(6) Gives effect to the issuance of Common Stock and Common Stock equivalents
at prices below the offering price per share during the twelve months
preceding the initial filing of the Company's Registration Statement and
through the effective date of the initial public offering, using the
treasury stock method, as if outstanding since the beginning of each period
presented. See Note 1 to Financial Statements.
(7) As adjusted to reflect the net proceeds from the sale of 1,000,000 Shares
and 1,000,000 Warrants offered hereby at an assumed initial public offering
price of $5.90 per Share and $0.10 per Warrant, after deducting estimated
underwriting discounts and commissions and estimated offering expenses, and
the application of a portion of the net proceeds therefrom to repay the
Bridge Notes and interest accrued thereon.
5
<PAGE> 7
RISK FACTORS
An investment in the securities offered hereby involves a high degree of
risk. In addition to the other information in this Prospectus, the following
risk factors should be considered carefully in evaluating the Company and its
business before purchasing the securities offered by this Prospectus. Except for
the historical information contained herein, the information in this Prospectus
contains certain forward-looking statements that involve risks and
uncertainties, such as with respect to the Company's plans, objectives,
expectations, intentions and strategies. The actual results could differ
materially from those discussed herein. The factors that could affect such
results or contribute to such differences include the following items as well as
other information discussed elsewhere in this Prospectus.
LIMITED OPERATING HISTORY; LIMITED EXPERIENCE IN YEAR 2000 SOLUTIONS
The Company was founded in September 1996, has a very limited operating
history and is in the development stage. As a result, the Company's operations
to date have not produced significant revenues, and there can be no assurance
that the Company will generate any future revenues from the sale of its services
or products.
The Company has limited experience in providing Year 2000 solutions.
Although the Company is in the process of completing its initial assessment
projects, the Company has not completed a large scale Year 2000 conversion
project. There can be no assurance that the Company will be successful in
completing large scale conversions, that the Company will not experience delays
or failures in providing its Year 2000 solutions or that the Year 2000 solutions
will be effective. The failure of the Company's Year 2000 solutions to function
properly or the existence of errors or bugs following completion of a Year 2000
conversion project could necessitate significant expenditures by the Company in
order to attempt to remedy the problems. The consequences of failures, errors
and bugs could have a material adverse effect on the Company's business,
operating results and financial condition.
HISTORY OF OPERATING LOSSES; NEED FOR ADDITIONAL FINANCING; GOING CONCERN
OPINION
The Company has experienced significant operating losses since its
inception in September 1996. As of September 30, 1997, the Company's accumulated
deficit was approximately $1,479,000, which includes a non-recurring non-cash
charge of approximately $1.2 million, as a result of sales of equity securities
to key employees at less than deemed value for financial statement purposes.
Losses have been principally the result of the various costs associated with the
Company's selling, general and administrative expenses as the Company commenced
operations, acquired its technology rights and began marketing activities. The
Company expects that it will incur operating losses over at least the next year.
The Company believes that the net proceeds from this Offering, together with its
existing capital resources, will enable it to fund its operations for 12 to 18
months following completion of the Offering. The Company will be required to
seek additional capital to continue its operations beyond that time. If
available, the additional capital may result in dilution to the purchasers of
the Shares and Warrants and underlying securities offered hereby. The Company
has no commitments for any future funding, and there can be no assurance that
the Company will be able to obtain additional capital in the future. If the
Company is unable to obtain the necessary capital, it will be required to
significantly curtail its activities or cease operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The report of the Company's independent auditors includes an explanatory
paragraph that describes the substantial doubt as to the ability of the Company
to continue as a going concern. The Company's proposed operations are subject to
numerous risks associated with establishing any new business, including
unforseeable expenses, delays and complications, as well as specific risks of
the computer consulting services industry. There can be no assurance that the
Company will achieve profitable operations. See the "Financial Statements and
Notes" thereto.
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INTENSE INDUSTRY COMPETITION; COMPETITIVE DISADVANTAGES
The market for Year 2000 solutions is highly competitive and is expected
to become increasingly competitive as the year 2000 approaches. The Company's
lack of resources and proven results makes it extremely vulnerable to
competition from larger companies, all of which benefit from greater
recognition, larger lists of reference clients and significantly greater
financial, technical and marketing resources. Leading competitors have proven
products which can provide them with a significant advantage over the Company
because the Company's services have not been widely deployed and therefore
present potential customers with uncertainty not associated with existing
solutions from larger companies. In addition, many of the Company's potential
clients are reluctant to choose small companies as key suppliers or service
providers due to concerns about long term viability and, especially with respect
to Year 2000 conversion projects, the consequences to the organization of a
failure of a proposed solution. There can be no assurance that the Company will
overcome these disadvantages.
There can be no assurance that competitors will not develop new products
or services or improve their existing products or services which, when combined
with their existing market presence, would make the Company's solutions obsolete
or unmarketable. Any such development would have a material adverse effect on
the Company. The Company also expects that competition will arise from new
competitors and from new technological approaches adopted by new and existing
competitors. Competitive technologies may be developed which could make the
Company's services obsolete or of diminished utility, thereby materially
adversely affecting the Company. If the Company is unable to respond to the
challenges of competition, there can be no assurance that the Company would be
able to achieve or maintain profitability at a level required to support its
survival or growth. See "Business -- Competition."
UNCERTAIN AND UNDEVELOPED MARKET
The primary focus of the Company's services is resolving the Year 2000
problem. Although the Company believes that the demand for Year 2000 consulting
services will grow significantly as the year 2000 approaches, there can be no
assurance that this demand will increase to the extent anticipated by the
Company, if at all. Although the public and the business community appear to be
gaining awareness of the scope of the Year 2000 problem, companies may not be
willing or able to allocate the resources to address this problem in a timely
manner. Many companies may attempt to resolve the problem internally rather than
contract with firms such as the Company. As a result, demand for the Company's
Year 2000 solutions is uncertain and unpredictable. If the demand for the
Company's Year 2000 solutions fails to grow, or grows more slowly than
anticipated, the Company's business, operating results and financial condition
could be materially adversely affected.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; CHARGE TO EARNINGS
At least initially, the Company expects to derive a substantial portion
of its revenues from a relatively small number of contracts. As a result, a
small delay during a quarter in the achievement of milestones triggering payment
to the Company could have a material adverse effect on the Company's revenues
and results of operations for that quarter. In addition, the Company's need to
expand its facilities and the need for continued investment by the Company in
research, development, marketing, customer service and support capabilities will
limit the Company's ability to reduce expenses in response to any such decrease
in sales. Moreover, because customer purchase orders are subject to cancellation
or rescheduling by the customer, backlog at any particular date is not
necessarily representative of actual sales for any succeeding period. If the
Company's anticipated level of revenues is not achieved for a particular period,
the Company's operating results could be adversely affected by its inability to
reduce costs. The impact of these and other factors on the Company's operating
results in any future period cannot be accurately forecast. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Upon completion of the Offering and repayment of the Bridge Notes, an
extraordinary charge representing the combined debt discount and deferred
finance charge of approximately $135,000 will be charged to operations in the
quarter in which the Offering will be completed, anticipated to be the first
quarter of 1998. This will result
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<PAGE> 9
in a significant decrease in earnings which the Company might have otherwise
achieved in this period. See "Capitalization--Bridge Financing."
COMPLEX SALES CYCLE
Sales of the Company's Year 2000 solutions are characterized by a
relatively complex sales cycle due to such factors as the magnitude of the
expenses associated with implementation of a comprehensive solution at most
organizations, the substantial time required by potential customers to evaluate
the Company's solutions and those of competitors, and the potential consequences
to the organization of a wrong decision, all of which suggest that the decision
will ultimately be made at a level in an organization that is relatively higher
than would otherwise be involved in information system matters. As a result, the
Company will likely be required to devote additional sales and marketing efforts
to concluding sales decisions.
NEED TO DEVELOP NEW PRODUCTS AND SERVICES
The Company currently generates substantially all of its revenues from,
and devotes most of its resources to, its Year 2000 solutions. Although the
Company believes that the demand for its Year 2000 solutions will continue to
exist for a limited period of time after the Year 2000, this demand will
diminish significantly over time and will eventually disappear. Therefore, the
Company plans to actively pursue business opportunities unrelated to the Year
2000 problem in the computer software and consulting market, and to develop
products and services to take advantage of those opportunities. The Company
believes that its future success will depend upon its ability to develop and
enhance its relationships with customers so that it will continue to be called
upon to assist in data conversion projects following the year 2000. To the
extent product offerings and services provided by the Company are based upon
anticipated changes, sales of such products and services may be adversely
affected if other technologies become accepted in the industry. If the Company
does not successfully introduce new products or services in a timely manner, any
competitive position the Company may develop would be lost and the Company's
sales, would be reduced. There can be no assurance that the Company will be able
to develop and introduce enhanced or new products or services which satisfy
customer needs and achieve market acceptance. The Company intends to use a
portion of the proceeds of the Offering to finance its own research and
development activities. The failure of the Company to implement a successful
research and development program would have a material adverse effect upon its
business and prospects.
DEPENDENCE ON LICENSES AND THIRD PARTY TECHNOLOGY
Substantially all of the tools that the Company uses to provide its Year
2000 solutions are licensed from third parties. The Company's proprietary
software, as well as licensed software, is designed to work on or in conjunction
with certain third party hardware and/or software products. If any of these
licensors or third party vendors were to discontinue making their products
available to the Company, or to increase materially the cost to the Company to
acquire, license or purchase the products, or if a material problem were to
arise in connection with the ability of the Company to use and operate with
third party hardware and/or software products, the Company would be required to
redesign its solutions to function with or on alternative third party products
or attempt to develop internally a replacement for the third party products. In
such an event, interruptions in the availability or functioning in the Company's
Year 2000 solutions and delays in the introduction of new products and services
may occur until equivalent technology is obtained. There can be no assurance
that alternative sources of suitable technology would be available or that the
Company would be able to develop an alternative product in sufficient time or at
a reasonable cost. The failure of the Company to obtain or develop alternative
technologies or products on a timely basis and at a reasonable cost could have a
material adverse effect on the Company's business, financial condition and
results of operations.
CUSTOMER AND SUPPLIER CONCENTRATION; UNCERTAINTY OF FOLLOW-ON BUSINESS
A large portion of the Company's revenues have been dependent on a few
customer projects. The Company derived approximately 91% of its revenues for the
nine months ended September 30, 1997 from three customers and 100% of its
revenues for the period ended December 31, 1996 from one customer.
Correspondingly,
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<PAGE> 10
as of September 30, 1997, 100% of the Company's accounts receivable balance
related to two customers and as of December 31, 1996, 100% of the Company's
accounts receivable balance related to one customer. In addition, the Company
has experienced a supplier concentration, with 99% of its total cost of revenues
for the nine months ended September 30, 1997 resulting from purchases from three
suppliers, and 100% of its total cost of revenues for the period ended December
31, 1996 resulting from purchases from one supplier. The Company expects that as
it continues to develop, it will continue to derive a majority of its revenues
from a small number of customers and to incur the majority of its cost of
revenues with a small number of suppliers. Therefore, a loss of any significant
customer or supplier could have a material adverse effect on the Company's
business, financial condition or results of operations. See "Financial
Statements and Notes" thereto.
At the conclusion of a project by the Company, that customer may not
have an immediate need for follow-on services or additional projects on the same
scale. The Company does not enter into long term or volume service contracts
with its customers, and customers may discontinue further purchases of the
Company's services at any time. There can be no assurance that any of the
Company's customers will require the Company's services or products in the
future, or if they do, that they will engage the Company to perform such
services or provide such products. The failure of any of the Company's
significant customers to meet their obligations to the Company would have a
material adverse effect on its business, financial condition and results of
operations. To maintain or increase existing levels of revenues, the Company
must identify and book projects with other companies in its existing base of
customers or with new customers. There can be no assurance that any of the
Company's current customers will engage the Company for projects in the future
or that the Company will be able to obtain additional new customers.
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company relies on trade secret and copyright protection for its
products and technology. The Company believes that its licensors use similar
means of protecting their technologies.
In the absence of significant proprietary protection, competitors may be
able to copy the Company's technology or design approaches, replicate its
processes or gain access to its trade secrets. Moreover, there can be no
assurance that competitors will not be able to develop technologies similar to
or more advanced than the Company's or design around any protected aspects of
the Company's technology rights. No assurance can be given that the Company's
current or future products or services will not infringe on the rights of
others.
There has been substantial litigation regarding intellectual property
rights in computer software related industries. In the future, litigation may be
necessary to enforce technological rights of the Company, to protect trade
secrets or know-how owned or licensed by the Company or to defend the Company
against claimed infringement of the rights of others and to determine the scope
and validity of the proprietary rights of others. Any such litigation would
likely result in substantial cost and diversion of effort by the Company, which
by itself could have a material adverse effect on the Company's business,
financial condition and operating results. Further, adverse determinations in
such litigation could result in the Company's loss of proprietary rights,
subject the Company to significant liabilities to third parties, require the
Company to seek licenses from third parties or prevent the Company from
providing its services, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
See "Business -- Intellectual Property Rights."
The Company also relies on trade secrets and proprietary technology that
it seeks to protect, in part, through confidentiality agreements with employees,
consultants and other parties. There can be no assurance that these agreements
will not be breached, that the Company will have adequate remedies for any
breach, or that the Company's trade secrets will not otherwise become known to
or independently developed by others.
DEPENDENCE ON KEY PERSONNEL; MANAGEMENT OF EXPANDING OPERATIONS
The Company's success will, to a large extent, depend upon the continued
services of its executive officers who have limited experience at managing a
business like the Company's. Two of the Company's four executive officers have
only been with the Company since June 1997 and one of the Company's executive
officers has only
9
<PAGE> 11
been with the Company since September 1997. The loss of services of any of these
executive officers would materially and adversely affect the Company. The
Company's employment agreements with its key personnel may be terminated by
either party, with or without cause, with the exception of Mr. Whalen's. Mr.
Whalen's employment agreement has a term of five years, expiring in May 2002,
and limits the Company's ability to terminate him, except for cause, and
provides for six months severance pay, unless Mr. Whalen voluntarily resigns his
position. The Company is in the process of securing key man life insurance in
the amount of $1,000,000 on Mr. Whalen.
The Company's plans to expand its business are expected to place a
significant strain on the Company's management, operational and financial
resources and systems. To manage its expanding operations, the Company must,
among other things, improve its operational, financial and management
information systems, including its billing, accounts receivable and payable
tracking, fixed assets and other financial management systems. The Company must
also attract, retain and train additional highly qualified management,
technical, sales and marketing and customer support personnel. The process of
locating such personnel with the combination of skills and attributes required
to implement the Company's strategy is often lengthy. The loss of the services
of key personnel, or the inability to attract and train additional qualified
personnel, could have a material adverse effect upon the Company's business and
results of operations.
RISKS ASSOCIATED WITH POTENTIAL UNSPECIFIED ACQUISITIONS
The Company plans to acquire assets or businesses complimentary to its
operations, although no specific acquisitions are currently in negotiation or
planned. Any such future acquisitions would be accompanied by the risks commonly
encountered in acquisitions of companies. Such risks include, among other
things, the difficulty of assimilating the operations and personnel of the
acquired companies, the potential disruption of the Company's business, the
inability of the Company's management to maximize the financial and strategic
position of the Company by the incorporation of acquired technology or business
into the Company's service offerings, the difficulty of maintaining uniform
standards, controls, procedures and policies, the potential loss of key
employees of acquired companies, and the impairment of relationships with
employees and customers as a result of changes in management. No assurance can
be given that the Company will undertake acquisition activities, will complete
any acquisitions, or that if an acquisition does occur it will not materially
and adversely effect the Company or will be successful in enhancing the
Company's business. If the Company proceeds with one or more significant
acquisitions, a substantial portion of the Company's available cash, including
proceeds of this Offering, could be used to consummate those transactions.
Alternatively, stockholders of the Company could suffer significant dilution of
their ownership interest in the Company. The accounting for business
acquisitions of the type of businesses that would likely be attractive
acquisition candidates for the Company is likely to involve the recognition of
significant goodwill and intangible assets in connection with the acquisition
and, as a result, would typically result in substantial amortization of the
charges against the Company's reported financial results.
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
A key component of the Company's strategy is its planned expansion into
international markets. The Company has no previous experience in working with
international customers and there can be no assurance that the Company will be
able to successfully market, sell and deliver its products and services in these
markets. In addition to the uncertainty as to the Company's ability to create an
international presence, there are risks inherent in doing business on an
international level, such as unexpected changes and regulatory requirements,
export restrictions, export controls, tariffs and other trade barriers,
difficulties in staffing and managing foreign operations, longer payment cycles,
problems in collecting accounts receivable, political instability, fluctuations
in currency exchange rates, and potential adverse tax consequences that could
adversely effect the Company's international operations, any one of which could
have a material adverse effect on the Company's business, financial conditions
and results of operations.
10
<PAGE> 12
POTENTIAL LIABILITIES ASSOCIATED WITH YEAR 2000 SERVICES
The Company's Year 2000 solutions involve key aspects of its client's
computer systems. A failure in a client's system could result in a claim for
substantial damages against the Company, regardless of the Company's
responsibility for such failure. The Company attempts to limit by contract, both
with its customers and with the parties that license technology to the Company,
its liability for damages arising in rendering its products and services.
Despite this precaution, there can be no assurance that the limitations of
liabilities set forth in its contracts would be enforceable or would otherwise
protect the Company from liability for damages. There can be no assurance that
the Company will be able to obtain or maintain insurance coverage for such
liabilities, that such coverage will continue to be available on acceptable
terms, or that such coverage will be available in amounts to cover one or more
large claims. The assertion of claims against the Company that exceed available
insurance coverage, or changes in the Company's insurance policies, including
premium increases or the imposition of large deductible or co-insurance
requirements, could have a material adverse effect on the Company's business,
financial condition and results of operation. Furthermore, litigation,
regardless of its outcome, could result in substantial cost to the Company and
divert management's attention from the Company's operations. Any contract
liability claim or litigation against the Company could, therefore, have a
material adverse effect on the Company's business, financial condition or
results of operations.
BROAD DISCRETION AS TO USE OF PROCEEDS
With the exception of approximately $615,000 for repayment of the Bridge
Notes including interest accrued thereon, the net proceeds to the Company from
this Offering will be used, as determined by management in its sole discretion,
for sales and marketing activities, facilities and capital expenditures,
personnel related costs, working capital and general corporate purposes, as well
as for the possible acquisition of or investment in complimentary businesses and
technologies. Investors in this Offering will rely upon the judgment of the
Company's management with respect to the use of proceeds, with only limited
information concerning management's specific intentions. See "Use of Proceeds."
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price of the Shares is substantially higher
than the tangible book value per share of Common Stock. Investors purchasing
Shares in this Offering will therefore incur immediate, substantial dilution of
$4.57 per share, or 77% of the estimated initial public offering price. To the
extent that the Warrants, the Representative Warrants, or outstanding stock
options are exercised, there will be further dilution. See "Dilution."
LIMITATION OF LIABILITY
Due to the limitations on the liability of officers and directors
contained in the Company's charter documents and agreements between the
Company's officers and directors and the Company, stockholders may have limited
or no monetary recourse against such officers and directors for their negligent
actions. See "Management -- Limitation of Liability and Indemnification."
CONCENTRATION OF SHARE OWNERSHIP AND VOTING POWER
Following the Offering, the directors and officers of the Company will
control approximately 62% of the voting power and will be able to elect all of
the Company's directors and, hence, will be able to control the affairs of the
Company. In addition, the directors and officers of the Company will, subject to
certain limitations imposed by applicable law, be able to, among other things,
amend the Company's Certificate of Incorporation and By-laws and effect or
preclude fundamental corporate transactions involving the Company, including the
acceptance or rejection of any proposals relating to a merger of the Company or
an acquisition of the Company by another entity,
11
<PAGE> 13
in each case without the approval of any of the Company's other stockholders.
See "Principal Stockholders" and "Description of Securities."
POTENTIAL ADVERSE EFFECT OF AUTHORIZED BUT UNISSUED PREFERRED STOCK ON HOLDERS
OF COMMON STOCK; ANTI-TAKEOVER EFFECTS
The Board of Directors has authority to issue up to 1,000,000 shares of
Preferred Stock and to fix the rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. The rights of the holders of the Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire a majority of the outstanding voting stock of the
Company, thereby delaying, deferring or preventing a change in control of the
Company. Furthermore, such Preferred Stock may have other rights, including
economic rights senior to the Common Stock, and, as a result, the issuance
thereof could have a material adverse effect on the market value of the Common
Stock. The Company has no present plans to issue shares of Preferred Stock. See
"Description of Securities."
