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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-23589
C2i SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0775687
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
6138 NANCY RIDGE DRIVE, SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 812-5800
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.001
PAR VALUE REDEEMABLE
WARRANTS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the 90 days. Yes [ ] No [X]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The registrant's revenues for its most recent fiscal year were $79,823.
The aggregate market value of voting stock held by nonaffiliates of the
registrant was approximately $20,173,000 as of March 30, 1998. Shares of common
stock held by each officer and director and by each person or group who owns 5%
or more of the outstanding common stock have been excluded in that such persons
or groups may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of March 1, 1998, the Registrant had 3,391,338 shares of its $.001 par
value common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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PART I
This Annual Report on Form 10-KSB contains certain forward-looking
statements within the meaning of Section 21E of the Securities and Exchange Act
of 1934, as amended, and is subject to the Safe Harbor provisions created by
that statute. In this report, the words "anticipates," "believes," "expects,"
"future," "intends" and similar expressions identify forward-looking statements.
Such statements are subject to certain risks and uncertainties, including, but
not limited to, those discussed herein, and, in particular, those contained in
"Item 6 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations" under the caption "Business Risks and Uncertainties,"
that could cause actual results to differ materially from those projected.
ITEM 1. BUSINESS
INTRODUCTION
C2i Solutions, Inc. ("C2i" or the "Company") 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 Annual Report, 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 performing date sensitive functions 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, companies involved in the healthcare industry,
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government agencies, transportation companies, communications companies,
manufacturers, including those of embedded systems, and utilities. 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
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.
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 a 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
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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 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.
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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 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
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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 a valuable road map that enhances a Year 2000 project by:
- Defining the scope of the conversion project, including size,
cost, resources and timeline
- 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.
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Oracle Corporation ("Oracle"). C2i has entered into 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.
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.
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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.
CUSTOMERS
During 1997, the Company was engaged to provide assessment projects to
agencies of two states, a hotel chain, 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. In January of 1998, the Company was selected by
and entered into an agreement with United Guaranty Corporation ("UGC") to help
UGC develop an improved strategy for assessment and solution of UGC's Year 2000
problems.
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 systems integrators, service providers, the parties who have entered into
VAR, or other business partnering relationships with C2i, including outside
sales agents. 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.
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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.
EMPLOYEES
As of December 31, 1997, the Company had 10 full-time employees and one
part-time employee.
As previously noted, the Company expects a significant increase in the
number of employees over the next twelve months. The actual rate of this
increase is dependent on a number of factors, including demand for the Company's
products and services. Also, 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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company subleases approximately 12,400 square feet of office space
in San Diego, California pursuant to a sublease agreement which also provides
the Company with two (2) options to extend the term of the lease for two
additional three-month periods. The Company moved 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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ITEM 3. LEGAL PROCEEDINGS
The Company is not involved in any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company effected an initial public offering ("IPO") on February 24,
1998 with its Common Stock and Redeemable Warrants traded on the Nasdaq SmallCap
Market under the symbols "CTWO" and "CTWOW," respectively. As of March 1, 1998,
there were 25 stockholders of record of the Company's Common Stock. Because many
of such shares are held by brokers and other institutions on behalf of
stockholders, the Company is unable to estimate the total number of stockholders
represented by these record holders.
The Company has not paid any cash dividends on its Common Stock. The
Company currently expects that it will retain its future earnings for use in the
operation and expansion of its business and does not anticipate paying any cash
dividends in the foreseeable future.
In the last three years, the Registrant (or its predecessor limited
liability company, which issued Owner Units) 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.
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. Each Bridge Warrant entitles
the holder to purchase one share of Common Stock of the Company at an exercise
price of $4.00 per share. The Bridge Warrants are exercisable for a one-year
period beginning February 24, 1999.
3. Option Grants to Employees, Consultants and Directors
From June 1, 1997 through January 31, 1998, the Company issued options
to purchase an aggregate of 665,500 shares of Common Stock at exercise prices
ranging from $2.50 to $5.50 per share to fourteen 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.