NO PRIOR TRADING MARKET; POTENTIAL PRICE VOLATILITY
Prior to the Offering there has been no public market for the Shares,
the Warrants or any of the underlying securities, and there can be no assurance
that an active market will develop or be sustained. The initial public offering
prices of the Shares and Warrants and the terms of the Warrants have been
negotiated between the Company and the Underwriters and are not related to the
Company's asset value, net worth or results of operations, and may not be
indicative of future market prices. See "Underwriting" for information related
to the method of determining the initial public offering prices.
The Company believes factors such as quarterly fluctuations in results
of operations, announcements of new orders by the Company and changes in either
earnings estimates of the Company or investment recommendations by stock market
analysts may cause the market price of the Shares, the Warrants and the
underlying securities to fluctuate, perhaps substantially. In addition, in
recent years the stock market in general, and the shares of technology companies
in particular, have experienced extreme price fluctuations which are likely to
continue. These broad market and industry fluctuations may adversely affect the
market price of the Shares, the Warrants and the underlying securities.
POSSIBLE DELISTING FROM NASDAQ SMALLCAP MARKET AND MARKET ILLIQUIDITY
While the Company's Common Stock and Warrants are expected to meet the
current Nasdaq SmallCap Market initial listing requirements, there can be no
assurance that such securities will meet the continued listing requirements.
Under criteria that will come into effect in early 1998 for continued inclusion
on the Nasdaq SmallCap Market, (i) the Company will have to maintain at least
$2,000,000 in net tangible assets or $35,000,000 market capitalization or
achieve net income of $500,000 for two of the last three years, (ii) the minimum
bid price of the Common Stock will have to be $1.00 per share, (iii) there must
be at least 500,000 shares in the public float valued at $1,000,000 or more,
(iv) the Common Stock must have at least two active market makers, and (v) the
Common Stock must be held by at least 300 holders.
If the Company is unable to satisfy the Nasdaq SmallCap Market's
maintenance requirements, its securities may be delisted from the Nasdaq
SmallCap Market. In such event, trading, if any, in the Common Stock and
Warrants would thereafter be conducted in the over-the-counter market in the
so-called "pink sheets" or the NASD's "Electronic Bulletin Board." Consequently,
the liquidity of the Company's securities could be impaired, not only in the
number of securities which could be bought and sold, but also through delays in
the timing of transactions, reduction in security analysts' and the news media's
coverage of the Company, and lower prices for the Company's securities than
might otherwise be attained.
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<PAGE> 14
The Shares, the Warrants and the underlying securities have not been
qualified or registered in all states and will not be eligible for trading
unless an exemption from the qualification or registration requirements is
available. There can be no assurance that any such exemption will become
available in any jurisdiction.
POSSIBLE RESTRICTIONS ON MARKET MAKING ACTIVITIES IN THE COMPANY'S SECURITIES
The Representative has advised the Company that the Representative
intends to make a market in the Company's securities. Regulation M of the
Securities and Exchange Commission (the "Commission") under the Securities
Exchange Act of 1934, as amended (the "1934 Act") may prohibit the
Representative from engaging in any market making activities with regard to the
Company's securities for the period from five business days (or such other
applicable period as Regulation M may provide) prior to any solicitation by the
Representative of the exercise of Warrants until the later of the termination of
such solicitation activity or the termination (by waiver or otherwise) of any
right that the Representative may have to receive a fee for the exercise of
Warrants following such solicitation. As a result, the Representative may be
unable to provide a market for the Company's securities during certain periods
while the Warrants are exercisable. Any temporary cessation of such
market-making activities could have an adverse effect on the market price of the
Company's securities.
RISK OF PENNY STOCK
The Commission has adopted regulations which define a "penny stock" to
be any equity security that has a market price (as therein defined) less than
$5.00 per share or with an exercise price of less than $5.00 per share, subject
to certain exceptions. For any transaction involving a penny stock, unless
exempt, the rules require delivery, prior to any transaction in a penny stock,
of a disclosure schedule prepared by the Commission relating to the penny stock
market. Disclosure is also required to be made about current quotations for the
securities and about commissions payable to both the broker-dealer and the
registered representative. Finally, broker-dealers must send monthly statements
to purchasers of penny stocks disclosing recent price information for the penny
stock held in the account and information on the limited market in penny stocks.
The foregoing penny stock restrictions will not apply to the Company's
securities if (i) they are listed on the Nasdaq SmallCap Market, (ii) certain
price and volume information is publicly available on a current and continuing
basis, and (iii) the Company meets certain minimum net tangible assets or
average revenue criteria. There can be no assurance that the Company's
securities will qualify for exemption from the penny stock restrictions. If the
Company's securities were subject to the rules on penny stocks, the market
liquidity for the Company's securities could be severely adversely affected.
LIMITED OFFERING EXPERIENCE OF UNDERWRITER
The Representative has been in business since May 1996. Prior to this
Offering, the Representative has only co-managed one other offering of
securities and has acted as an underwriter in several other offerings. There can
be no assurance that the Representative's limited offering experience and small
size relative to other broker-dealers will not adversely affect this Offering or
the subsequent development, if any, of a trading market for the Common Stock and
Warrants. See "Underwriting."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS
During the four-year period commencing one year from the date of this
Prospectus, the Warrants may be redeemed by the Company, with the
Representative's prior written consent, at a redemption price of $.01 per
Warrant upon not less than 30 days' notice if the closing bid price of the
Common Stock is at least 150% of the then current exercise price of the Warrants
for 20 consecutive trading days ending on the third day prior to the Notice of
Redemption. Redemption of the Warrants could force the holders to exercise the
Warrants and pay the exercise price therefor at a time when it may be
disadvantageous for the holders to do so, to sell the Warrants at the then
current market price (which will likely be adversely affected by the impending
redemption of the Warrants) when they might otherwise wish to hold the Warrants,
or to accept the redemption price, which, at the time the
13
<PAGE> 15
Warrants are called for redemption, is likely to be substantially less than the
market value of the Warrants. See "Description of Securities -- Warrants."
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS
Holders of Warrants will only be able to exercise the Warrants if (i) a
current prospectus under the Securities Act of 1933, as amended (the "Securities
Act") relating to the securities underlying the Warrants is then in effect and
(ii) such securities are qualified for sale or exempt from qualification under
the applicable securities laws of the states in which the various holders of
Warrants reside. Although the Company has undertaken to use its best efforts to
maintain the effectiveness of a current prospectus covering the securities
underlying the Warrants, there can be no assurance that the Company will be able
to do so. There also can be no assurance that exemptions from the registration
or qualification requirements of those states in which the Company's securities
are not currently registered or qualified will be available at the time a
Warrant holder wishes to exercise his or her Warrant. The value of the Warrants
may be greatly reduced if a current prospectus, covering the securities issuable
upon the exercise of the Warrants, is not kept effective or if such securities
are not qualified, or exempt from qualification, in the states in which the
holders of Warrants reside. See "Description of Securities -- Warrants."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Immediately following this Offering, there will be an aggregate of
3,391,338 shares of Common Stock outstanding. Of these shares, the 1,000,000
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"), unless such shares are held by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act
("Affiliates"). The remaining 2,391,338 shares, and any shares issued upon
exercise of the Bridge Warrants or stock options, were or will be sold by the
Company in reliance on exemptions from the registration requirements of the
Securities Act and are or will be "restricted" securities within the meaning of
Rule 144 under the Securities Act (the "Restricted Shares"). Restricted Shares
may be sold in the public market only if registered or if they qualify for an
exemption from registration under Rule 144 or 701 promulgated under the
Securities Act.
Holders of the Warrants will be entitled to purchase an aggregate of
1,000,000 additional shares of Common Stock upon exercise of the Warrants at any
time during the four year period commencing one year from the date of this
Prospectus, provided that the Company satisfies certain securities registration
and qualification requirements with respect to the securities underlying the
Warrants. Any and all shares of Common Stock purchased upon exercise of the
Warrants will be freely tradable, provided such registration requirements are
met.
The holders of the Representative Warrants have been granted
registration rights with respect to all shares purchased upon exercise of the
Representative Warrants and the underlying securities. The sale, or availability
for sale, of substantial amounts of Common Stock in the public market subsequent
to this Offering could adversely affect the prevailing market price of the
Common Stock and could impair the Company's ability to raise additional capital
through the sale of its equity securities. See "Shares Eligible for Future Sale"
and "Underwriting."
NO DIVIDENDS ANTICIPATED
The Company has never paid any cash dividends on its Common Stock. The
Company anticipates that in the future, earnings, if any, will be retained for
use in the business or for other corporate purposes, and it is not anticipated
that cash dividends in respect of the Common Stock will be paid. See "Dividend
Policy."
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<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 Shares
and 1,000,000 Warrants offered by the Company hereby are estimated to be
approximately $4,875,000 ($5,658,000 if the Underwriters' over-allotment option
is exercised in full) at an assumed public offering price of $5.90 per Share and
$0.10 per Warrant and after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company. The Company expects that net
proceeds will be utilized as follows:
<TABLE>
<CAPTION>
Approximate Amount Percentage of
Application of Net Proceeds Net Proceeds
----------- ------------------ ------------
<S> <C> <C>
Sales and Marketing
Compensation and related expenses...................... $ 900,000
Advertising, promotion and business development........ $ 293,000
----------
$1,193,000 24%
----------
Facilities and Capital Outlay
Facility expansion/relocation.......................... $ 600,000
Equipment.............................................. $ 400,000
----------
$1,000,000 20%
----------
Hiring Personnel (advertising, recruiting, training
and other associated costs) ................................ $1,217,000 25%
Repayment of Bridge Notes and Interest (1)................. $ 615,000 13%
Officers' Salaries......................................... $ 480,000 10%
Working Capital............................................ $ 370,000 8%
---------- ---
Total .................................................. $4,875,000 100%
========== ===
</TABLE>
- ----------
(1) Includes accrued interest. The Bridge Financing was completed in October
1997, with the proceeds used to finance operations and provide working
capital to the Company.
The foregoing represents the Company's best estimate of its allocation
of the net proceeds of the Offering. This estimate is based upon certain
assumptions, including that no events occur which would cause the Company to
abandon any particular efforts, that competitive conditions remain stable, that
the Company's product and service activities will occur as projected and that
revenue levels and headcount do not differ materially from management's
expectations. The amounts actually expended for each purpose may vary
significantly in the event any of these assumptions prove inaccurate. The
Company reserves the right to change its use of proceeds, as unanticipated
events may cause the Company to redirect its priorities and reallocate the
proceeds accordingly.
A portion of the proceeds may also be used to acquire or invest in
complementary businesses or products or to obtain the right to use complementary
technologies. While from time to time the Company may evaluate potential
acquisitions of such businesses, products or technologies, there are no present
understandings, commitments or agreements with respect to any acquisition of
other businesses, products or technologies.
Any additional proceeds received upon exercise of the Over-Allotment
Option, the Representative Warrants or the Warrants will be added to working
capital. Pending utilization, the net proceeds of the Offering will be invested
in short-term, interest-bearing investments.
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock. It is
the present policy of the Company to retain earnings to finance the growth and
development of the business and, therefore, the Company does not anticipate
paying cash dividends on its Common Stock in the foreseeable future.
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<PAGE> 17
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) at
September 30, 1997, (ii) on a pro forma basis to reflect the completion of the
Bridge Financing, and (iii) as adjusted to reflect the sale of the 1,000,000
Shares and 1,000,000 Warrants offered hereby at an assumed public offering price
of $5.90 per Share and $0.10 per Warrant, the application of a portion of the
estimated net proceeds therefrom to repay Bridge Notes and accrued interest, and
an extraordinary charge to operations of approximately $135,000 in connection
with the Bridge Notes, after deducting the underwriting discounts and
commissions and estimated offering expenses payable by the Company.
<TABLE>
<CAPTION>
September 30, 1997
-----------------------------------------------
Actual Pro Forma As Adjusted
<S> <C> <C> <C>
Bridge Notes payable (1).............................. $ -- $ 492,000 $ --
----------- ----------- -----------
Stockholders' Equity:
Preferred Stock - par value $.001; 1,000,000 shares
authorized; no shares issued and outstanding,
actual, pro forma and as adjusted ................. -- -- --
Common Stock - par value $.001; 10,000,000 shares
authorized; 2,391,338 shares issued and
outstanding, actual and pro forma; 3,391,338
shares issued and outstanding as adjusted (2) ..... 2,391 2,391 3,391
Additional paid-in capital ........................ 1,697,391 1,697,391 6,471,391
Warrants to acquire Common Stock .................. -- 108,000 208,000
Accumulated deficit ............................... (1,479,232) (1,479,232) (1,614,052)
Deferred compensation ............................. (129,166) (129,166) (129,166)
----------- ----------- -----------
Total stockholders' equity .................... 91,384 199,384 4,939,564
----------- ----------- -----------
Total capitalization ........................ $ 91,384 $ 691,384 $ 4,939,564
=========== =========== ===========
</TABLE>
- ----------
(1) The Bridge Notes were issued in October 1997 and are payable on the earlier
of September 30, 1999 or the completion of the Offering. See Note 4 of the
Notes to Financial Statements.
(2) Does not include 2,425,000 shares issuable upon exercise of outstanding
warrants and options, or 82,500 shares reserved for future stock option
grants.
BRIDGE FINANCING
In October 1997, the Company completed the Bridge Financing in which it
sold, to 36 accredited investors, an aggregate of $600,000 principal amount of
Bridge Notes and 600,000 Bridge Warrants and received net proceeds of
approximately $573,000 (after expenses of such offering). The Bridge Warrants
entitle the holders thereof to purchase, during the one-year period beginning
one year after completion of this Offering, one share of Common Stock at a
purchase price of the lower of (i) $4.00 per share or (ii) 2/3 of the offering
price to the public of a Share and a Warrant. The only executive officer of the
Company to participate in the Bridge Financing was Frank Vukmanic, the Company's
Senior Vice President, Sales and Marketing.
For financial statement purposes, the Bridge Financing has been
allocated $108,000 to warrants, $492,000 to Bridge Notes payable and $27,000 to
deferred finance charges. The Bridge Notes are payable, together with interest
at the rate of 10% per annum, on the earlier of September 30, 1999 or the
closing of the Offering. The resulting $135,000 of combined debt discount and
deferred finance charges will be charged to expense using the interest method
over the term of the Bridge Notes or as an extraordinary item upon the
retirement of the Bridge Notes, currently expected to occur in the first quarter
of 1998 with the proceeds of the Offering. See "Use of Proceeds."
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<PAGE> 18
DILUTION
The pro forma net tangible book value of the Company as of September 30,
1997 was $78,432 or $0.03 per share of Common Stock. "Pro forma net tangible
book value" per share represents the amount of total tangible assets of the
Company reduced by the amount of its total liabilities and divided by the total
number of outstanding shares of Common Stock. The pro forma adjustment to the
historical net book value gives effect the completion of the Bridge Financing.
See Notes to Financial Statements. After giving effect to the sale of 1,000,000
Shares and 1,000,000 Warrants offered hereby at an assumed initial public
offering price of $5.90 per Share and $0.10 per Warrant (after deducting
underwriting discounts, commissions and other estimated offering expenses,
anticipated to aggregate $1,125,000), and repayment of the Bridge Financing, the
net tangible book value of the Company, as adjusted, at September 30, 1997 would
have been $4,845,432 or $1.43 per share. This represents an immediate increase
from pro forma net tangible book value per share to pro forma net tangible book
value per share, as adjusted, of $1.40 per share to existing stockholders and an
immediate dilution of $4.57 per share to new investors purchasing Shares and
Warrants in this Offering or 77% of the estimated initial public offering price.
The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price per
Share and Warrant................... $6.00
Pro forma net tangible book value per share
as of September 30, 1997 before the Offering.... $ .03
Increase per share attributable to new investors.... 1.40
----
Pro forma net tangible book value per share
as of September 30, 1997 after the Offering.... 1.43
-----
Dilution per share to new investors.................... $4.57
=====
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1997, the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by existing stockholders
and by the new investors at an assumed initial public offering price of $6.00
per Share and Warrant:
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------ ---------- ------ --------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 2,391,338 70.5% $1,570,616 20.7% $ .66
New investors................. 1,000,000 29.5% 6,000,000 79.3% 6.00
--------- ----- ---------- ------ --------
Total:................... 3,391,338 100.0% $7,570,616 100.0% $ 2.23
========= ===== ========== ====== ========
</TABLE>
The above computations assume no exercise of options or warrants to
purchase shares of Common Stock. As of November 30, 1997, there were outstanding
options to purchase 625,000 shares of Common Stock at a weighted average
exercise price of $2.96 share and outstanding warrants to purchase 600,000
shares of Common Stock at a weighted average exercise of $4.00 per share. The
above computations also exclude 200,000 shares of Common Stock issuable upon
exercise of the Representative Warrants and the Warrants included therein. To
the extent outstanding options or warrants are exercised in the future, there
will be further dilution to new investors. See "Capitalization--Bridge
Financing," "Management--Stock Plans" and Notes 2 and 4 to Financial Statements.
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<PAGE> 19
SELECTED FINANCIAL DATA
The selected historical financial data set forth below is qualified by
reference to, and should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the financial
statements and notes thereto and the discussion thereof included elsewhere in
this Prospectus.
The following selected statement of operations data for the period from
inception (September 17, 1996) through December 31, 1996 and the balance sheet
data as of December 31, 1996 are derived from the financial statements of the
Company, included elsewhere in this Prospectus, which have been audited by Ernst
& Young LLP, independent auditors. The statements of operations data presented
below for the nine months ended September 30, 1997, and the period from
inception (September 17,1996) through September 30, 1997, and the balance sheet
data as of September 30, 1997, are derived from unaudited financial statements
included elsewhere in this Prospectus. The unaudited statement of operations
data and balance sheet data have been prepared by the Company on a basis
consistent with the Company's audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information. The results of operations for the nine
months ended September 30, 1997, are not indicative of results to be expected
for the year ending December 31, 1997 or for any future period.
<TABLE>
<CAPTION>
Period from Period from
inception Nine Months inception (September 17,
(September 17, 1996) Ended 1996)
through December 31, September 30, through September 30,
1996 1997 1997
---- ---- ----
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues ................... $ 9,798 $ 79,283 $ 89,081
Cost of revenues ........... 6,300 46,894 53,194
----------- ----------- -----------
Gross profit ............... 3,498 32,389 35,887
Selling, general and
administrative expenses .... 47,836 1,465,683 1,513,519
----------- ----------- -----------
Operating loss ............. (44,338) (1,433,294) (1,477,632)
Net loss ................... $ (44,338) $(1,434,894) $(1,479,232)
=========== =========== ===========
Pro forma net loss per share $ (0.02) $ (0.50)
=========== ===========
Shares used in computing pro
forma net loss per share .. 2,874,255 2,874,255
=========== ===========
BALANCE SHEET DATA
(AT PERIOD END):
Cash ..................... $ 16,467 $ 65,863
Working capital .......... 94,352 (40,471)
Total assets ............. 144,397 242,638
Total liabilities ........ 31,235 151,254
Total stockholders' equity 113,162 91,384
</TABLE>
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<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion contains forward-looking statements which involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in such forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus. The following discussion and analysis should be read in conjunction
with "Selected Financial Data" and the financial statements and notes thereto
included elsewhere in this Prospectus.
OVERVIEW
The Company has developed relationships with leading providers of Year
2000 software products, two international hardware manufacturers, and a
multinational consulting organization, thereby enabling C2i to provide solutions
to its customers from a wide variety of service choices and alternatives
intended to match their specific needs in achieving Year 2000 compliance. The
Company was founded in 1996, has a very limited operating history and is in the
development stage. As a result, the Company's operations to date have not
produced significant revenues.
In view of the early stage of the Company's development, the expected
changes in the development costs related to the Company's Year 2000 solutions,
and the anticipated increases in its selling, general and administrative
expenses associated with its anticipated increased activity levels, the Company
believes that period-to-period comparisons of its financial results are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
In order to identify, capture and meet the anticipated demand for Year
2000 solutions, the Company will need to expand its workforce and facilities.
The Company expects to begin incurring expenses relating to this expansion
before it begins to generate revenue of any significance.
Specifically, the Company expects to incur or experience notable
increases in (i) salary, commission, consulting fees, placement fees, travel,
marketing, and office expenses associated with expanding its direct sales force:
(ii) personnel, training, placement fees, rent and other occupancy expenses, to
build its technical operations team; and, (iii) personnel, rent and other
occupancy expenses, professional fees and general overhead expenses associated
with the creation of a general and administrative infrastructure necessary to
support the anticipated future growth.
In late September 1997, the Company hired its first two regional sales
representatives and began selling activities. Given the complex nature of the
sales cycle and the expected length of time typically required for a potential
customer to conclude its purchase decision related to a comprehensive Year 2000
solution, the Company currently has no backlog of signed customer orders. The
Company is in the process of negotiating contracts with half a dozen potential
clients. The Company has submitted at least twice as many additional proposals
to potential clients, which have not yet progressed to the contract negotiation
stage. The Company does not expect to realize any significant revenues before
the end of the first quarter of 1998. There can be no assurance that the Company
will successfully conclude any of these negotiations and realize revenues
related to these or other potential customers.
The Company began its workforce expansion in the third quarter of 1997,
and expects this to continue throughout 1998. The Company commenced payment in
December 1997 of salaries to its officers. Prior to December 1997, the Company
had not incurred any significant cash compensation for its officers since its
inception. The Company has recognized a charge of approximately $1.2 million for
non-cash compensation expense to officers. The Company expects to incur
additional non-cash compensation expenses related to previous grants of stock
options at exercise prices below their deemed values. Future compensation
expenses are also expected to be significant in order to attract qualified
individuals in the early stages of the Company's operations. The Company has
recently negotiated a lease agreement for larger facilities. The Company expects
to relocate to
19
<PAGE> 21
this new facility in January 1998. Also, during the three months ending March
31, 1998, the Company expects to recognize an extraordinary charge to operations
arising from the Bridge Financing of approximately $135,000, representing the
combined debt discount and deferred finance charges. In addition, most of the
Company's revenues are expected to be derived from a relatively small number of
large-scale comprehensive Year 2000 conversion projects provided by the Company
and its strategic partners. As a result, the Company's revenues and operating
results are subject to substantial variations in any given year and from quarter
to quarter. See "Risk Factors-Fluctuations in Quarterly Operating Results."
The Company believes that a demand for its Year 2000 solution exists
today and will continue to exist for some time after the Year 2000, although the
demand will diminish significantly over time and will eventually disappear. The
Company plans to continue actively pursuing business opportunities unrelated to
the Year 2000 problem in the computer software and consulting market, with a
focus on the conversion marketplace, and to develop products and services to
take advantage of these opportunities. However, there can be no assurance that
the Company will be able to successfully develop its Year 2000 business or
expand its business beyond the Year 2000 conversion market. The failure to
diversify and develop additional computer software and consulting services would
materially adversely affect the Company's business, operating results and
financial condition. See "Risk Factors--Need to Develop New Products and
Technologies."
Revenue associated with performance under contracts to provide Year 2000
computer consulting and reengineering services is recognized utilizing the
percentage-of-completion method in the ratio that labor-hours incurred to date
bear to estimated total labor-hours at completion, provided that collection of
the related receivable is probable. Adjustments to contract cost estimates are
made in the periods in which the facts which require such revisions become
known. If the revised estimates indicate a loss, such loss will be provided for
currently in its entirety. The costs of providing warranty and follow-on
customer support related to services performed are currently non-existent. In
the future such costs are not expected to be significant and will be accrued.
The Company recognizes revenue from the sale of software and hardware
products upon delivery of the product to customers, when collection is assured.
Revenues on sales of software products to customers which require significant
continued obligation from the Company are deferred until such obligations are no
longer significant.
RESULTS OF OPERATIONS
The following tables sets forth, for the periods indicated, certain
items from the Company's statements of operations as a percentage of total
revenue:
<TABLE>
<CAPTION>
PERIOD PERIOD FROM
FROM INCEPTION INCEPTION
(SEPTEMBER 17, NINE MONTH (SEPTEMBER 17,
1996) THROUGH PERIOD ENDED 1996) THROUGH
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1997
---------------- ----------------- ----------------
<S> <C> <C> <C>
Revenues ................. 100.0% 100.0% 100.0%
Cost of revenues ......... 64.3% 59.1% 59.7%
----- ------ ------
Gross profit ............. 35.7% 40.9% 40.3%
Selling, general and ..... 488.2% 1848.7% 1699.0%
administrative expenses ----- ------ ------
Operating loss ........... (452.5%) (1807.8%) (1658.7%)
Provision for income taxes -- 2.0% 1.8%
administrative expenses ----- ------ ------
Net loss ................. (452.5%) (1809.8%) (1660.5%)
===== ====== ======
</TABLE>
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<PAGE> 22
NINE MONTHS ENDED SEPTEMBER 30, 1997.
Revenues. The Company's revenues of $79,283 consist primarily of
consulting fees for services provided ($47,033) and fees received for the sale,
license or use of software and hardware products ($32,250).
Cost of Revenues. Cost of revenues consists primarily of
personnel-related costs of providing software consulting services. Cost of
revenues also includes third party royalties relating to licensed technology,
and costs of products sold. Cost of revenues for the period ended September 30,
1997 was approximately 59% of revenues.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $1,465,683 for the period ended September 30, 1997,
which includes a charge of $1,199,999, recognized for financial statement
purposes, as a result of sales of equity securities to key employees at below
the deemed value. Other selling, general and administrative expenses related
primarily to personnel and other occupancy expenses, overhead costs to support
the growth in the Company's workforce, as well as continued increases in
training, marketing and sales activities. The Company expects that such selling,
general and administrative expenses will continue to increase in the fourth
quarter 1997 and thereafter, as previously discussed herein.
FISCAL YEAR ENDED DECEMBER 31, 1996.
Revenues. The Company was founded in September 1996 and as a result had
limited revenues and related cost of revenues in the period ended December 31,
1996.
Selling, general and administrative. Selling, general administrative
expenses were $47,836 for the period ended December 31, 1996 and primarily
related to costs incurred to establish the Company's infrastructure and internal
operations.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily
through the proceeds from the issuance of Common Stock and a Bridge Financing
completed in October 1997. See "Capitalization--Bridge Financing". To date, the
Company has raised approximately $960,000 in total from the sale and issuance of
debt and equity securities, including warrants. Funds from these sources have
been and are expected to continue to be used as working capital to fund the
expansion of the Company's infrastructure and internal operations, including
purchases of capital equipment and the hiring of additional personnel.
The Company generated negative cash flow from operating activities of
$41,343 and $126,856 in the period from inception (September 17, 1996) through
December 31, 1996 and for the nine months ended September 30, 1997,
respectively. The increase in the net cash used for operating activities in 1997
over 1996 is primarily attributed to a larger net loss for the nine months ended
September 30, 1997 as a result of the continued expansion of the Company's
operations, partially offset by an increase in accounts payable and accrued
liabilities.
The Company's investing activities have consisted primarily of equipment
purchases to support the additional personnel being hired, and amounted to
$23,028 and $28,309 for the periods ended December 31, 1996 and September 30,
1997, respectively. The Company currently has no significant commitments for
capital expenditures, however, assuming the Company realizes an increased demand
for its services, and a corresponding increase in personnel, future capital
expenditures could be significant.
Based on Management's current operating plan and anticipated personnel
increases, the Company expect to invest approximately $400,000 over the next
twelve months in capital equipment. This includes approximately $150,000 for
general office equipment, furniture and fixtures and approximately $250,000 for
computer equipment, including software. Because future capital expenditures will
be directly affected by the Company's ability to achieve targeted revenue levels
and successfully recruit qualified individuals, actual capital investment could
vary substantially.
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<PAGE> 23
The Company's financing activities provided $80,838 and $204,561 for the
periods ending December 31, 1996 and September 30, 1997, respectively. The
Company received an advance from a former stockholder of $45,000 in 1996. In
addition, the Company sold an aggregate of $157,500 of equity in 1996, of which
$60,000 was collected in 1996. In 1997, the remaining $97,500 was collected and
additional equity was sold, providing the Company with an additional $200,000 in
cash.
As of September 30, 1997, the Company had cash of $65,863 and working
capital of $(40,471). In October 1997, the Company completed a Bridge Financing
of $600,000, which resulted in net proceeds to the Company of $573,000 (after
deducting selling commissions and expenses of $27,000).
The Company believes that net proceeds from the sale of Common Stock and
Warrants offered hereby, together with existing cash and anticipated funds from
operations will be sufficient to repay its Bridge Financing and to fund it
capital expenditures, working capital and other cash requirements for at least
the next twelve months. However, the Company expects to continue to experience
operating losses and to have negative cash flow from operations for the
foreseeable future. To the extent that the Company's sources of capital are
insufficient to fund the Company's activities in the short or long term, the
Company may need to raise additional funds through public or private financing.
There can be no assurance that additional financings will be available as needed
or, if available, will be on terms acceptable to the Company.
The timing and amount of the Company's capital requirements will depend
on a number of factors, including demand for the Company's products and
services, the need to develop new or enhanced products and services, competitive
pressures and the availability of complementary businesses or technologies that
the Company may wish to acquire. If additional funds are raised through the
issuance of equity securities, the percentage ownership of the Company's
stockholders will be diluted and such equity securities may have rights,
preferences or privileges senior to those of the holders of the Company's Common
Stock. There can be no assurance that additional financing will be available
when needed or that, if available, such financing will include terms favorable
to the Company or its stockholders. If adequate funds are not available on
acceptable terms, the Company may be unable to develop or enhance its products
and services, take advantage of opportunities or respond to competition, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
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<PAGE> 24
BUSINESS
INTRODUCTION
C2i is a provider of services to address the Year 2000 challenge and to
transition legacy software applications effectively and efficiently. Legacy
software and systems, which refers to installed bases of computing hardware and
software acquired over a number of years, usually do not represent the most
advanced technology and are frequently not Year 2000 compliant. C2i employs
proven methodology, advanced tools and the expertise of dedicated professionals
to offer a wide variety of Year 2000 services. From assessment through
implementation and testing, C2i brings together the elements required for cost
effective implementation of solutions to the Year 2000 problem. C2i began
providing Year 2000 related services and products in late 1996, however, the
Company has limited experience in providing Year 2000 solutions. As of the date
of this Registration Statement, the Company has not completed a large scale Year
2000 conversion project.
BACKGROUND
Organizations periodically perform complex conversions on their
information systems in order to respond to changing environments. These
conversions can include operating system migrations, programming language
upgrades and application changes, such as data field expansions to accommodate
additional digits in telephone numbers, zip codes and account numbers. The
largest and most immediate conversion need currently facing users of information
systems is caused by the Year 2000 problem, the potential errors and failures
resulting from widespread use of computer programs utilizing two-digit year
codes when calculating dates after December 31, 1999.
As the end of the century approaches, the Year 2000 problem is gaining
increased attention in the media and business community. Although many of the
computer programs recently written are designed to accommodate the year 2000, a
large number of mission critical programs currently in use lack the ability to
properly interpret date codes representing the year 2000 and beyond. For
example, these programs using two-digit year codes may misinterpret "00" as the
year 1900 rather than 2000, resulting in faulty information processing or
reporting and potential failures of related systems controlled by date codes or
date code comparisons.
Businesses which are not ready for the Year 2000 problem will experience
significant operating difficulties. Many software applications depend on the way
dates are compared, used in calculations and sorted. These software applications
include financial services applications, billing, scheduling and planning. The
Company estimates that in many large-scale legacy environments millions of lines
of code will need to be scanned to find all occurrences of date-related
instructions, including data structure definitions and all related processing
instructions. These instructions must then be changed to handle year 2000
calculations correctly. Once these potential problems are addressed, changes to
application software may necessitate a corresponding change to the data used by
that software, including the millions of records often contained in an
organization's database.
The Year 2000 problem is particularly important to large organizations
with mainframe computer systems, such as banks, securities firms, insurance
companies, healthcare providers, government agencies and transportation
companies. Solving the Year 2000 problem is essential in order for these
organizations to conduct their businesses.
The worldwide cost of solving the Year 2000 problem has been estimated
by industry sources to be $300 billion to $600 billion over the next few years.
Much of these costs are expected to relate to conversion solutions for IBM MVS
mainframe systems. As a result of limitations on an organization's internal
resources and expertise, C2i believes it is likely that a substantial portion of
the Year 2000 update process will be outsourced. Thus, the market for conversion
solutions provided by independent consultants is expected to grow rapidly as
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<PAGE> 25
business organizations become aware of the Year 2000 problem and recognize their
own limitations in solving the problem internally.
As a result of the size of the Year 2000 problem and its critical
importance to many organizations, there are many tools and methodologies, each
with a different approach, that have been developed to address the Year 2000
problem. This has produced a situation where organizations are faced with a
difficult task of selecting from a confusing array of claims and potential
solutions.
THE C2I SOLUTION
C2i has developed relationships with leading providers of Year 2000
tools to provide its customers with a wide variety of service choices and
alternatives. These relationships include non-exclusive licensing agreements
that allow C2i to use third-party software to develop Year 2000 solutions,
value-added-reseller agreements ("VAR agreements") that allow C2i to re-sell
certain third-party software as part of its Year 2000 solutions, consulting
agreements and joint-development agreements. C2i is engaged in a constant
process of evaluating potential relationships with technology providers in order
to develop the most advanced Year 2000 solutions and add to its suite of service
and product offerings. Through its access to a number of tools and approaches,
C2i is able to recommend and select solutions intended to match a customer's
specific needs. C2i's tools scan and analyze software components, assess and
evaluate the software structure, including date-related fields and their
respective processing instructions, produce a range of reports and support
semi-automatic and automatic conversion of most of the information systems
components. The conversion involves both changes in the data and related
software through data field expansion, and if data field expansion is not
possible, application logic changes. By increasing the amount of automation in
the conversion process, these tools reduce overall conversion time and cost. The
Company combines its licensed technology with related consulting services,
training and support to deliver Year 2000 solutions for the IBM MVS mainframe
and other platform environments.
STRATEGY
EXPLOIT YEAR 2000 OPPORTUNITIES. The flaw in the programming code of
current legacy systems has produced a threat for many companies of significant
liabilities, business interruption and computer system failure. C2i intends to
employ its hardware, software, programming and consulting skills to satisfy the
market need for its services.
UTILIZE STRATEGIC RELATIONSHIPS TO OBTAIN ASSIGNMENTS. C2i intends to
use the leads generated by the software providers with whom it has entered into
a VAR agreement to overcome the initial reluctance of customers to retention of
a smaller company, such as C2i, to address critical organizational needs.
EXPAND CHOICE OF SOFTWARE TOOLS. As new tools and approaches are
developed to address the Year 2000 problem, C2i intends to evaluate those
products and, where appropriate, to enter into agreements with the providers of
those solutions to expand C2i's existing capabilities.
FOCUS ON CLIENT SERVICE. C2i believes that it must be dedicated to
quality improvement and service in order to build the level of customer loyalty
that will allow it to compete with larger organizations and obtain the insight
necessary to expand its service offerings beyond Year 2000 compliance.
LEVERAGE SKILLS AND CONTACTS TO PENETRATE ADDITIONAL MARKETS. By
applying the knowledge it obtains about customers' needs during a Year 2000
project, C2i intends to expand the scope of services it provides to include
other complex data and system reengineering and conversion tasks. The Company
believes that these additional tasks will include operating system migrations,
programming language upgrades, database migrations and application changes. C2i
intends to expand its Year 2000 and reengineering practice into European and
Pacific Rim markets.
24
<PAGE> 26
SERVICES
The services provided in a Year 2000 conversion project involve a
detailed series of assessment, analysis, conversion, replacement, testing and
implementation steps, all of which must be managed through several different
groups within an organization.
PROJECT MANAGEMENT
Maintaining control of a Year 2000 conversion project requires project
managers to predict and monitor factors affecting resource consumption, delivery
dates and costs throughout the project. Computer time, personnel time and need
to work around existing operations are constraints that directly affect resource
availability and costs. C2i's project manager, who is a specialist in the
language(s) used in the customer's information systems, allocates assignments to
project personnel and uses project tracking system to monitor progress during
the complex series of tasks associated with the conversion.
ENTERPRISE ASSESSMENT
The enterprise assessment phase is an extremely important step that
forms the information-base upon which significant decisions will be made
regarding the nature of the conversion, code renovation and system replacement
efforts. To make a proper decision, a company needs to have accurate data
regarding the cost and manpower requirements of the various options. The "best
decision" must be able to be accomplished in the required time frame with the
available resources.
C2i collects and analyzes customer specific data and reports the results
of its cost estimation and analysis activities to the customer. This step
predicts how much work will be needed to reformat date-related data and programs
for the Year 2000, based on a metric or cost model.
C2i works with representatives of all involved business units in an
organization to compile a comprehensive Enterprise Assessment Report. This
report enables management to select a course of action and deploy resources for
conversion/replacement and compliance.
INVENTORY
C2i assists clients to inventory and review their Data Processing (DP)
and business environment to document the existing topology, currency of software
releases and inter-relationships of systems and subsystems. This inventory and
review becomes the basis for developing an overall methodology to deal with Year
2000 problems. The DP environment review addresses hardware, software, staff
resources and skills, and current system software plans. The software inventory
organizes operating systems, database systems, programming languages,
measurement and performance tools, utilities and any other vendor-supplied items
that may have Year 2000 implications.
During the enterprise assessment, C2i assists clients to inventory and
review application systems, subsystems and programs to determine their
inter-relationships, as well as age, usefulness, size and appropriateness for
selection as a Pilot Scan and Analysis candidate. The inventory documents the
name, function, size, age, origin (in-house developed or purchased package),
available documentation, and importance of the system or subsystem to the
organization. It is important to understand how the program is stored, backed-up
and called, and to determine which other libraries and data feeds are used in
conjunction with the loading of the program or system.
PILOT SCAN/ANALYSIS
On the basis of the information gathered during the Enterprise
Assessment, C2i and the client may select a small segment of code to be scanned
and analyzed in the Pilot Scan and Analysis phase. This phase consists of
building tables of naming conventions and understanding how dates are used
within the systems. The Pilot Scan and Analysis phase produces reports showing
the number, location and relevance of date-sensitive fields, and
25
<PAGE> 27
highlights those instances where failure will occur in the year 2000 and beyond.
The Pilot Scan and Analysis phase assists C2i and the client to determine the
order and timing of a comprehensive scan and analysis of programs, subsystems
and systems and to determine the most cost-effective and functionally beneficial
remedies available to the organization.
SCANNING AND ANALYSIS
These processes are accomplished using the Scanning and Analysis tools.
The multi-pass scanning process identifies vulnerable lines of code, classifies
each date reference and procedure reports to assist C2i and the customer. The
date-search process matches language elements and data names against known
language elements and date-specific mnemonics. C2i can scan COBOL, Fortran,
Assembler, RPG, PL/1, Mantis, Natural, Focus, APS, CSP, Easytrieve, SAS, ADS and
Culprit. While scanning gives the programmer an overview of sensitive dates, the
analysis tools specify the dates, by line, that will cause the system to fail.
During the analysis steps, C2i search engines review data-names and comparison
and calculation statements and produce exception reports of data references that
fail or that appear to be inaccurate or misleading. This phase identifies the
lines of code that must be addressed by C2i and the client.
IMPLEMENTATION CONSULTATION
After the Scanning and Analysis steps are completed, C2i gathers all the
data reports and charts and provides client executives with the information
necessary to make the appropriate Year 2000 business decisions. At this point, a
client is in a position to make informed decisions of the cost of solutions and
the consequences of failing to act. A key element of the C2i approach is the
establishment of an overall project management system to assist planning,
tracking and communication regarding all aspects of the Year 2000 compliance
effort throughout the enterprise. The Company believes that it is of utmost
importance for all involved to be able to follow the progress regarding
milestones, manpower issues and costs on an ongoing basis. C2i uses, among other
tools, Microsoft Project with Year 2000 customized templates to insure that a
consistent methodology is followed and standardized reporting is provided to
assist in enterprise-wide communications.
RENOVATION/REPLACEMENT
This stage involves implementing the decisions to solve identified Year
2000 problems. This phase occurs when a plan has been agreed upon by all
business units and senior management. The adoption of this plan begins the
critical enterprise-wide process of insuring the organization will survive the
date-change implications of the Year 2000. All critical systems, programs,
databases, data feeds, procedures and printed material must meet the change
requirements set out in the Enterprise Alternatives Study Report. Solutions
generally entail fixing the system, replacing with packaged Year 2000-compliant
systems or modules, or abandoning the business function served by the programs
or systems.
Fixes generally fall into one of three categories:
- date-field expansion to create a standard four-digit year field
- windowing, a procedural solution technique using the existing
two-digit field
- compression to create a four-digit representation in a two-digit
field
TESTING AND IMPLEMENTATION
Testing is a significant and critical element of every successful Year
2000 effort. All critical systems, programs, data bases, data feeds, procedures
and printed material must meet the change requirements. The Company believes
that testing entails approximately 50% of the entire project. C2i intends to
assist clients to develop and implement testing procedures from unit test and
integration testing through systems and acceptance
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<PAGE> 28
testing. With additional storage from date expansion or added logic code for
windowing or workaround, it is vital to conduct full-scale testing with live
data in production volumes. The C2i data center mainframe environment, with a
direct dedicated line or secure Internet connection to the client's production
mainframe system, will provide flexibility for unit and integration testing.
The challenge for all organizations is the on-time completion of
mission-critical compliance efforts to insure that fundamental business systems
will not fail in the year 2000. Many experts predict that there is simply not an
adequate supply of technical and management resources to handle the challenge of
required intervention. This increases the importance of project prioritization
and planning. Complete re-systemization, date-field expansion, and some
compliance work will extend well into the year 2000 and beyond, where temporary
fixes and workarounds will require replacement by permanent solutions.
LICENSES AND RELATIONSHIPS
C2i has entered into VAR Agreements with IBM, Computer Associates
International and Oracle, a development agreement with Sun Microsystems, and
non-exclusive licensing agreements with several other vendors, and is constantly
evaluating potential relationships with other third-parties to provide an
extensive range of Year 2000 solutions, including hardware, software and
consulting services and add to its suite of service and product offerings. Some
of the Company's licensors offer conversion services directly or have licensed
other companies to use the technologies offered by C2i.
HARDWARE
IBM. C2i has entered into a VAR Agreement with IBM that provides that
C2i may act as an IBM Business Partner and Solution Provider in the United
States and Puerto Rico. As a re-seller of IBM R390-P/390 hardware and software,
C2i may purchase at a discount and offer its clients an extensive selection of
tested and integrated software and tools in a hardware platform that mirrors the
customer's MVS environment and permits secure testing of date functions without
risk of propagating corrupted information into production data sets. The IBM
agreement may be terminated without cause by C2i or IBM on three months' written
notice, and may be modified by IBM on one month written notice. C2i's ability to
re-sell IBM equipment and services under the IBM agreement is conditioned on
IBM's approval of C2i's value-added enhancements, which must significantly add
to the function and capability of the IBM products to be resold.
Sun Microsystems. C2i has entered into a series of agreements with Sun
Microsystems ("Sun") in connection with Sun's Catalyst Developer Program. This
relationship provides C2i with discounts on Sun software and hardware, a
non-exclusive license to Solaris, Sun's development environment, access to news
and information produced by Sun for its Catalyst Developers, special technical
support options, use of certain Sun trademarks, listings in Sun on-line and
printed catalogs and royalty-free joint marketing services in exchange for C2i's
development of products compatible with Sun SPARC workstations and Solaris. This
relationship allows C2i to more easily develop Year 2000 solutions for Sun and
other UNIX workstations.
SOFTWARE
Computer Associates International ("CA"). C2i has entered into a VAR
agreement with CA that provides C2i the non-exclusive right and license to
distribute CA's Discovery 2000 software, which C2i may purchase from CA at a
discount, within the United States. The Discovery 2000 solution helps to
formulate a Year 2000 strategy, establish appropriate guidelines, and deploy
needed tools and techniques. The CA-Discovery 2000 solution can be implemented
immediately in the existing environment and can be used to modify all
applications, including mission-critical legacy systems running on MVS
platforms. The CA-Discovery 2000 assists in reducing the costs and resources
associated with a Year 2000 solution by providing automated
conversion/replacement and partial testing. The CA-Discovery 2000 solution
provides the user with valuable road map that enhances a Year 2000 project by:
- Defining the scope of the conversion project, including size, cost,
resources and timeline
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<PAGE> 29
- Identifying problem areas with impact analysis tools
- Detecting source code to be modified through code analysis tools
- Implementing changes and converting programs to newer source
dialects
- Managing and controlling the application life cycle
- Utilizing automated tools for unit and system testing
- Enhancing quality assurance with automated regression tools
- Facilitating the distribution and redeployment of converted
applications
The inventory and assessment of existing information systems portfolios
is a critical phase of Year 2000 projects. The CA-Discovery 2000 solution
includes the CA-Impact/2000 analysis tool, which is executable wherever the
source code resides, whether on the mainframe or on PC workstations. This
eliminates the need to move the code from one platform to another.
CA-Impact/2000 analyzes applications and details the information needed to
accurately estimate and carefully plan the Year 2000 project. The parser-based
technology is tuned for all of the leading data manipulation languages, such as
SQL, CA-IDMS , CA-Datacom and DL/1. The CA agreement may be terminated without
cause by C2i or CA on thirty days written notice.
Oracle Corporation ("Oracle"). C2i has entered a VAR agreement with
Oracle which grants C2i a non-exclusive license to demonstrate, provide training
and technical support for, and sublicense certain Oracle software to its Year
2000 clients in exchange for payment by C2i to Oracle of sublicense fees. As
clients review their business priorities and cost for renovating or converting
their existing legacy applications to achieve Year 2000 compliance, a compelling
option in many cases is to abandon certain applications or replace them outright
with packaged solutions that are already Year 2000 compliant. C2i is able to
utilize Oracle's products and services based upon Oracle's relational database
management system (RDBMS) Oracle 7 product line. Oracle offers a number of
enterprise wide application solutions such as Manufacturing, Engineering,
Financial and H.R. Systems. In addition many other software developers have
created packaged solution products that utilize the Oracle 7 RDBMS and could
replace legacy applications that face expensive Year 2000 renovation costs.
CenturySolver Solutions. C2i offers certain Scanning and Analysis and
Renovation/Replacement solutions under its CenturySolver trade name to address
the special Year 2000 problems associated with software written in various
dialects of Assembler, COBOL and AS/400 RPG. C2i also offers a CenturySolver
solution for customers who use software written in multiple languages and/or
running on multiple platforms. The CenturySolver solutions consist of software
provided to C2i by third party vendors under non-exclusive license agreements.
C2i researches and tests the Year 2000 software available at any given time to
determine which of those software packages are suitable for the CenturySolver
line of solutions and which are potential additions to bolster its services or
products.
CenturySolver/Assembler Solutions. CenturySolver/Assembler helps
pinpoint the problems associated with finding and fixing date operations in
complex legacy Assembler code. Using the CenturySolver/Assembler automated
analysis capabilities, date variables can be tracked through registers, scratch
(and misused) variables, and offsets into memory areas. The program then
identifies operations carried out on, and using, dates, and provides an
annotated and commented listing of the source-code in machine-readable form and
a set of metrics giving a profile of the code and Year 2000 problem incidence.
Because CenturySolver/Assembler automates the previously manual task of
tracking how and where each date operation is used in a program, it can achieve
substantial productivity and quality improvements over manual methods. Using
conventional manual techniques, an assembler programmer can analyze in detail
only a few hundred lines of code per day. With CenturySolver/Assembler, hundreds
of thousands of lines of complex Assembler code can be analyzed in a single day,
leaving the developer more time to make the identified changes and test the
code. As a result, CenturySolver/Assembler helps to reduce overall project costs
by ensuring that the conversion is completed faster and with a higher degree of
accuracy. Scarce assembler programmer resources can then be targeted at the key
points in the conversion process where they will have the most impact.
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<PAGE> 30
CenturySolver/2000 COBOL Solutions. CenturySolver/2000 identifies code
that needs to be changed, then transforms this code to correctly handle dates in
the beyond the year 2000. It uses advanced data flow analysis techniques
combined with type analysis to accurately identify date-related code and analyze
its type (year, month, day, etc.). CenturySolver/2000 can handle MIS environment
and Year 2000 transformation requirements, including multiple language dialects
and transformation strategies, DBMS operating systems, and screen generators.
CenturySolver/2000 runs on scaleable UNIX platforms configured for Year 2000
transformation of MVS COBOL.
CenturySolver/Multi-Language Solutions. CenturySolver/Multi-Language is
an innovative, inexpensive, multiple-language, cross-platform solution for Year
2000 projects. It uses a user-defined sliding-date approach where only date
logic is modified, versus expanding the year to four digits. Database date
fields are expanded for century only where required. This solution is uniform
for all software applications and languages. CenturySolver/Multi-Language
quickly pinpoints complexity issues to aide in assigning tasks to appropriate
staff members. It does not require expanding the year to four digits in existing
software applications. No change to records, files, input, historical or
archival data is required, nor are changes to data fields in applications.
Instead, existing applications are utilized without the extensive time-consuming
activities and major expense associated with new computers and/or software, data
conversions, wholesale retraining, etc.
CenturySolver/400 RPG Solutions. CenturySolver/400 is a powerful
software solution designed for modification and maintenance of AS/400 RPG
applications for Year 2000 compliance. Extensive use of AS/400 object
descriptions and source information makes it possible to quickly find and
document all dates within an application. Because the information is derived
directly from the operating system, it is always up-to-date. A cross-reference
database captures detailed relationship information about all programs that
directly or indirectly use a file or data area, all programs that directly or
indirectly call other programs, and all files or programs that use a certain
data field can be captured and stored in the database. The library
administration function provides facilities for managing applications libraries
and the programs, files and other objects they contain. This includes the
implementation of changes and new versions of software applications as well as
the creation and maintenance of test environments.
CONSULTING
Tata Consultancy Services. C2i is in the final stages of completing a
non-exclusive consulting agreement with Tata America International Corporation
("Tata") for the provision of services by Tata to C2i, both on-site worldwide
and by dedicated communications with Tata's offices in India. Tata has agreed to
provide programming, development, maintenance and enhancement, Year 2000
conversion, documentation and other services to C2i or its customers, as
requested by C2i, on a project by project basis. The scope of the work, pricing
and substantially all other terms of any services performed under this contract
are to be agreed to by both C2i and Tata prior to commencement of the specific
project. The Tata agreement and work orders agreed upon under the agreement may
be terminated by C2i or Tata on ninety days written notice.
INTELLECTUAL PROPERTY
The Company relies on a combination of copyright and trade secret laws
and contractual provisions to establish and protect its rights in its software
products and proprietary technology. Despite these precautions, it may be
possible for unauthorized parties to copy certain portions of the Company's
technologies or to reverse engineer to obtain and use information that the
Company regards as proprietary. The Company has no patents and existing
copyright and trade secret laws offer only limited protection. In addition, the
laws of some foreign countries do not protect the Company's proprietary rights
to the same extent as do the laws of the United States.
The Company's competitive position may be affected by its ability to
protect its proprietary information. However, because the software industry is
characterized by rapid technological change, the Company believes that patent,
trademark, copyright, trade secret and other legal protection are less
significant to the Company's success than other factors such as the knowledge,
ability and experience of the Company's personnel, new product and service
development, frequent product enhancements, customer service and ongoing product
support.
29
<PAGE> 31
CUSTOMERS
During 1997, the Company has been engaged to provide assessment projects
to agencies of two states, a hotel chain, a major money center bank and a large
savings and loan. The Company is in the process of negotiating agreements with
several institutions to provide remediation and testing of code.
SALES AND MARKETING
C2i's sales and marketing strategy is designed to promote and enhance
recognition that C2i's services provide turnkey solutions to a major problem.
The Company anticipates that many of its sales leads will come through referrals
from major accounting firms, systems integrators, service providers and the
parties who have entered into VAR relationships with C2i. Once a lead is
identified, C2i uses the technical capabilities of its services and the reduced
interference with customer operations made possible by C2i's ability to conduct
most of the required processes off-site to complete the selling process.
C2i intends to use a direct sales force to follow up on potential
customers as well as telemarketing and direct mail to increase name recognition
and generate additional inquiries from prospective customers in the strategic
partners' existing client basis. The direct sales force will initially focus on
education of strategic partners and pre- and post-sales support.
C2i intends to advertise in trade magazines targeted to individuals who
would influence an organization's Year 2000 compliance efforts as well as
referral sources. C2i also plans to participate in trade shows where potential
customers or referral sources are expected to be present.
As the number of competitors providing Year 2000 services increases, it
is more likely that substantially similar tools and methodologies will be used
in providing such services. Although the Company's services have never been the
subject of an infringement claim, there can be no assurance that third parties
will not assert infringement claims against the Company in the future, that the
assertion of such claims will not result in litigation or that the Company would
prevail in such litigation or be able to obtain a license for the use of any
infringed intellectual property from a third party on commercially reasonable
terms. Furthermore, litigation, regardless of its outcome, could result in
substantial cost to the Company and divert management's attention from the
Company's operations. Any infringement claim or litigation against the Company
could, therefore, materially adversely affect the Company's business, operating
results and financial condition.
COMPETITION
The market for services relating to the Year 2000 problem is highly
competitive and will become increasingly competitive as the Year 2000
approaches. The anticipated growth in this industry is expected to attract
additional competitors, many of whom may offer additional products and services.
Existing competitors for Year 2000 conversions and related software tools
include Coopers & Lybrand LLP, Electronic Data Services Corporation, Ernst &
Young LLP, Zitel Corp., Viasoft, Inc., Computer Horizons, Inc., Data Dimensions,
Inc., Crystal System Solutions, Ltd., Platinum Technology Inc., Acceler8
Technology Corporation, TSR, Inc. and Peritus Software Services, Inc. Most of
the competitors providing software tools and services for Year 2000 conversion
projects are more established, benefit from greater name recognition and have
substantially greater financial, technical and marketing resources than the
Company. As a result, there can be no assurance that the Company will be able to
compete effectively.
The principal competitive factors affecting the market for the Company's
services include product performance and reliability, product functionality,
availability of experienced personnel and price, ability to respond in a timely
manner to changing customer needs, project management capabilities, ease of use,
training and quality of support.
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<PAGE> 32
EMPLOYEES
As of December 31, 1997, the Company had 10 full-time employees and one
part-time employee.
Competition for qualified software personnel is intense and there are a
limited number of professionals with the level of knowledge and experience
required by the Company. There can be no assurance that the Company will be
successful in attracting, integrating, training, and retaining such personnel in
accordance with the Company's needs.
LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings.
FACILITIES
The Company has signed an agreement to sublease approximately 12,400
square feet of office space in San Diego, California for a six-month term ending
in July 1998. The Company expects to move into these facilities in January 1998.
The Company believes that its new facilities will be adequate for its current
needs and that suitable additional space will be available as needed.
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<PAGE> 33
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
John Anthony Whalen, Jr. 55 Chairman of the Board of
Directors; President and
Chief Executive Officer
Frank J. Vukmanic 51 Senior Vice President, Sales
and Marketing
Clyde Wooten 55 Senior Vice President,
Operations and Chief
Technology Officer
Diane E. Hessler 37 Vice President, Finance,
Secretary and Chief Financial
Officer
Hal H. Beretz (2) 62 Director
Kim P. Goh (1)(2) 54 Director
David Tendler (1) 59 Director
</TABLE>
- ----------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Mr. Whalen founded the Company in 1996. Prior to joining the Company he
served from February 1994 through October 1994 as President and Chief Operating
Officer of NETCOM On-line Communication Services, Inc., an Internet service
provider and software developer, and from October 1986 through May 1990 as
Executive Vice President of Optimum Care Corporation, a company operating
behavioral medicine programs in healthcare facilities. From May 1990 to February
1994 and from October 1994 to February 1996, Mr. Whalen was a private investor.
Mr. Whalen holds a B.A. in English literature and American History from St.
Mary's College of California and an M.B.A. from California State University. Mr.
Whalen was licensed as a Certified Public Accountant by the State of California.
Mr. Vukmanic joined the Company in June 1997 as Senior Vice President,
Sales and Marketing. From May 1994 through June 1997, Mr. Vukmanic served in
various executive sales and marketing positions with Zitel Corporation, a Year
2000 service provider and mid-range software, services and data storage company,
and from April 1989 through February 1994, he served as Senior Vice President,
Sales & Marketing at Amperif Corporation, a manufacturer of high-end storage
systems and provider of systems integration services. Prior to that he served
for a total of 19 years in various sales, marketing and executive positions,
first with Burroughs Corporation and later with Unisys Corporation. Mr. Vukmanic
holds a B. Sc. degree in Education: Social Sciences and History from
Shippensburg University.
Mr. Wooten joined the Company in June 1997 as Senior Vice President,
Operations and Chief Technology Officer. From July 1995 through May 1997, Mr.
Wooten served as Vice President of Image Products of Excalibur
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<PAGE> 34
Technologies, a software company, and from October 1992 to June 1995 he served
as Senior Director of New Technology Development at Knight-Ridder Information,
an electronic publishing company. Prior to that he served for a total of 26
years in various software and product development management positions with IBM
Corporation, Reference Technology, Inc., and Amdahl Corporation. Mr. Wooten
holds a B.Sc. degree in Aerospace Engineering and a M.S. degree in Aerospace
Engineering from Massachusetts Institute of Technology.
Ms. Hessler joined the Company in September 1997 as Chief Financial
Officer. From May 1994 through March 1997, Ms. Hessler served in various senior
financial and accounting positions with AlphaNet Telecom, Inc., a
telecommunications company. From June 1991 through February 1994 she served as
Chief Financial Officer and Controller at Bluebird Systems, a software
development company, and from August 1989 through May 1991 she served as a
Manager of Accounting and Business Consulting at Steres, Alpert & Carne, a
public accounting firm. Prior to that, she served for a total of eight years in
various positions with public accounting firms, including Deloitte Haskins &
Sells, Breedlove & Co., P.C. and Fairall, Quindt & Cummins, Inc., P.C. Ms.
Hessler holds a B.B.A. in Accountancy from Western Michigan University, and is
licensed as a Certified Public Accountant by the State of Texas.
Mr. Beretz was elected to the Board in September 1997. Mr. Beretz has
been a partner in the international consulting firm of Tendler Beretz LLC since
January 1985. Prior to forming Tendler Beretz LLC, Mr. Beretz served as
President and Chief Operating Officer of Phibro--Salomon, Inc., currently known
as Salomon, Inc., and was also a Director from May 1981 until leaving the firm
in December 1984. Mr. Beretz serves on the Boards of several institutions and is
active in various philanthropic organizations. Mr. Beretz holds a B.B.A. from
City College of New York.
Mr. Goh was elected to the Board in September 1997. Mr. Goh is an
independent consultant for Merck/Medco, a managed healthcare company. From 1993
to 1996, he was Executive Vice President of MIS at Merck/Medco. From 1988 to
1993, Mr. Goh was Senior Vice President, Head of GeoService Technology and
Senior Vice President, Head of Retail Operations Division for Chemical Banking
Corporation, New York. From 1970 to 1988 he held several senior executive
positions at Citibank, N.A., New York, including several of Citicorp's
information business subsidiaries. Mr. Goh has a B.A. from Southhampton College
of Long Island University, an M.A. in Economics from the New School for Social
Research, New York, and an AMP from Harvard University Business School.
Mr. Tendler was elected to the Board in September 1997. Mr. Tendler has
been a partner in the international consulting firm of Tendler Beretz LLC since
January 1985. Prior to forming Tendler Beretz LLC, Mr. Tendler served as
Co-Chairman and Chief Executive Officer of Phibro-Salomon, Inc., currently known
as Salomon, Inc. Mr. Tendler has almost forty years of experience in the
commodity and investment banking industries, including twenty years in senior
executive positions. Mr. Tendler serves as Chairman of V.I. Technologies, Inc.
and as a director of Bio-Technology General Corporation. Mr. Tendler has also
served on the Boards of various philanthropic organizations. Mr. Tendler holds a
B.B.A. from City College of New York.
Currently, all directors hold office until the next annual meeting of
stockholders and until their successors have been duly elected and qualified.
However, the Company's Certificate of Incorporation provides that upon the
effective date of the Offering, the Board of Directors, without further action
by the stockholders, will be divided into three classes. Each class of directors
will consist of one or two directors, who will serve for a one, two or three
year period or until their successors are elected and qualified. Thereafter,
directors will serve staggered three year terms. See "Description of Securities
- -- Delaware Law and Certain Charter Provisions." As of the effective date of the
Offering, the Class I directors, whose terms will end in 1998, will be Mr.
Beretz and Mr. Goh; the Class II director, whose term will end in 1999, will be
Mr. Tendler; and the Class III director, whose term will end in 2000, will be
Mr. Whalen.
Officers are elected by and serve at the discretion of the Board of
Directors. There are no family relationships among the directors or officers of
the Company.
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<PAGE> 35
EMPLOYMENT ARRANGEMENTS
On June 1, 1997, the Company entered into an employment agreement with
Mr. Whalen, its President and Chief Executive Officer. Under the agreement, Mr.
Whalen receives an annual base salary of $150,000 and may receive a bonus
determined in the discretion of the Board of Directors. Mr. Whalen's employment
agreement has a term of five years, expiring in May 2002, limits the Company's
ability to terminate him except for cause, and provides six months severance
pay, unless Mr. Whalen voluntarily resigns his position.
Messrs. Whalen, Vukmanic and Wooten, executive officers of the Company,
have waived their right to receive compensation for their employment with the
Company from the respective dates their employment commenced through November
30, 1997. The Company commenced payment of salaries to Messrs. Whalen, Vukmanic
and Wooten in December 1997.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company
during the fiscal year ended December 31, 1997 to the Company's Chief Executive
Officer. No executive officer of the Company received total salary and bonus in
excess of $100,000 during the fiscal year ended December 31, 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Securities
Annual Compensation Underlying All other
Name and Principal Position Salary Bonus Options Compensation
- --------------------------- ------ ----- ------- ------------
<S> <C> <C> <C> <C>
John Anthony Whalen, Jr. $12,500 $ 0 62,000 $ 0
President and CEO
</TABLE>
Option Grants in Last Fiscal Year
The following table sets forth, as to the Company's Chief Executive
Officer, information concerning stock options granted during the fiscal year
ended December 31, 1997.
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------
Potential Realization Value
at Assumed Annual Rates
Number of Percent of of Stock Purchase
Securities Total Options Exercise Appreciation for
Underlying Granted to Price Per Expiration Option Term(1)
Options Employees in Share Date ---------------------
Name Granted Fiscal Year 5% 10%
- ---------------------- ---------- ----------- ----------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
John Anthony Whalen, Jr. 62,000 24% $ 2.50 6/01/07 $97,479 $247,030
</TABLE>
- ----------
(1) The 5% and 10% assumed compouned annual rates of stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can be
no assurance that the actual stock price appreciation over the ten-year option
term will be at the assumed 5% and 10% levels or at any other defined level.
Unless the market price of the Common Stock appreciates over the option term, no
value will be realized from the option grants.
34
<PAGE> 36
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values.
The following table sets forth, as to the Company's Chief Executive
Officer, certain stock option information concerning the number of shares
subject to both exercisable and unexercisable stock options and the value of
unexercised options as of December 31, 1997. No options were exercised by the
Company's Chief Executive Officer during the fiscal year ended December 31,
1997.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year End at Fiscal Year End ($)(1)
------------------------------- -------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
John Anthony Whalen, Jr 12,056 49,944 $42,196 $174,804
</TABLE>
- ----------
(1) Based on the difference between the assumed initial public offering price of
$6.00 per share and the exercise price.
STOCK PLANS
1997 Stock Option Plan. The Board of Directors is currently reviewing a
Stock Option Plan which the Company anticipates will be adopted prior to the
effective date of this Offering, with an initial share reserve of 82,500 shares
of Common Stock (the "Option Plan"). Under the Option Plan, options may be
granted to employees, including officers, consultants, advisors and directors,
although only employees and directors and officers who are also employees may
receive "incentive stock options" intended to qualify for certain tax treatment.
The exercise price of all nonqualified stock options must equal at least 85% of
the fair market value of the Common Stock on the date of grant, and the exercise
price of incentive stock options must be no less than the fair market value on
the date of grant. Options granted under the Option Plan are generally
immediately exercisable, vest over periods ranging from one to four years and
must be exercised within ten years.
Prior to the adoption of the Option Plan, the Company has granted
nonqualified options to purchase an aggregate of 625,000 shares to employees,
directors and consultants. Options to purchase 100,000 shares vest ratably over
twelve months, options to purchase 262,500 shares vest ratably over three years
and the remaining options to purchase 262,500 shares vest ratably over four
years. These options have exercise prices ranging from $2.50 to $5.40 per share
and expire five to ten years from the date of grant or earlier in the event of
termination of employment, directorship or consulting engagement.
COMPENSATION OF DIRECTORS
Directors of the Company who are not employees of the Company do not
receive any compensation for attending meetings of the Board of Directors,
although directors are reimbursed for their expenses in attending such meetings.
From time to time, directors have received grants of options to purchase the
Company's Common Stock. The Company does not pay additional amounts for
committee participation or special assignments of the Board of Directors. The
Company has agreed to pay to Messrs. Tendler, Beretz and Goh certain referral
fees based on sales by the Company to customers introduced to the Company by
such director. See "Certain Transactions."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
The Managing Owners of the limited liability company that was the
predecessor to the Company fulfilled all functions of the Compensation Committee
with regard to the compensation of executive officers of the Company with
respect to the fiscal year ended December 31, 1997. John Anthony Whalen, Jr. was
an executive officer and a Managing Owner during 1997.
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<PAGE> 37
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to the provisions of the Delaware General Corporation Law, the
Company has adopted provisions in its Certificate of Incorporation which provide
that directors of the Company shall not be personally liable for monetary
damages to the Company or its stockholders for a breach of fiduciary duty as a
director, except for liability as a result of (i) a breach of the director's
duty of loyalty to the Company or its stockholders; (ii) acts or omissions not
in good faith or which involve intentional misconduct or knowing violation of
law; (iii) an act related to the unlawful stock repurchase or payment of a
dividend under Section 174 of Delaware General Corporation Law; and (iv)
transactions from which the director derived an improper personal benefit. Such
limitation of liability does not affect the availability of equitable remedies
such as injunctive relief or rescission.
The Company's Certificate of Incorporation also authorizes the Company
to indemnify its officers, directors and other agents, by bylaws, agreements or
otherwise, to the full extent permitted under Delaware law. The Company has
entered into separate indemnification agreements with its directors and officers
which may, in some cases, be broader than the specific indemnification
provisions contained in the Delaware General Corporation Law. The
indemnification agreements require the Company, among other things, to indemnify
such officers and directors against certain liabilities that may arise by reason
of their status or service as directors or officers (other than liabilities
arising from willful misconduct of a culpable nature), to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified, and to obtain directors' and officers' insurance if available on
reasonable terms.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
CERTAIN TRANSACTIONS
During the period from inception to September 30, 1997, the limited
liability company that was the predecessor to the Company sold Owner Units to
certain of its officers, directors and holders of 5% of the outstanding equity
of the Company, as described below.
In September 1996, the Company issued 350,000 Owner Units to John A.
Whalen, Jr., Chairman, President and Chief Executive Officer, and a co-founder
of the Company for cash consideration of $.15 per Unit, for total consideration
of $52,500.
In June 1997, the Company issued 666,666 Owner Units to John A. Whalen,
Jr., for cash consideration of $.15 per Owner Unit, for total cash consideration
of $100,000. An additional $599,999 has been recorded as compensation expense in
the accompanying statement of operations for the nine months ended September 30,
1997, reflecting the additional deemed fair value of such Units on the date of
issuance.
In June 1997, the Company issued 333,333 Owner Units to Frank J.
Vukmanic, Senior Vice President, Sales and Marketing for $.15 per Owner Unit,
for total consideration of $50,000. Mr. Vukmanic gave the Company a noninterest
bearing, 90 day promissory note as consideration for these Owner Units. Mr.
Vukmanic paid this promissory note in full in August, 1997. An additional
$300,000 has been recorded as compensation expense in the accompanying statement
of operations for the nine months ended September 30, 1997, reflecting the
additional deemed fair value of such Units on the date of issuance.
In June 1997, the Company issued 333,333 Owner Units to Clyde Wooten,
Senior Vice President, Operations and Chief Technology Officer for $.15 per
Owner Unit, for total consideration of $50,000. Mr. Wooten gave the Company a
noninterest bearing 90 day promissory note as consideration for these Owner
Units. Mr. Wooten paid this promissory note in full in September, 1997. An
additional $300,000 has been recorded as compensation expense in the
accompanying statement of operations for the nine months ended September 30,
1997, reflecting the additional deemed fair value of such Units on the date of
issuance.
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<PAGE> 38
In August and September 1997, the Company agreed to pay to each of David
Tendler, Hal Beretz and Kim Goh, directors of the Company, referral fees of four
and one-half percent for sales by the Company that are consummated without the
Company participating in a "Request for Proposal" process (an "RFP") with a
customer, provided the engagement of the Company by the customer resulted from
an introduction by the director, and two percent of sales by the Company that
are consummated following the participation in an RFP with a customer, if the
entrance of the Company in the RFP resulted from an introduction by the
director. These referral fees are payable by the Company on all revenue
generated from such customers during the period that the director serves as a
director. Such fees are payable within 30 days after receipt of payment from the
customer. No such fees have been paid to or earned by any of these directors as
of November 30, 1997.
Also in August 1997, the Company issued to each of Messrs. Tendler and
Beretz options to purchase 87,500 Owner Units of the Company at an exercise
price of $2.50 per share. In August, Mr. Goh was granted options to purchase
10,000 Owner Units of the Company, and in November 1997, he was granted options
to purchase an additional 77,500 shares of Common Stock all at an exercise price
of $2.50 per share. Such options vest in equal monthly amounts over a four year
period, for as long as they remain directors.
On September 30, 1997, the Company exchanged each Owner Unit for one
share of its Common Stock, and converted options to acquire Owner Units to
options to acquire Common Stock, in connection with its reorganization from a
California LLC to a Delaware corporation.
In October 1997, Mr. Vukmanic, an executive officer of the Company,
participated in the Bridge Financing and was issued a Bridge Note in the
principal amount of $17,304 and Bridge Warrants to acquire 17,304 shares of
Common Stock, which he directed the Company to transfer equally to his two
children.
The Company believes that all transactions with affiliates described
above were made on terms no less favorable to the Company than could have been
obtained from unaffiliated third parties. The Company intends to submit all
future transactions, including loans, between the Company and affiliates of the
Company, to the Company's Board of Directors for approval by its disinterested
members, with access to legal counsel, to ensure that such future transactions
are for a bona fide business purpose and on terms no less favorable to the
Company than could be obtained from independent parties. The Company intends to
maintain at least two independent directors on its Board of Directors.
37
<PAGE> 39
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Company's capital stock as of November 30, 1997, and
as adjusted to reflect the sale of the Shares and Warrants offered hereby,
assuming no exercise of the Underwriters' over-allotment option, (i) by each
person who is known by the Company to own beneficially more than 5% of the
Company's capital stock, (ii) by each of the executive officers named in the
tables under "Executive Compensation" and by each of the Company's directors,
and (iii) by all officers and directors as a group.
<TABLE>
<CAPTION>
Number of
Shares Percentage
Beneficially Beneficially Owned(2)
Owned Before and Before the After the
Beneficial Owner After the Offering (1) Offering Offering
- ---------------- ---------------------- -------- ---------
<S> <C> <C> <C>
John Anthony Whalen, Jr.(3) 1,462,694 60.8% 42.9%
Frank Vukmanic(4) 345,333 14.4% 10.1%
Konrad Witt 267,750 11.2% 7.9%
Clyde Wooten(5) 345,333 14.4% 10.1%
Hal H. Beretz(6) 10,938 * *
Kim P. Goh(7) 6,094 * *
David Tendler(8) 10,938 * *
All directors and 2,186,886 88.8% 63.1%
executive officers as a
group (7 persons)
</TABLE>
- ----------
* Represents less than one percent.
(1) Except pursuant to applicable community property laws or as otherwise
noted, all shares are beneficially owned and sole voting and investment
power is held by the persons named.
(2) Based on 2,391,338 shares of Common Stock outstanding before this
Offering and 3,391,338 shares of Common Stock outstanding after this
Offering.
(3) Mr. Whalen is the President and Chief Executive Officer of the Company.
Includes 13,778 shares subject to options exercisable within 60 days of
November 30, 1997.
(4) Mr. Vukmanic is the Senior Vice President, Sales and Marketing, of the
Company. Includes 12,000 shares subject to options exercisable within 60
days of November 30, 1997.
(5) Mr. Wooten is the Senior Vice President, Operations and Chief Technology
Officer of the Company. Includes 12,000 shares subject to options
exercisable within 60 days of November 30, 1997.
(6) Mr. Beretz is a director of the Company. Includes 10,938 shares subject
to options exercisable within 60 days of November 30, 1997.
(7) Mr. Goh is a director of the Company. Includes 6,094 shares subject to
options exercisable within 60 days of November 30, 1997
(8) Mr. Tendler is a director of the Company. Includes 10,938 shares subject
to options exercisable within 60 days of November 30, 1997.
38
<PAGE> 40
DESCRIPTION OF SECURITIES
GENERAL
The Company's authorized capital stock consists of 10,000,000 shares of
Common Stock, par value $.001 per share, and 1,000,000 shares Preferred Stock,
par value $.001 per share (the "Preferred Stock").
COMMON STOCK
As of November 30, 1997, there were 2,391,338 shares of Common Stock
outstanding held of record by eight stockholders. The holders of Common Stock
are entitled to one vote for each share held of record on all matters submitted
to a vote of the holders of Common Stock. All outstanding shares of Common Stock
are fully paid and nonassessable, and the shares of Common Stock to be issued
upon completion of the Offering will be fully paid and non assessable. The
Certificate does not provide for cumulative voting, and accordingly, the holders
of a majority of the shares of Common Stock entitled to vote in any election of
directors may elect all of the directors standing for election.
WARRANTS
The holder of each Warrant is entitled, upon payment of the exercise
price of $ (125% of the initial Share offering price), to purchase one share of
Common Stock. The exercise price of the Warrant will be reduced by $0.25 per
share for every $200,000 that the Company's pre-tax earnings from operations for
the year ending December 31, 1998 are less than $3,000,000, but in no event will
this reduction result in an exercise price of less than $2.00 per share. Unless
previously redeemed, the Warrants are exercisable at any time during the four
year period commencing one year after the date of this Prospectus, provided that
at such time a current prospectus relating the underlying Common Stock is in
effect and the underlying shares of Common Stock are qualified for sale or
exempt from qualification under applicable state securities laws. The Warrants
are subject to redemption, as described below.
Redemption. Commencing one year from the date of this Prospectus, the
Warrants are subject to redemption by the Company, on not less than 30 days
written notice, at a price of $.01 per Warrant, if the closing bid price of the
Common Stock is at least 150% of the then current exercise price of the Warrants
for any 20 consecutive business days ending on the third day prior to the date
on which the notice of redemption is given. Holders of Warrants will
automatically forfeit their rights to purchase the shares of Common Stock
issuable upon exercise of such Warrants unless the Warrants are exercised before
the close of business on the business day immediately prior to the date set for
redemption. All of the outstanding Warrants, except for the Representative
Warrants, must be redeemed if any of that class are redeemed. A notice of
redemption shall be mailed to each of the registered holders of the Warrants,
except for those underlying the Representative Warrants, by first class mail,
postage prepaid. The notice of redemption shall specify the redemption price,
the date fixed for redemption, the place where the Warrant certificates shall be
delivered and the redemption price to be paid, and that the right to exercise
the Warrants shall terminate at 5:00 p.m. (New York City time) on the business
day immediately preceding the date fixed for redemption.
General. The Warrants may be exercised upon surrender of the
certificate(s) therefor on or prior to the earlier of their expiration or the
redemption date (as explained above) at the offices of the Company's warrant
agent (the "Warrant Agent") with the form of "Election to Purchase" on the
reverse side of the certificate(s) filled out and executed as indicated,
accompanied by payment (in the form of certified or cashier's check payable to
the order of the Company) of the full exercise price for the number of Warrants
being exercised.
The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price in certain events, such as stock
dividends, stock splits, mergers, sale of substantially all of the Company's
assets, and for other extraordinary events in order to enable the holders of the
Warrants to obtain the same or equivalent rights which they would have obtained
if the Warrants had been exercised prior to the event.
39
<PAGE> 41
The Company is not required to issue fractional shares of Common Stock,
and in lieu thereof will make a cash payment based upon the current market value
of such fractional shares. The holder of a Warrant will not possess any rights
as a stockholder of the Company unless and until he exercises the Warrant.
REPRESENTATIVE WARRANTS
The Company has agreed to grant to the Representative, upon the closing
of the Offering, the Representative Warrants to purchase up to 100,000 Shares
and Warrants. These Shares and Warrants will be identical to the Shares and
Warrants offered hereby except that the Representative Warrants and the Warrants
included in the Representative Warrants will not be subject to redemption by the
Company. The Representative Warrants cannot be transferred, sold, assigned or
hypothecated for one year, except to any officer or partner of the
Representative or members of the selling group. The Representative Warrants are
exercisable during the four-year period commencing one year from the date of
this Prospectus at an exercise price of $______ per Share and Warrant (135% of
the initial Share offering price) subject to adjustment in certain events to
protect against dilution. The holders of the Representative Warrants and
underlying securities have certain demand and piggyback registration rights. The
existence of the Representative Warrants and the inability of the Company to
redeem the Warrants included therein may hinder the Company's future financing
or business transactions. See "Underwriting."
BRIDGE WARRANTS
Each Bridge Warrant issued by the Company in connection with the Bridge
Financing entitles the holder to purchase one share of Common Stock of the
Company at an exercise price of the lower of (i) $4.00 per share, or (ii)
two-thirds (2/3) of the price to the public in this Offering of a Share and a
Warrant. The Bridge Warrants are exercisable for a one-year period beginning one
year after the closing of this Offering.
PREFERRED STOCK
The Preferred Stock may be issued in series, and shares of each series
will have such rights and preferences as are fixed by the Board in the
resolutions authorizing the issuance of that particular series. In designating
any series of Preferred Stock, the Board may, without further action by the
holders of Common Stock, fix the number of shares constituting that series and
fix the dividend rights, dividend rate, conversion rights, voting rights (which
may be greater or lesser than the voting rights of the Common Stock), rights and
terms of redemption (including any sinking fund provisions), and the liquidation
preferences of the series of Preferred Stock. It is to be expected that the
holders of any series of Preferred Stock, when and if issued, will have priority
claims to dividends and to any distributions upon liquidation of the Company,
and that they may have other preferences over the holders of the Common Stock.
Before issuing any Preferred Stock, the Company will obtain approval of a
majority of its independent directors who do not have an interest in the
transaction and who have access to legal counsel.
The Board may issue series of Preferred Stock without action of the
stockholders of the Company. Accordingly, the issuance of Preferred Stock may
adversely affect the rights of the holders of the Common Stock. In addition, the
issuance of Preferred Stock may be used as an "anti-takeover" device without
further action on the part of the stockholders. Issuance of Preferred Stock may
dilute the voting power of holders of Common Stock (such as by issuing Preferred
Stock with super-voting rights) and may render more difficult the removal of
current management, even if such removal may be in the stockholders' best
interests. The Company has no current plans to issue any of the Preferred
Stock. In the event that the Company issues Preferred Stock in the future, it
will only permit executive officers, directors or promoters to purchase shares
on the same terms as other purchasers.
DELAWARE SECTION 203
As a Delaware corporation, the Company is subject to Section 203 of the
Delaware General Corporation Law ("Section 203"), which regulates large
accumulations of shares, including those made by tender offers. Section 203 may
have the effect of significantly delaying a purchaser's ability to acquire the
entire interest in the Company if such acquisition is not approved by the
Company's Board. In general, Section 203 prevents an "Interested Stockholder"
(defined generally as a person with 15% or more of a corporation's outstanding
voting stock) from engaging in a "Business Combination" (defined below) with a
Delaware corporation for three years
40
<PAGE> 42
following the date such person became an Interested Stockholder. For purposes of
Section 203, the term "Business Combination" is defined broadly to include
mergers and certain other transactions with or caused by the Interested
Stockholder; sales or other dispositions to the Interested Stockholder (except
proportionately with the corporation's other stockholders) of assets of the
corporation or a subsidiary equal to ten percent or more of the aggregate market
value of the corporation's consolidated assets or its outstanding stock; the
issuance or transfer by the corporation or a subsidiary of stock of the
corporation or such subsidiary to the Interested Stockholder (except for
transfers in a conversion or exchange or a pro rata distribution or certain
other transactions, none of which increase the Interested Stockholder's
proportionate ownership of any class or series of the corporation's or such
subsidiary's stock); or receipt by the Interested Stockholder (except
proportionately as a stockholder), directly or indirectly, of any loans,
advances, guarantees, pledges or other financial benefits provided by or through
the corporation or a subsidiary.
The three-year moratorium imposed on Business Combinations by Section
203 does not apply if: (a) prior to the date on which a stockholder becomes an
Interested Stockholder, the Board approves either the Business Combination or
the transaction which resulted in the person becoming an Interested Stockholder;
(b) the Interested Stockholder owns 85% of the corporation's voting stock upon
consummation of the transaction which made him or her an Interested Stockholder
(excluding from the 85% calculation shares owned by directors who are also
officers of the target corporation and shares held by employee stock plans which
do not permit employees to decide confidentially whether to accept a tender or
exchange offer); or (c) on or after the date a person becomes an Interested
Stockholder, the Board approves the Business Combination, and it is also
approved at a stockholder meeting by sixty-six and two-thirds percent (66-2/3%)
of the voting stock not owned by the Interested Stockholder.
Under Section 203, the restrictions described above do not apply if,
among other things, the corporation's original certificate of incorporation
contains a provision expressly electing not to be governed by Section 203. The
Company's Certificate of Incorporation does not contain such a provision. The
restrictions described above also do not apply to certain Business Combinations
proposed by an Interested Stockholder following the announcement or notification
of one of certain extraordinary transactions involving the corporation and a
person who had not been an Interested Stockholder during the previous three
years or who became an Interested Stockholder with the approval of a majority of
the corporation's directors.
TRANSFER AND WARRANT AGENT.
The Transfer Agent for the Common Stock and Warrants and the Warrant
Agent for the Warrants is American Stock Transfer & Trust Company.
41
<PAGE> 43
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
3,391,338 shares of Common Stock. Of these shares, the 1,000,000 shares of
Common Stock offered hereby will be freely tradable without restriction or
further registration under the Securities Act, unless such shares are held by
"Affiliates."
Holders of the Warrants offered hereby will be entitled to purchase an
aggregate of 1,000,000 additional shares of Common Stock upon exercise of the
Warrants at any time during the four-year period commencing one year from the
date of this Prospectus, provided that the Company satisfies certain securities
registration and qualification requirements with respect to the securities
underlying the Warrants. Any and all shares of Common Stock purchased upon
exercise of the Warrants will be freely tradable, provided such registration
requirements are met.
Up to 200,000 additional shares of Common Stock may be purchased by the
Representative through the exercise of the Representative Warrants and the
Warrants that may be purchased with the Representative Warrant. Until five years
from the date of this Prospectus, holders of such securities will have the
right, subject to certain conditions, to require the Company to register all or
a portion of such securities at the Company's expense beginning one year after
the date of this Prospectus.
The 2,391,338 shares of Common Stock outstanding prior to this Offering
and any shares of Common Stock issuable upon exercise of outstanding Bridge
Warrants and stock options were sold by the Company in reliance on exemptions
from the registration requirements of the Securities Act and are "restricted"
securities within the meaning of Rule 144 under the Securities Act (the
"Restricted Shares"). Restricted Shares may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rule 144
or 701 promulgated under the Securities Act. The Company's officers, directors
and shareholders owning five percent (5%) or more of the outstanding shares of
Common Stock, who hold an aggregate of 2,383,332 shares of Common Stock have
agreed that they will not sell such Common Stock for a period ending eighteen
months from the effective date of the Offering without the prior written consent
of the Representative. The Representative may agree upon request to release for
resale some or all of the shares subject to lock-up agreements. When determining
whether to release shares from the lock-up agreements, the Representative will
consider, amount other factors, the stockholder's reasons for requesting the
release, the number of shares for which the release is being requested and
market conditions at the time. Following expiration of the foregoing lock-up
agreements, all such Restricted Shares will be available for sale in the public
market subject to compliance with Rule 144 or Rule 701.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act, is
entitled to sell, within any three month period, a number of shares beneficially
owned for at least one year that does not exceed the greater of (i) one percent
of the number of then outstanding shares of Common Stock, or (ii) 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. Furthermore, a person who is not deemed to
have been an affiliate of the Company during the ninety days preceding a sale by
such person and who has beneficially owned such shares for at least two years is
entitled to sell such shares without regard to the volume, manner of sale or
notice requirements of Rule 144.
Prior to the Offering, there has been no public market for the Company's
securities. Following the Offering, the Company cannot predict the effect, if
any, that market sales of the Common Stock, or the availability of such shares
for sale, will have on the market price prevailing from time to time.
Nevertheless, sales by the existing stockholders of substantial amounts of
Common Stock in the public market could adversely affect prevailing market
prices for the Common Stock. In addition, the availability for sale of
substantial amounts of Common Stock acquired through the exercise of the
Warrants or the Representative Warrants could adversely affect prevailing market
prices for the Company's securities.
42
<PAGE> 44
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, and each of
such Underwriters for whom, Hobbs Melville Securities Corp. is acting as
Representative, has severally agreed to purchase from the Company, the
respective number of Shares and Warrants set forth opposite its name below:
<TABLE>
<CAPTION>
Number of Shares
Underwriters of Common Stock
and Number of
Warrants
<S> <C>
Hobbs Melville Securities Corp....................
---------------
Total.................................. 1,000,000
===============
</TABLE>
The Underwriters are committed to purchase all of the Common Stock and
Warrants offered hereby, if any Common Stock and Warrants are purchased. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to approval of certain legal matters by counsel to the Underwriters and
various other conditions specified therein, including the Underwriters' right to
terminate the Underwriting Agreement in the event of an occurrence of a default
of a more than 10% purchaser. In the event that such a purchaser default occurs
and the Underwriters decide to go forward with the Offering, the Company will be
required to amend and recirculate this Prospectus, prior to any confirmation of
sales to the public.
The Underwriters propose to offer the Shares and Warrants to the public
at the initial 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 which not in excess of $.___ per Share may be
reallowed to other dealers who are members of the NASD. After the initial public
offering, the public offering price, concessions and reallowances may be changed
by the Representative. The Representative has informed the Company that the
Underwriters do not intend to confirm sales of Shares and Warrants offered
hereby to any accounts over which they exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable for
45 days from the date of this Prospectus, to purchase up to 150,000 additional
Shares and 150,000 additional Warrants at the initial 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 and Warrants offered hereby.
The Company has agreed to pay to the Representative a nonaccountable
expense allowance equal to 3% of the gross proceeds of this Offering, of which
$45,000 has been paid. The Company has also agreed to pay all expenses in
connection with qualifying the Shares 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 $100.00, the Representative Warrants to purchase up to
100,000 Shares and 100,000 Warrants at an exercise price of $______ (135% of the
initial public offering price per Share) per Share and accompanying Warrant. The
Representative Warrants may not be transferred for one year except to the
officers of the Representative or members of the selling group, and are
exercisable during the four-year period commencing one year after the date of
this Prospectus. Subject to certain limitations and exclusions, the Company has
agreed, at the request of the holders of a majority of the Representative
Warrants or underlying securities to register the Representative Warrants and
the underlying securities under the Securities Act (at the Company's
43
<PAGE> 45
expense) during such four-year period and to include such Representative
Warrants and underlying securities in any appropriate registration statement
which is filed by the Company during that period.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Representative has been in business since May 1996. Prior to this
Offering, the Representative has only co-managed one other offering of
securities and has acted as an underwriter in several other offerings. There can
be no assurance that the Representative's limited offering experience and small
size relative to other broker-dealers will not adversely affect this Offering or
the subsequent development, if any, of a trading market for the Common Stock and
Warrants.
The Company's officers, directors and shareholders owning five percent
or more of the outstanding shares of Common Stock, who hold an aggregate of
2,383,332 shares of Common Stock, have agreed that they will not sell such
Common Stock for a period ending eighteen months from the effective date of this
Offering without the prior written consent of the Representative.
The Company has agreed, in connection with the exercise of Warrants
pursuant to solicitation by the Underwriters, to pay to the Underwriters a fee
of 4% of the Warrant exercise price, a portion of which may be reallowed to any
dealer who is a member of the NASD who solicited the exercise (which may also be
the Representative) for each Warrant exercised, if (i) the market price of the
Common Stock of the Company at the time of exercise is higher than the exercise
price of the Warrants; (ii) the Warrants are not held in any discretionary
account; (iii) disclosure of compensation arrangements was made both at the time
of this Offering and in documents provided to holders of the Warrants at the
time of exercise; (iv) the exercise of the Warrants is solicited by a member of
the NASD as designated in writing on the Warrant Certificate Subscription Form;
and (v) the solicitation of exercise of the Warrants was not in violation of
Regulation M promulgated under the 1934 Act.
In connection with this Offering, the Underwriters and certain selling
group members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Company's Common
Stock and Warrants. Such transactions may include stabilization transactions
effected in accordance with Rule 104 of Regulation M, pursuant to which, such
persons may bid for or purchase the Common Stock or Warrants of the Company for
the purposes of stabilizing their market price. The Underwriters may also create
a short position of the account of the Underwriters by selling more of the
Common Stock or Warrants in connection with the Offering then they are committed
to purchase from the Company, and in such case may purchase Common Stock or
Warrants of the Company in the open market following completion of the Offering
to cover all or a portion of such short position. The Underwriters may also
cover all or a portion of such short position by exercising the Underwriters'
Over-Allotment Option. In addition, the Representative may impose "penalty bids"
under contractual arrangements with an Underwriter participating in the Offering
whereby it may reclaim from the Underwriter for the account of another
Underwriter, the selling concession with respect to the shares of Common Stock
or Warrants that are distributed in the Offering but subsequently purchased for
the account of the Underwriter in the open market. Any of the transactions
described in this paragraph may stabilize or maintain the price of the Company's
Common Stock or Warrants at a level above which might otherwise prevail in the
open market. None of the transactions described in this paragraph are required,
and, if they are undertaken, they may be discontinued at any time."
Regulation M of the Securities and Exchange Commission under the 1934
Act may prohibit the Underwriters from engaging in any market making activities
with regard to the Company's securities for the period from five business days
(or such other applicable period as Regulation M may provide) prior to any
solicitation by the Underwriters of the exercise of Warrants until the later of
the termination of such solicitation activity or the termination (by waiver or
otherwise) of any right that the Underwriters may have to receive a fee for the
exercise of Warrants following such solicitation. As a result, the Underwriters
may be unable to provide a market for the Company's securities during certain
periods while the Warrants are exercisable.
44
<PAGE> 46
The Company has agreed, during the five year period from the date of
this Prospectus, to recommend and use its best efforts to elect a designee of
the Representative, at the option of the Representative, either as a member of
or a non-voting advisor to its Board of Directors. If the Representative's
designee is elected or appointed, the designee will attend meetings of the Board
and receive no more or less compensation than is paid to other non-management
directors of the Company for board attendance, and shall be entitled to receive
reimbursement for reasonable costs incurred in attending such meetings. To the
extent permitted by law, the Company will indemnify the Representative and its
designee for the actions of such designee as a director of the Company, and if
the Company maintains a liability insurance policy affording coverage for the
acts of its officers and directors, it will include each of the Representative
and its designee as an insured under such policy. The Representative has not
exercised its right to designate a member of the Board of Directors of the
Company, and does not intend to exercise its right in the near future.
The initial public offering price of the Shares and Warrants and the
exercise prices of the Warrants have been determined by negotiations between the
Company and the Underwriters. Among the facts considered in determining these
terms were the Company's present state of development, products and prospects,
the Company's management, the Company's financial condition, demand for
securities of comparable companies and the general condition of the securities
market.
45
<PAGE> 47
LEGAL MATTERS
The validity of the Shares and Warrants offered hereby has been passed
upon by Gray Cary Ware & Freidenrich, A Professional Corporation. Certain legal
matters relating to the Offering will be passed upon by Piper & Marbury L.L.P.
on behalf of the Underwriters.
EXPERTS
The financial statements of C2i Solutions, Inc. (formerly Challenge 2000
International LLC) as of December 31, 1996, and for the period from inception
(September 17, 1996) through December 31, 1996, appearing in this Prospectus and
the Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement (which term shall include any amendments thereto) on Form
SB-2 under the Securities Act with respect to the Shares and Warrants offered
hereby. This Prospectus, which constitutes a part of the Registration Statement
does not contain all of the information set forth in the Registration Statement,
certain items of which are contained in exhibits to the Registration Statement
as permitted by the rules and regulations of the Commission. For further
information with respect to the Company and the Shares and Warrants offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto, and the financial statements and notes filed as a part thereof.
Statements made in this Prospectus concerning the contents of any document
referred to herein are not necessarily complete. With respect to each such
document filed with the Commission as an exhibit to the Registration Statement,
reference is made to the exhibit for a more complete description of the matter
involved. The Registration Statement, including the exhibits thereto and the
financial statements and notes filed as a part thereof, as well as such report
and other information filed with the Commission, may be inspected without charge
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part thereof
may be obtained from the Commission upon the payment of certain fees prescribed
by the Commission. In addition, the Commission maintains a Website that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of the
Commission's Website is http://www.sec.gov.
46
<PAGE> 48
C2i Solutions, Inc.
(a development stage company)
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................F-2
Balance Sheets as of December 31, 1996 and September 30, 1997 (unaudited)..........F-3
Statements of Operations for the period from inception (September 17, 1996)
through December 31, 1996, nine month period ended September 30, 1997
(unaudited) and for the period from inception (September 17, 1996) through
September 30, 1997
(unaudited)........................................................................F-4
Statements of Stockholders' Equity for the periods ended December 31, 1996
and September 30, 1997 (unaudited) ................................................F-5
Statements of Cash Flows for the period from inception (September 17, 1996)
through December 31, 1996, nine month period ended September 30, 1997
(unaudited) and for the period from inception (September 17, 1996) through
September 30, 1997(unaudited)......................................................F-6
Notes to Financial Statements......................................................F-7
</TABLE>
F-1
<PAGE> 49
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
C2i Solutions, Inc.
We have audited the accompanying balance sheet of C2i Solutions, Inc. (a
development stage company) as of December 31, 1996 and the related statements of
operations, stockholders' equity and cash flows for the period from inception
(September 17, 1996) through December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides 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 C2i Solutions, Inc. at December
31, 1996, and the results of its operations and its cash flows for the period
from inception (September 17, 1996) through December 31, 1996, in conformity
with generally accepted accounting principles.
As more fully described in Note 1, at December 31, 1996 the Company has limited
working capital and will require additional sources of financing to complete the
commercialization of its services and products. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
ERNST & YOUNG LLP
San Diego, California
February 28, 1997,
except for the first and second paragraphs of Note 1
and all of Note 4, as to which the date is November 3, 1997
F-2
<PAGE> 50
C2i Solutions, Inc.
(a development stage company)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 16,467 $ 65,863
Accounts receivable, net 9,797 36,478
Capital subscriptions receivable from stockholders 97,500 --
Prepaid expenses and other 1,823 8,442
----------- -----------
Total current assets 125,587 110,783
----------- -----------
Property and equipment, at cost:
Computer equipment and purchased software 13,988 30,907
Furniture and fixtures 7,645 16,783
----------- -----------
21,633 47,690
Accumulated depreciation (4,148) (11,612)
----------- -----------
17,485 36,078
----------- -----------
Deferred offering costs -- 93,525
Other assets 1,325 2,252
----------- -----------
Total assets $ 144,397 $ 242,638
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,955 $ 107,444
Accrued payroll and related 1,142 19,233
Accrued royalty due to former stockholder 6,300 1,345
Advance from former stockholder 20,838 21,424
Other current liabilities -- 1,808
----------- -----------
Total current liabilities 31,235 151,254
----------- -----------
Commitments [Note 3]
Stockholders' equity:
Preferred Stock - $.001 par value; 1,000,000 shares
authorized; no shares issued and outstanding -- --
Common Stock - $.001 par value; 10,000,000 shares
authorized; 1,050,000 and 2,391,338 (unaudited) shares
issued and outstanding at December 31, 1996
and September 30, 1997, respectively 1,050 2,391
Additional paid-in capital 156,450 1,697,391
Deficit accumulated during the development stage (44,338) (1,479,232)
Deferred compensation -- (129,166)
----------- -----------
Total stockholders' equity 113,162 91,384
----------- -----------
Total liabilities and stockholders' equity $ 144,397 $ 242,638
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 51
C2i Solutions, Inc.
(a development stage company)
Statements of Operations
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(SEPTEMBER 17, NINE MONTH SEPTEMBER 17,
1996) THROUGH PERIOD ENDED 1996) THROUGH
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1997
----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenues $ 9,798 $ 79,283 $ 89,081
----------- ----------- -----------
Costs and expenses:
Cost of revenues paid to former stockholder 6,300 11,352 17,652
Cost of revenues -- 35,542 35,542
Selling, general and administrative
expenses 47,836 1,465,683 1,513,519
----------- ----------- -----------
Total costs and expenses 54,136 1,512,577 1,566,713
----------- ----------- -----------
Operating loss (44,338) (1,433,294) (1,477,632)
Provision for income taxes -- 1,600 1,600
----------- ----------- -----------
Net loss $ (44,338) $(1,434,894) $(1,479,232)
=========== =========== ===========
Pro forma net loss per share $ (.02) $ (.50)
=========== ===========
Shares used in computing pro forma net loss
per share 2,874,255 2,874,255
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 52
C2i Solutions, Inc.
(a development stage company)
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional during the Total
------------------------- Paid-In Development Deferred Stockholders'
Shares Amount Capital Stage Compensation Equity
----------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at inception, -- $ -- $ -- $ -- $ -- $ --
September 17, 1996
Issuance of common stock for
cash and capital subscriptions
receivable 1,050,000 1,050 156,450 -- -- 157,500
Net loss -- -- -- (44,338) -- (44,338)
----------- ----------- ----------- ----------- ---------- -----------
Balance at December 31, 1996 1,050,000 1,050 156,450 (44,338) -- 113,162
Issuance of common stock for
cash and capital subscriptions
receivable (unaudited) 1,333,332 1,333 1,398,666 -- -- 1,399,999
Issuance of common stock for
services rendered (unaudited) 8,006 8 9,075 -- -- 9,083
Deferred compensation
(unaudited) -- -- 133,200 -- (129,166) 4,034
Net loss (unaudited) -- -- -- (1,434,894) -- (1,434,894)
----------- ----------- ----------- ----------- ---------- -----------
Balance at September 30, 1997
(unaudited) 2,391,338 $ 2,391 $ 1,697,391 $(1,479,232) $ (129,166) $ 91,384
=========== =========== =========== =========== ========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 53
C2i Solutions, Inc.
(a development stage company)
Statements of Cash Flows
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(SEPTEMBER 17, NINE MONTH (SEPTEMBER 17,
1996) THROUGH PERIOD ENDED 1996) THROUGH
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1997
----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (44,338) $(1,434,894) $(1,479,232)
Adjustments to reconcile net loss
to net cash used for operating
activities:
Depreciation and amortization 4,218 8,789 13,007
Amortization of deferred
compensation -- 4,034 4,034
Non-cash compensation -- 1,209,082 1,209,082
Changes in operating assets
and liabilities:
Accounts receivable (9,797) (26,681) (36,478)
Prepaid expenses and other (1,823) (6,619) (8,442)
Accounts payable 2,955 104,489 107,444
Accrued payroll and related 1,142 18,091 19,233
Accrued royalty 6,300 (4,955) 1,345
Other current liabilities -- 1,808 1,808
----------- ----------- -----------
Net cash used for operating
activities (41,343) (126,856) (168,199)
----------- ----------- -----------
INVESTING ACTIVITIES
Purchases of property and
equipment (21,633) (26,057) (47,690)
Other assets (1,395) (2,252) (3,647)
----------- ----------- -----------
Net cash used for investing
activities (23,028) (28,309) (51,337)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of common
stock 60,000 100,000 160,000
Deferred offering costs -- (93,525) (93,525)
Advance from former stockholder 45,000 586 45,586
Repayment of advance from former
stockholder (24,162) -- (24,162)
Collection of capital
subscriptions receivable
from stockholders -- 197,500 197,500
----------- ----------- -----------
Net cash provided by financing
activities 80,838 204,561 285,399
----------- ----------- -----------
Net increase in cash 16,467 49,396 65,863
Cash at beginning of period -- 16,467 --
----------- ----------- -----------
Cash at end of period $ 16,467 $ 65,863 $ 65,863
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES
NON-CASH FINANCING ACTIVITIES:
Capital subscriptions receivable
from stockholders $ 97,500 $ 100,000 $ 197,500
OTHER CASH FLOW INFORMATION:
Interest paid -- -- --
Income taxes paid -- 1,600 1,600
</TABLE>
See accompanying notes.
F-6
<PAGE> 54
C2i Solutions, Inc.
(a development stage company)
Notes to Financial Statements
(Information as of September 30, 1997, for the nine
months ended September 30, 1997, and for the period from
inception (September 17, 1996)
through September 30, 1997 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
C2i Solutions, Inc. (the "Company") was incorporated in the State of Delaware on
September 30, 1997. The Company was initially organized as a California limited
liability company under the name of Challenge 2000 International LLC ("LLC") on
September 17, 1996 (Inception). From Inception through September 30, 1997, the
Company operated under the name of the LLC. On September 30, 1997, the Company
reorganized as a Delaware corporation and changed its name to C2i Solutions,
Inc. On September 30, 1997, all LLC Owner Units were converted into 2,391,338
shares of the Delaware corporation's common stock and all Owner options were
converted into options to acquire 547,500 shares of common stock. Concurrent
with the formation of the Delaware corporation, the LLC was dissolved.
The accompanying financial statements have been adjusted to give retroactive
effect to the reorganization and capital structure of the Delaware corporation
from Inception.
C2i Solutions, Inc.'s authorized capital stock consists of 10,000,000 shares of
common stock, with a par value of $.001 per share, and 1,000,000 shares of
preferred stock, with a par value of $.001 per share. The Board may issue series
of preferred stock without action of the stockholders of the Company.
Accordingly, the issuance of preferred stock may adversely affect the rights of
the holders of the common stock. In addition, the issuance of preferred stock
may be used as an "anti-takeover" device without further action on the part of
the stockholders. Issuance of preferred stock may dilute the voting power of
holders of common stock (such as by issuing preferred stock with super-voting
rights) and may render more difficult the removal of current management, even if
such
F-7
<PAGE> 55
C2i Solutions, Inc.
(a development stage company)
Notes to Financial Statements (continued)
(Information as of September 30, 1997, for the nine
months ended September 30, 1997, and for the period from
inception (September 17, 1996)
through September 30, 1997 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
removal may be in the stockholders' best interests. The Company has no current
plans to issue any of the preferred stock.
The Company is a provider of integrated solutions for organizations to assess,
manage and implement required changes to computer applications for the "Year
2000 Problem." In addition to shrink-wrapped products, the Company intends to
offer its customers a complete range of consulting services, including project
management, out-sourcing and testing in connection with Year 2000 projects.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This basis of accounting contemplates
the recovery of the Company's assets and the satisfaction of its liabilities in
the normal course of conducting business. Since Inception, the Company has been
primarily engaged in organizational activities, including raising capital,
recruiting personnel and the marketing of its products and services. As of
September 30, 1997, the Company has not realized significant revenues and
therefore is considered to be in the development stage.
The Company's ability to transition from the development stage and ultimately to
attain profitable operations is dependent upon its ability to raise additional
capital through debt or equity financing and the successful market acceptance of
its products and services. There can be no assurances that the Company's
products and services or its efforts to raise additional capital will be
successful. The accompanying financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from
the outcome of this uncertainty.
INTERIM PERIODS
The financial statements for the nine months ended September 30, 1997 and for
the period from inception (September 17, 1996) through September 30, 1997 are
unaudited, but include all adjustments (consisting only of normal recurring
adjustments) which the Company considers necessary for a fair presentation of
the financial position as of such date and the operating results and cash flows
for such periods. Results for the interim
F-8
<PAGE> 56
C2i Solutions, Inc.
(a development stage company)
Notes to Financial Statements (continued)
(Information as of September 30, 1997, for the nine
months ended September 30, 1997, and for the period from
inception (September 17, 1996)
through September 30, 1997 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
period and period since inception are not necessarily indicative of results to
be expected for the entire year or for any future period.
FISCAL YEAR END
The Company's fiscal year end is December 31.
CONCENTRATION OF CREDIT RISK
Credit is extended based on an evaluation of the customer's financial condition
and generally collateral is not required.
SIGNIFICANT CUSTOMERS
Revenue from one customer accounted for 100% of the Company's total revenue for
the period ended December 31, 1996. Revenue from three customers accounted for
62%, 19% and 10%, respectively, of the Company's total revenue for the nine
months ended September 30, 1997. At December 31, 1996, all of the accounts
receivable related to the customer which represented 100% of total revenue was
outstanding, and represented 100% of the accounts receivable balance. At
September 30, 1997, 91% and 9%, respectively of the accounts receivable related
to the customers which represented 62% and 10%, respectively, of total revenue
for the nine months ended September 30, 1997.
SIGNIFICANT SUPPLIERS
Purchases from a single supplier, who is also a former stockholder, accounted
for 100% of the Company's cost of revenues for the period ended December 31,
1996. At December 31, 1996, all $6,300 of these costs were outstanding and have
been included as accrued royalty due to former stockholder in the accompanying
balance sheet. Purchases from three suppliers, one of whom is a former
stockholder, accounted for 60%, 24% and 15% of the Company's total cost of
revenues for the nine months ended September 30, 1997. At September 30, 1997,
$16,544, $1,345 and $2,138 of these costs were outstanding and have been
included in accrued royalty due to former stockholder and accounts payable in
the accompanying balance sheet.
F-9
<PAGE> 57
C2i Solutions, Inc.
(a development stage company)
Notes to Financial Statements (continued)
(Information as of September 30, 1997, for the nine
months ended September 30, 1997, and for the period from
inception (September 17, 1996)
through September 30, 1997 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and is being depreciated using the
straight-line method over the estimated useful life of the property and
equipment, which is three to seven years.
INTANGIBLE ASSETS
Organization costs which totaled $1,395 and $607 at December 31, 1996, and
September 30, 1997, respectively, are included in other assets and are amortized
using the straight-line method over five years. Accumulated amortization totaled
$70 and $0 at December 31, 1996 and September 30, 1997, respectively. In
September 1997, the unamortized balance of LLC organization costs totaling
$1,116 was written off as a result of the LLC's dissolution.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the balance sheet. Actual
results could differ from those estimates.
REVENUE RECOGNITION
Revenue associated with performance under contracts to provide Year 2000
computer consulting and reengineering services is recognized utilizing the
percentage-of-completion method in the ratio that labor-hours incurred to date
bear to estimated total labor-hours at completion, provided that collection of
the related receivable is probable. Adjustments to contract cost estimates are
made in the periods in which the facts which require such revisions become
known. When the revised estimates indicate a loss, such loss is provided for
currently in its entirety. The costs of providing warranty and follow-on
customer support related to services performed are not significant and have been
accrued.
The Company recognizes revenue from the sale of software and hardware products
upon delivery of the product to the customers when collection is assured.
Revenues on sales of software products to customers which require significant
continued obligation from the Company are deferred until such obligations are no
longer significant.
F-10
<PAGE> 58
C2i Solutions, Inc.
(a development stage company)
Notes to Financial Statements (continued)
(Information as of September 30, 1997, for the nine
months ended September 30, 1997, and for the period from
inception (September 17, 1996)
through September 30, 1997 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION
Awards by the Company of stock options are accounted for in accordance with
Accounting Principles Board Opinion No. 25 and related interpretations ("APB
25"). The Company has adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123, ("SFAS 123"), "Accounting for
Stock-Based Compensation" (Note 2).
INCOME TAXES
Prior to September 30, 1997, the Company elected to be treated as a Limited
Liability Corporation ("LLC") for tax purposes. In lieu of corporate income
taxes, all taxable income or loss of the Company is included in the income tax
returns of the individual stockholders. Accordingly, the accompanying historical
financial statements do not include a provision for federal income taxes, but
reflect a provision for the California minimum franchise tax. On September 30,
1997, the Company elected to terminate its LLC status and thereafter become
taxable as a "C" Corporation.
PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share is computed using the weighted average number of
shares of common stock and common stock equivalents outstanding during that
period, adjusted to reflect the conversion from a limited liability company to a
Delaware corporation, on a retroactive basis.
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83,
common stock equivalents, regardless of their anti-dilutive impact, issued at
prices below the offering price per share during the twelve months preceding the
initial filing of the Company's Registration Statement and through the effective
date of the initial public offering of the Company's common stock have been
included in the calculation of pro forma net loss per share using the treasury
stock method as if outstanding since the beginning of each period presented.
F-11
<PAGE> 59
C2i Solutions, Inc.
(a development stage company)
Notes to Financial Statements (continued)
(Information as of September 30, 1997, for the nine
months ended September 30, 1997, and for the period from
inception (September 17, 1996)
through September 30, 1997 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Supplemental net loss per share, giving effect to the use of a portion of the
net proceeds of this offering to repay the Bridge Notes payable, is not
presented since it does not differ materially from pro forma net loss per share.
2. STOCKHOLDERS' EQUITY
As of December 31, 1996, the Company had issued 1,050,000 shares of Common Stock
to three individuals. In accordance with the Operating Agreement (the
"Agreement"), these individuals were required to contribute total capital of
$157,500, of which $60,000 had been received by the Company as of December 31,
1996. The Company recorded the remaining $97,500 to be received as capital
subscriptions receivable in the accompanying balance sheet. The subscription
amounts were received in January 1997.
In June 1997, the Company issued an additional 1,333,332 shares of Common Stock
to existing and new stockholders. In exchange for these shares, the Company
received a $100,000 cash payment and $100,000 was recorded as capital
subscriptions receivable. These subscription amounts were received $50,000 in
August 1997, and $50,000 in September 1997. The Company recognized $1,199,999 of
compensation expense, which is included in selling, general and administrative
expenses in the accompanying statement of operations, related to the issuance of
these shares, representing the difference between the deemed value of the shares
of Common Stock and the consideration received. In addition, from June 1997 to
September 1997, the Company issued 8,006 shares of Common Stock valued at $9,083
to consultants in exchange for services received.
Stock Options
During the period from June 1997 through September 1997, the Company granted
nonqualified options to purchase an aggregate of 547,500 shares of the Company's
Common Stock, at exercise prices ranging from $2.50 to $5.40 per share, to
employees, consultants and directors of the Company. These options vest over
periods ranging from one to four years, are exercisable at various dates and
expire five to ten years from the date of grant, or earlier in the event of
termination of employment, directorship or consulting engagement.
F-12
<PAGE> 60
C2i Solutions, Inc.
(a development stage company)
Notes to Financial Statements (continued)
(Information as of September 30, 1997, for the nine
months ended September 30, 1997, and for the period from
inception (September 17, 1996)
through September 30, 1997 is unaudited)
2. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes certain information regarding stock
options during the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
Weighted average
Shares exercise price
----------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Outstanding at beginning of period 0 $ --
Granted 547,500 3.03
Exercised 0 --
Forfeited 0 --
------- -----
Outstanding at end of period 547,500 $3.03
======= =====
Options exercisable at end of period 36,121 $3.84
======= =====
</TABLE>
The following summarizes information regarding options outstanding at September
30, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
(Unaudited) (Unaudited)
Weighted Weighted
average Weighted average Weighted
remaining average remaining average
Number contractual exercise Number contractual exercise
Outstanding life (years) price exercisable life (years) price
- ------------------ ------------- ------------- -------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
100,000 4.8 $5.40 16,667 4.8 $5.40
447,500 9.9 $2.50 19,454 9.8 $2.50
</TABLE>
F-13
<PAGE> 61
C2i Solutions, Inc.
(a development stage company)
Notes to Financial Statements (continued)
(Information as of September 30, 1997, for the nine
months ended September 30, 1997, and for the period from
inception (September 17, 1996)
through September 30, 1997 is unaudited)
2. STOCKHOLDERS' EQUITY (CONTINUED)
In accordance with APB 25, the Company recognized $4,034 of compensation expense
during the nine month period ended September 30, 1997 related to the grant of
options, as the exercise price of options granted was below the deemed value on
the date of value grant. Had compensation cost related to the options been
determined based upon the fair value of options at their grant dates, as
prescribed in SFAS 123, the Company's net loss would not have been materially
different.
The fair value of options at date of grant was estimated using the minimum value
method with the following weighted average assumptions:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1997
------------------
(Unaudited)
<S> <C>
Expected life (years)...................................................5.0
Risk-free interest rate.................................................6.0%
Dividend yield..........................................................0.0%
</TABLE>
Because options vest over several years and additional option grants are
expected to be made in future years, the above pro forma results applying the
provisions of SFAS 123 are not representative of pro forma results for future
years.
F-14
<PAGE> 62
C2i Solutions, Inc.
(a development stage company)
Notes to Financial Statements (continued)
(Information as of September 30, 1997, for the nine
months ended September 30, 1997, and for the period from
inception (September 17, 1996)
through September 30, 1997 is unaudited)
3. COMMITMENTS
Licensing Agreements
In 1996, the Company entered into an exclusive technology licensing agreement
with a former stockholder through which it obtained world-wide marketing rights
to certain software products sold by the Company. Under this agreement, the
Company was obligated to pay a royalty on sales of the product ranging from 50%
to 70%. The accompanying balance sheets include $6,300 and $1,345 of accrued
royalties due under this agreement at December 31, 1996 and September 30, 1997,
respectively. In 1997, the Company terminated this licensing agreement and no
longer uses these software products.
Subsequent to December 31, 1996, the Company entered into several non-exclusive
license agreements. These agreements generally allow the Company to utilize and
resell to its customers certain software products, in exchange for royalty
payments by the Company which generally range from 10% to 50%.
Officers Salaries
The Agreement for the Company specifies that officers' salaries are only payable
from monthly profits as calculated prior to the consideration of such salaries.
In the event monthly profits are not sufficient to pay all amounts owed, such
salaries will be paid on a pro-rata basis with any remaining unpaid amount
payable in later profitable periods. As of September 30, 1997, the Company had
not realized any profits and as such no significant compensation had been paid
to its officers. As of September 30, 1997, three of the four officers have
agreed to forgo claims to unpaid salaries owed for services rendered in the
period from inception. The Company commenced payment of salaries to these
officers in December 1997 (unaudited).
Lease Commitments
The Company leases its office facilities and certain computer equipment under
lease agreements which are classified as operating leases.
F-15
<PAGE> 63
C2i Solutions, Inc.
(a development stage company)
Notes to Financial Statements (continued)
(Information as of September 30, 1997, for the nine
months ended September 30, 1997, and for the period from
inception (September 17, 1996)
through September 30, 1997 is unaudited)
3. COMMITMENTS AND CONTINGENCIES (CONTINUED)
At September 30, 1997, future minimum payments under these noncancelable
operating leases are summarized as follows:
<TABLE>
<CAPTION>
Period Ending December 31:
<S> <C>
1997 $ 7,564
1998 6,030
1999 --
2000 --
2001 --
Thereafter --
--------
Total future minimum lease payments $ 13,594
========
</TABLE>
Rent expense amounted to $5,643, $19,989, and $25,632 for the period from
inception (September 17, 1996) through December 31, 1996, the nine months ended
September 30, 1997, and for the period from inception (September 17, 1996)
through September 30, 1997, respectively, and has been included in selling,
general and administrative expenses in the accompanying statements of
operations.
4. SUBSEQUENT EVENTS
Bridge Financing
In October 1997, the Company completed a $600,000 Bridge Financing. This debt
consists of $600,000 face value promissory notes bearing 10% interest, due at
the earlier of completion of an initial public offering or September 30, 1999
and 600,000 warrants which initially enable the holder to purchase shares of
Common Stock at $4.00 per share or two-thirds of the public offering price per
unit, if less. The Company received net proceeds of $573,180 (after deducting
selling commission and expenses), which have been allocated $108,000 to
warrants, $492,000 to Bridge Notes payable and $26,820 to deferred finance
changes. The resulting $134,820 of combined debt discount and deferred finance
charges will be charged to expense using the interest method over the term of
the notes.
F-16
<PAGE> 64
C2i Solutions, Inc.
(a development stage company)
Notes to Financial Statements (continued)
(Information as of September 30, 1997, for the nine
months ended September 30, 1997, and for the period from
inception (September 17, 1996)
through September 30, 1997 is unaudited)
4. SUBSEQUENT EVENTS (CONTINUED)
Stock Options
Subsequent to September 30, 1997, the Company granted options for the purchase
of 77,500 shares of Common Stock to a director. These options have an exercise
price of $2.50 per share, vest over a four year period and expire ten years from
the date of grant, or earlier in certain cases, in the event of termination of
directorship.
Initial Public Offering
In October 1997, the Board of Directors authorized management of the Company to
file a registration statement with the Securities and Exchange Commission,
permitting the Company to sell up to 1,150,000 securities (consisting of one
share of Common Stock and one Warrant for the purchase of one share of Common
Stock) to the public.
Lease Commitments
Subsequent to September 30, 1997, the Company entered into an agreement to lease
certain computer equipment under a lease agreement which is classified as a
capital lease. The lease term is for a thirty-six month period, with minimum
lease payments as follows:
<TABLE>
<CAPTION>
Period Ending December 31:
<S> <C> <C>
1997 $ 878
1998 3,309
1999 3,309
2000 3,033
2001 --
Thereafter --
--------
10,529
Less amount representing interest (2,587)
--------
Present value of net minimum lease payments $ 7,942
========
</TABLE>
F-17
<PAGE> 65
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT 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 OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
Prospectus Summary ........................................................ 3
Risk Factors .............................................................. 6
Use of Proceeds ........................................................... 15
Dividend Policy ........................................................... 15
Capitalization ............................................................ 16
Dilution .................................................................. 17
Selected Financial Data ................................................... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations .............................................................. 19
Business .................................................................. 23
Management ................................................................ 32
Certain Transactions ...................................................... 36
Principal Stockholders .................................................... 38
Description of Securities ................................................. 39
Shares Eligible for Future Sale ........................................... 42
Underwriting .............................................................. 43
Legal Matters ............................................................. 46
Experts ................................................................... 46
Additional Information .................................................... 46
Index to Financial Statements ............................................. F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS
1,000,000 SHARES OF COMMON STOCK
AND
1,000,000 REDEEMABLE WARRANTS
C2i SOLUTIONS, INC.
PROSPECTUS
HOBBS MELVILLE SECURITIES CORP.
___________, 1998
<PAGE> 66
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 of the Delaware General Corporation Law permits
indemnification of officers, directors, and other corporate agents under certain
circumstances and subject to certain limitations. The Registrant's Certificate
of Incorporation and By-Laws provide that the Registrant shall indemnify its
directors, officers, employees and agents to the full extent permitted by
Delaware General Corporation Law, including in circumstances in which
indemnification is otherwise discretionary under Delaware law. In addition, the
Registrant has entered into separate indemnification agreements with its
directors and officers which require the Registrant, among other things, to
indemnify them against certain liabilities which may arise by reason of their
status or service (other than liabilities arising from willful misconduct of a
culpable nature) and to maintain directors' and officers' liability insurance,
if available on reasonable terms.
These indemnification provisions and the indemnification agreement
entered into between the Registrant and its officers and directors may be
sufficiently broad to permit indemnification of the Registrant's officers and
directors for liabilities (including reimbursement of expenses incurred) arising
under the Securities Act.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act, or otherwise.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Shares and Warrants being registered. All amounts shown are estimates
except for the registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee........................................................... $ 4,740
NASD filing fee............................................................ 2,064
Nasdaq SmallCap Market fee................................................. 10,000
Blue sky qualification fees and expenses................................... 35,000
Printing and engraving expenses............................................ 20,000
Legal fees and expenses.................................................... 150,000
Accounting fees and expenses............................................... 50,000
Transfer agent and registrar fees.......................................... 5,000
Directors and Officers insurance coverage.................................. 55,000
Non-Accountable Representative Expense Allowance........................... 180,000
Miscellaneous.............................................................. 13,196
---------
Total...................................................................... $ 525,000
=========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In the last three years the Registrant has sold and issued the following
unregistered securities:
1. Owner Units (Common Stock)
In September 1996, the Company issued an aggregate of 1,050,000
Owner Units to four founders of the Company at a price of $.15 per Unit, for
aggregate consideration of $157,500.
In June 1997, the Company issued 1,333,332 Owner Units to three
executive officers of the Company at a price of $.15 per unit, for aggregate
consideration of $200,000.
II-1
<PAGE> 67
In the months of June through September 1997, the Company issued
an aggregate of 8,006 Owner Units to four consultants to the Company as
consideration for services rendered to the Company by these consultants, valued
in the aggregate at $9,083.
On September 30, 1997, the Company exchanged each Owner Unit for
one share of its Common Stock in connection with its reorganization from a
California limited liability company to a Delaware corporation.
2. Bridge Notes and Bridge Warrants
In October 1997, the Company issued Bridge Notes having an
aggregate principal of $600,000, as well as 600,000 Bridge Warrants, to 36
accredited investors for aggregate consideration of $600,000.
3. Option Issuances to Employees, Consultants and Directors
From June 1, 1997 to the present, the Company issued options to
purchase an aggregate of 625,000 shares of Common Stock at exercise prices
ranging from $2.50 to $5.40 per share to ten employees and consultants and three
outside directors. No consideration was paid to the Company by any recipient of
any of the foregoing options for the grant of any such options.
There were no underwriters employed in connection with any of the
transactions set forth in Item 26.
The issuances described in Items 26(1) through 26(2) were exempt from
registration under the Securities Act because they did not involve a public
offering. The issuances described in Item 26(3) were exempt from registration
under the Securities Act in reliance on Rule 701 promulgated thereunder and on
Section 4(2) thereof as transactions pursuant to compensatory benefit plans and
contracts relating to compensation and transactions not involving a public
offering. The recipients of securities in each such transaction represented
their intention to acquire the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates and other instruments issued in
such transactions.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
+1.1 Proposed Form of Underwriting Agreement
+1.2 Form of Representative Warrant
+3.1 Certificate of Incorporation
+3.2 Bylaws
+4.1 Form of Warrant Agreement between the Company and the Warrant Agent, including the
form of Warrants
+5.1 Opinion and Consent of Gray Cary Ware & Freidenrich +10.1 Form of
Indemnity Agreement for officers and directors +10.2 Form of Proposed
Stock Option Plan and Agreements thereunder +10.3 Form of Bridge Note
and accompanying Bridge Warrant
+10.4 Employment Agreement dated June 1, 1997 between the Company and John Anthony Whalen,
Jr.
+10.5 Letter Agreement dated August 4, 1997 between the Company, David Tendler and Hal
Beretz
+10.6 Letter Agreement dated August 20, 1997 between the Company and Kim P. Goh
+10.7 Letter Agreement dated November 3, 1997 between the Company and Kim P. Goh.
</TABLE>
II-2
<PAGE> 68
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
10.8 Sublease Agreement dated December 16, 1997 between the Company and Road Runner
Sports, Inc.
+11.1 Calculation of Earnings Per Share
23.1 Consent of Independent Accountants
+23.2 Consent of Gray Cary Ware & Freidenrich (included in Exhibit 5.1)
+24.1 Power of Attorney
+27.1 Financial Data Schedule
</TABLE>
* To be filed by amendment.
+ Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES.
All required information is set forth in the financial statements
included in the Prospectus constituting part of this Registration Statement.
ITEM 28. UNDERTAKINGS
Rule 415 Offering
The undersigned Registrant hereby undertakes that it will:
(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 in
the Registration Statement; and
(iii) Include any additional or changed material information on
the plan of distribution.
(2) For determining liabilities under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
Request for Acceleration of Effectiveness
Insofar as indemnification by the Registrant for liabilities arising
under the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement 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
II-3
<PAGE> 69
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 hereunder,
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.
Reliance on Rule 430A
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
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 shall be deemed to be part of this Registration
Statement as of the time it was declared effective;
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to be
the initial bona fide offering thereof; and
II-4
<PAGE> 70
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereto duly authorized, in the City of
San Diego, State of California, on the 8th day of January, 1998.
C2i SOLUTIONS, INC.
By: /S/ JOHN ANTHONY WHALEN, JR.
---------------------------------------
John Anthony Whalen, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the 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/ JOHN ANTHONY WHALEN, JR. Chief Executive Officer and January 8, 1998
------------------------------------ Director (Principal
John Anthony Whalen, Jr. Executive Officer)
/S/ DIANE E. HESSLER Chief Financial Officer January 8, 1998
------------------------------------ (Principal Financial and
Diane E. Hessler Accounting Officer)
HAL H. BERETZ * Director January 8, 1998
------------------------------------
Hal H. Beretz
KIM P. GOH * Director January 8, 1998
------------------------------------
Kim P. Goh
DAVID TENDLER * Director January 8, 1998
------------------------------------
David Tendler
*By:/S/ JOHN ANTHONY WHALEN, JR.
----------------------------
John Anthony Whalen, Jr.
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 1
EXHIBIT 10.8
[CB COMMERCIAL LOGO] SUBLEASE
CB COMMERCIAL REAL ESTATE GROUP, INC.
BROKERAGE AND MANAGEMENT
LICENSED REAL ESTATE BROKER
1. PARTIES.
This Sublease, dated December 16, 1997, is made between Road Runner Sports,
Inc. ("Sublessor"), and C2i Solutions, Inc. ("Sublessee").
2. MASTER LEASE.
Sublessor is the lessee under a written lease dated February 16, 1993,
wherein First Security Mortgage ("Lessor") leased to Sublessor the real
property located in the City of San Diego, County of San Diego, State of
California, described as approximately 52,648 square feet in two (2)
freestanding buildings located at 6138 and 6150 Nancy Ridge Drive.
_____________________________________________________________________________
("Master Premises"). Said lease has been amended by the following amendments
N/A
_____________________________________________________________________________
____________________________________________________________________________;
said lease and amendments are herein collectively referred to as the "Master
Lease" and are attached hereto as Exhibit "A."
3. PREMISES.
Sublessor hereby subleases to Sublessee on the terms and conditions set
forth in this Sublease the following portion of the Master Premises
("Premises"): approximately 12,373 square feet located on the second floor
of 6138 Nancy Ridge Drive, San Diego, California 92121.
4. WARRANTY BY SUBLESSOR.
Sublessor warrants and represents to Sublessee that the Master Lease has not
been amended or modified except as expressly set forth herein, that
Sublessor is not now, and as of the commencement of the Term hereof will not
be, in default or breach of any of the provisions of the Master Lease, and
that Sublessor has no knowledge of any claim by Lessor that Sublessor is in
default or breach of any of the provisions of the Master Lease.
5. TERM.
The Term of this Sublease shall commence on January 15, 1998 ("Commencement
Date"), or when Lessor consents to this Sublease (if such consent is required
under the Master Lease), whichever shall last occur, and end on July 14, 1998
("Termination Date"), unless otherwise sooner terminated in accordance with
the provisions of this Sublease. In the event the Term commences on a date
other than the Commencement Date, Sublessor and Sublessee shall execute a
memorandum setting forth the actual date of commencement of the Term.
Possession of the Premises ("Possession") shall be delivered to Sublessee on
the commencement of the Term. If for any reason Sublessor does not deliver
Possession to Sublessee on the commencement of the Term, Sublessor shall not
be subject to any liability for such failure, the Termination Date shall not
be extended by the delay, and the validity of this Sublease shall not be
impaired, but rent shall abate until delivery of Possession. Notwithstanding
the foregoing, if Sublessor has not delivered Possession to Sublessee within
thirty (30) days after the Commencement Date, then at any time thereafter and
before delivery of Possession, Sublessee may give written notice to Sublessor
of Sublessee's intention to cancel this Sublease. Said notice shall set forth
an effective date for such cancellation which shall be at least ten (10) days
after delivery of said notice to Sublessor. If Sublessor delivers Possession
to Sublessee on or before such effective date, this Sublease shall remain in
full force and effect. If Sublessor fails to deliver Possession to Sublessee
on or before such effective date, this Sublease shall be cancelled, in which
case all consideration previously paid by Sublessee to Sublessor on account
of this Sublease shall be returned to Sublessee, this Sublease shall
thereafter be of no further force or effect, and Sublessor shall have no
further liability to Sublessee on account of such delay or cancellation. If
Sublessor permits Sublessee to take Possession prior to the commencement of
the Term, such early Possession shall not advance the Termination Date and
shall be subject to the provisions of this Sublease, including without
limitation the payment of rent.
6. RENT.
6.1 Minimum Rent. Sublessee shall pay to Sublessor as minimum rent, without
deduction, setoff, notice, or demand, at 6150 Nancy Ridge Drive, San
Diego, CA 92121 Attention: Bill Ness or at such other place as
Sublessor shall designate from time to time by notice to Sublessee,
the sum of Twelve Thousand Nine Hundred Ninety-One and 65/100---------
Dollars ($12,991.65----------) per month, in advance on the first day
of each month of the Term. Sublessee shall pay to Sublessor upon
execution of this Sublease the sum of Nineteen Thousand Four Hundred
Eighty-Seven and 47/100---------- Dollars ($19,487.47-----------) as
rent for all of January and all of February, 1998. If the Term begins or
ends on a day other than the first or last day of a month, the rent for
the partial months shall be prorated on a per diem basis. Additional
provisions: N/A
6.2 Operating Costs. If the Master Lease requires Sublessor to pay to
Lessor all or a portion of the expenses of operating the building and/or
project of which the Premises are a part ("Operating Costs"), including but not
limited to taxes, utilities, or insurance, then Sublessee shall pay to
Sublessor as additional rent N/A percent (____%) of the amounts payable by
Sublessor for Operating Costs incurred during the Term. Such
1
<PAGE> 2
additional rent shall be payable as and when Operating Costs are payable by
Sublessor to Lessor. If the Master Lease provides for the payment by
Sublessor of Operating Costs on the basis of an estimate thereof, then as
and when adjustments between estimated and actual Operating Costs are made
under the Master Lease, the obligations of Sublessor and Sublessee
hereunder shall be adjusted in a like manner; and if any such adjustment
shall occur after the expiration or earlier termination of the Term, then
the obligations of Sublessor and Sublessee under this Subsection 6.2 shall
survive such expiration or termination. Sublessor shall, upon request by
Sublessee, furnish Sublessee with copies of all statements submitted by
Lessor of actual or estimated Operating Costs during the Term.
7. SECURITY DEPOSIT.
Sublessee shall deposit with Sublessor upon execution of this Sublease the
sum of Twelve Thousand Nine Hundred Ninety-One and 65/100 Dollars
($12,991.65) as security for Sublessee's faithful performance of
Sublessee's obligations hereunder ("Security Deposit"). If Sublessee fails
to pay rent or other charges when due under this Sublease, or fails to
perform any of its other obligations hereunder, Sublessor may use or apply
all or any portion of the Security Deposit for the payment of any rent or
other amount then due hereunder and unpaid, for the payment of any other
sum for which Sublessor may become obligated by reason of Sublessee's
default or breach, or for any loss or damage sustained by Sublessor as a
result of Sublessee's default or breach. If Sublessor so uses any portion
of the Security Deposit, Sublessee shall, within ten (10) days after
written demand by Sublessor, restore the Security Deposit to the full
amount originally deposited, and Sublessee's failure to do so shall
constitute a default under this Sublease. Sublessor shall not be required
to keep the Security Deposit separate from its general accounts, and shall
have no obligation or liability for payment of interest on the Security
Deposit. In the event Sublessor assigns its interest in this Sublease,
Sublessor shall deliver to its assignee so much of the Security Deposit as
is then held by Sublessor. Within ten (10) days after the Term has
expired, or Sublessee has vacated the premises, or any final adjustment
pursuant to Subsection 6.2 hereof has been made, whichever shall last
occur, and provided Sublessee is not then in default of any of its
obligations hereunder, the Security Deposit, or so much thereof as had not
theretofore been applied by Sublessor, shall be returned to Sublessee or
to the last assignee, if any, of Sublessee's interest hereunder.
8. USE OF PREMISES.
The Premises shall be used and occupied only for office, engineering and
other general office uses, and for no other use or purpose.
9. ASSIGNMENT AND SUBLETTING.
Sublessee shall not assign this Sublease or further sublet all or any part
of the Premises without the prior written consent of Sublessor (and the
consent of Lessor, if such is required under the terms of the Master
Lease).
10. OTHER PROVISIONS OF SUBLEASE.
All applicable terms and conditions of the Master Lease are incorporated
into and made a part of this Sublease as if Sublessor were the lessor
thereunder, Sublessee the lessee thereunder, and the Premises the Master
Premises, except for the following:
See Addendum
Sublessee assumes and agrees to perform the lessee's obligations under the
Master Lease during the Term to the extent that such obligations are
applicable to the Premises, except that the obligation to pay rent to
Lessor under the Master Lease shall be considered performed by Sublessee
to the extent and in the amount rent is paid to Sublessor in accordance
with Section 6 of this Sublease. Sublessee shall not commit or suffer any
act or omission that will violate any of the provisions of the Master
Lease. Sublessor shall exercise due diligence in attempting to cause
Lessor to perform its obligations under the Master Lease for the benefit
of Sublessee. If the Master Lease terminates, this Sublease shall
terminate and the parties shall be relieved of any further liability or
obligation under this Sublease, provided however, that if the Master Lease
terminates as a result of a default or breach by Sublessor or Sublessee
under this Sublease and/or the Master Lease, then the defaulting party
shall be liable to the nondefaulting party for the damage suffered as a
result of such termination. Notwithstanding the foregoing, if the Master
Lease gives Sublessor any right to terminate the Master Lease in the event
of the partial or total damage, destruction, or condemnation of the Master
Premises or the building or project of which the Master Premises are a
part, the exercise of such right by Sublessor shall not constitute a
default or breach hereunder.
11. ATTORNEYS' FEES.
If Sublessor, Sublessee, or Broker shall commence an action against the
other arising out of or in connection with this Sublease, the prevailing
party shall be entitled to recover its costs of suit and reasonable
attorney's fees.
12. AGENCY DISCLOSURE.
Sublessor and Sublessee each warrant that they have dealt with no other
real estate broker in connection with this transaction except: CB
COMMERCIAL REAL ESTATE GROUP, INC., who represents Road Runner Sports,
Inc. and Douglas C. Lozier and Brent H. Wright of CB Commercial Real
Estate Group, Inc., who represents C2i Solutions, Inc.
In the event that CB COMMERCIAL REAL ESTATE GROUP, INC. represents both
Sublessor and Sublessee, Sublessor and Sublessee hereby confirm that they
were timely advised of the dual representation and that they consent to
the same, and that they do not expect said broker to disclose to either of
them the confidential information of the other party.
13. COMMISSION.
Upon execution of this Sublease, and consent thereto by Lessor (if such
consent is required under the terms of the Master lease), Sublessor shall
pay Broker a real estate brokerage commission in accordance with
Sublessor's contract with Broker for the subleasing of the Premises, if
any, and otherwise in the amount of per Agreement Dollars ($____), for
services rendered in effecting this Sublease. Broker is hereby made a
third party beneficiary of this Sublease for the purpose of enforcing its
right to said commission.
14. NOTICES.
All notices and demands which may or are to be required or permitted to be
given by either party on the other hereunder shall be in writing. All
notices and demands by the Sublessor to Sublessee shall be sent by United
States Mail, postage prepaid, addressed to the Sublessee at the Premises,
and to the address hereinbelow, or to such other place as Sublessee may
from
2
<PAGE> 3
time to time designate in a notice to the Sublessor. All notices and demands by
the Sublessee to Sublessor shall be sent by United States Mail, postage prepaid,
addressed to the Sublessor at the address set forth herein, and to such other
person or place as the Sublessor may from time to time designate in a notice to
the Sublessee.
<TABLE>
<CAPTION>
<S> <C>
To Sublessor: Road Runner Sports, Inc., 6150 Nancy Ridge Drive, San Diego, CA 92121
-------------------------------------------------------------------------------------
To Sublessee: C2i Solutions, Inc., 6138 Nancy Ridge Drive, San Diego, CA 92121
-------------------------------------------------------------------------------------
</TABLE>
15. CONSENT BY LESSOR.
THIS SUBLEASE SHALL BE OF NO FORCE OR EFFECT UNLESS CONSENTED TO BY LESSOR
WITHIN 10 DAYS AFTER EXECUTION HEREOF, IF SUCH CONSENT IS REQUIRED UNDER
THE TERMS OF THE MASTER LEASE.
16. COMPLIANCE.
The parties hereto agree to comply with all applicable federal, state and
local laws, regulations, codes, ordinances and administrative orders having
jurisdiction over the parties, property or the subject matter of this
Agreement, including, but not limited to, the 1964 Civil Rights Act and all
amendments thereto, the Foreign Investment In Real Property Tax Act, the
Comprehensive Environmental Response Compensation and Liability Act, and
The Americans With Disabilities Act.
Sublessor: Road Runner Sports, Inc. Sublessee: C2i Solutions, Inc.
------------------------- ------------------------------
By: By: [SIG]
--------------------------------- -------------------------------------
Title: Title: VP, Finance & CFO
----------------------------- ----------------------------------
By: By:
-------------------------------- -------------------------------------
Title: Title:
---------------------------- ---------------------------------
Date: Date: 12/24/97
------------------------------ -----------------------------------
LESSOR'S CONSENT TO SUBLEASE
The undersigned ("Lessor"), lessor under the Master Lease, hereby consents to
the foregoing Sublease without waiver of any restriction in the Master Lease
concerning further assignment or subletting. Lessor certifies that, as of the
date of Lessor's execution hereof, Sublessor is not in default or breach of any
of the provisions of the Master Lease, and that the Master Lease has not been
amended or modified except as expressly set forth in the foregoing Sublease.
Lessor:
---------------------------
By:
-------------------------------
Title:
----------------------------
By:
-------------------------------
Title:
----------------------------
Date:
-----------------------------
CONSULT YOUR ADVISORS -- This document has been prepared for approval by your
attorney. No representation or recommendation is made by Broker as to the legal
sufficiency or tax consequences of this document or the transaction to which it
relates. These are questions for your attorney.
In any real estate transaction, it is recommended that you consult with a
professional, such as a civil engineer, industrial hygienist or other person,
with experience in evaluating the condition of the property, including the
possible presence of asbestos, hazardous material and underground storage tanks.
3
<PAGE> 4
ADDENDUM
This Addendum by and between Road Runner Sports Inc., ("Sublessor") and C2i
Solutions, Inc. ("Sublessee"), modifies the terms and condition of the Master
Lease Agreement dated February 16, 1993 as follows:
Page 1 of 2
- --------------------------------------------------------------------------------
1. PREMISES/OCCUPANCY SCHEDULE/TERM AND COMMENCEMENT:
DECEMBER 15, 1997 THROUGH JANUARY 14, 1998 -- Early Occupancy Period
(vacant area only) no rent;
JANUARY 15, 1998 THROUGH JULY 14, 1998 -- 12,373 square feet located on and
representing the entire second floor of 6138 Nancy Ridge Drive (Total
Square Feet Occupied: Approximately 12,373).
2. TERM OF THE SUBLEASE: Six (6) month term and thereafter month-to-month
tenancy with the right to cancel by either party with thirty (30) days
notice after July 15, 1998.
3. PREMISES CONDITION: Sublessor to perform minor repairs including, but not
limited to, painting and patching of all interior demising walls, carpet
repair, cleaning, as well as HVAC, plumbing, electrical and all other base
building systems. Sublessee understands it is leasing Premises on an
"as-is" basis subject to Sublessor responsibilities contained in this
article.
4. TELEPHONE SYSTEM: Sublessor to provide twenty-five (25) direct dial lines
for Sublessee. Sublessee will be responsible for installation and
maintenance of network cabling.
5. MAIN LOBBY INGRESS/EGRESS: Sublessor to provide shared main lobby ingress
and egress to the Premises beginning December 15, 1997 and continuing
through the duration of the Sublease term. In addition, Sublessor will
share lobby conference rooms on a scheduled basis. Road Runner Sports will
have first right of use.
6. MAINTENANCE AND REPAIRS: sublessor shall maintain, repair, and replace all
the structural elements and exterior surfaces of the Premises including the
roof, roof membrane and roof covering, walls, concrete slab, footings,
electrical and plumbing exterior to the building at Sublessor's sole
expense, unless problems are directly related to Sublessee use,
improvements and/or caused by Sublessee's employees, agents or contractors.
7. SIGNAGE: Sublessee shall be granted standard sign rights for the subject
Premises. All costs associated with design, installation, permitting, and
removal of said signage shall be paid by Sublessee. Said signage shall be
mutually agreed upon between Landlord, Sublessor and Sublessee in
accordance with the sign criteria for the project and according to City of
San Diego codes and regulations.
8. PARKING: Sublessee shall receive two (2) reserved parking spaces in close
proximity to the main entrance of the subject Premises within the three per
one thousand (3:1,000) parking ratio not to exceed forty-two (42) spaces.
9. HAZARDOUS MATERIALS: The parties hereby expressly acknowledge that Broker
has made no independent determination or investigation regarding the
following: present or future use or zoning of the property; environmental
matters affecting the Property; the condition of the Property including,
but not limited to, structural, mechanical, and soils conditions as well as
issues surrounding hazardous wastes or substances; violations of the
Occupational Safety and Health Act or any other federal, state, county or
municipal laws, ordinances, or statutes; measurements of land and/or
buildings. Lessee agrees to make its own investigation and determination
regarding such items. A REAL ESTATE BROKER IS QUALIFIED TO ADVISE ON REAL
ESTATE. IF YOU DESIRE LEGAL ADVICE, CONSULT YOUR ATTORNEY.
10. AMERICANS WITH DISABILITIES ACT: Owners or tenants of real property may be
subject to the Americans with Disabilities Act (ADA), a federal law
codified at 42 USC Section 12101 et seq. Among other requirements of the
ADA that could apply to the Property, Title III of the Act requires owners
and tenants of "public accommodations" to remove barriers to access by
disabled persons and provide auxiliary aids and services for hearing,
vision, or speech impaired persons. The regulations under Title III of the
ADA are codified at 28 CFR Part 36.
<PAGE> 5
ADDENDUM BETWEEN ROADRUNNER SPORTS, INC. AND C2i SOLUTIONS, INC.
Page 2 of 2
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Broker recommends that you and your attorney review the ADA and the
regulations and, if appropriate, this Lease to determine if this law
would apply to you and the nature of the requirements. These are legal
issues. You are responsible for conducting your own independent
investigation of these issues.
11. CODE COMPLIANCE: The parties hereto agree to comply with all applicable
federal, state, and local laws, regulations, codes, ordinances, and
administrative orders having jurisdiction over the parties, the
Property, or the subject matter of this Lease including, but not
limited to, the 1964 Civil Rights Act and all amendments thereto, the
Foreign Investment in Real Property Tax Act, the Comprehensive
Environmental Response Compensation and Liability Act, and The
Americans With Disabilities Act.
12. LESSOR APPROVAL: This Sublease is subject to Lessor's approval which
per the Master Lease shall not be unreasonably withheld.
13. ASSIGNMENT: Sublessee may not assign its interest under this Sublease
Agreement.
14. EXTRAORDINARY UTILITY COST: If it is determined that C2i Solutions'
after hours utilities consumption is deemed excessive by Sublessor,
Sublessor will impose a $35.00 per hour utility fee.
SUBLESSOR SUBLESSEE
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ROAD RUNNER SPORTS, INC. C2i SOLUTIONS, INC.
By: By: [SIG]
----------------------------------- -------------------------------------
Date: Date: 12/24/97
--------------------------------- -----------------------------------
<PAGE> 1
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected Financial
Data" and "Experts" and to the use of our report dated February 28, 1997
(except for the first and second paragraphs of Note 1 and all of Note 4, as to
which the date is November 3, 1997) in Amendment No. 2 to the Registration
Statement (Form SB-2 No. 333-39425) and related Prospectus of C2i Solutions,
Inc.
/s/ ERNST & YOUNG LLP
ERNST & YOUNG LLP
San Diego, California
January 6, 1998