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4. Underwriter Warrants
On February 27, 1998, the Company issued warrants (the "Underwriter
Warrants") to purchase up to 100,000 shares of Common Stock and Warrants to
Gilford Securities Incorporated ("Gilford") (90,000), the Underwriter in the
Company's initial public offering of equity securities, and to an officer of
Gilford designated by Gilford. These shares of Common Stock and Warrants are
identical to those offered in the Company's initial public offering except that
the Underwriter Warrants and the Warrants included in the Underwriter Warrants
will not be subject to redemption by the Company. The Underwriter Warrants
cannot be transferred, sold, assigned or hypothecated for one year and
thereafter transfers may only be made to persons who are bona fide officers or
directors of the Underwriter. The Underwriter Warrants are exercisable during
the four-year period commencing February 13, 1999 at an exercise price of $8.10
per share and $0.135 per Warrant subject to adjustment in certain events to
protect against dilution. The holders of the Underwriter Warrants and underlying
securities have certain demand and piggyback registration rights.
There were no underwriters employed in connection with any of the
transactions set forth above.
The issuances described in items 1, 2 and 4 were exempt from
registration under the Securities Act because they did not involve a public
offering. The issuances described in item 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.
Pursuant to the Company's Registration Statement on Form SB-2 (No.
333-39425), declared effective by the Commission on February 13, 1998, the
Company registered 1,150,000 shares of Common Stock, $.001 par value, 1,150,000
Redeemable Warrants and 1,150,000 shares of Common Stock underlying such
Redeemable Warrants. Of such securities, 150,000 shares of Common Stock and
Redeemable Warrants were subject to an over-allotment option in favor of the
underwriter of the initial public offering, Gilford Securities, Incorporated,
which over-allotment option has been exercised as to both the Shares of Common
Stock and the Redeemable Warrants as of the date hereof.
The price to the public per share of Common Stock was $6.00 per share,
with underwriting discounts and commissions of $0.60 per share, for net proceeds
to the Company of $5.40 per share. The price to the public of the Redeemable
Warrants was $0.10 per warrant, with an underwriting discount and commission of
$0.01 per Warrant with proceeds to the Company of $0.09 per Warrant. The
aggregate price to the public of the Common Stock and Warrants (including those
issued upon exercise of the overallotment option) was $7,015,000, with aggregate
underwriting discounts and commissions of $701,500, for aggregate proceeds to
the Company of $6,313,500. In connection with initial public offering, the
Company incurred approximately $555,450 of expenses, none of which was paid to
directors, officers or general partners of the Registrant or their associates,
or to any person owning 10% or more of any class of equity of the Registrant.
The net proceeds to the Company from the sale of the 1,150,000 shares of Common
Stock and 1,150,000 Redeemable Warrants were approximately $5,758,050, after
deducting underwriting discounts and commissions and the estimated offering
expenses payable by the Company. Since the closing of the public offering
occurred following the end of the reporting period addressed by this Report, no
proceeds from the offering were used by the Company during the applicable
reporting period.
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ITEM 6. 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 "Business Risks and Uncertainties'" and
elsewhere in this Form 10-KSB. In this report, the words "anticipates,"
"believes," "expects," "future," "intends," and similar expressions identify
forward-looking statements. The following discussion and analysis should be read
in conjunction with the financial statements and notes thereto contained in Item
7 of this report.
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 late 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, expected
changes in the cost structure related to provision of the Company's Year 2000
solutions, and projected increases in 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 continue to expand its workforce and
facilities. The Company expects to incur progressively increasing expense levels
relating to this expansion through July 1998 at a minimum, during which time it
does not expect to generate revenues of any significance. There can be no
assurance that the Company will achieve or maintain profitable operations.
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 and indirect
sales efforts; (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.
The Company began its workforce expansion in the third quarter of 1997,
and expects this to continue throughout 1998. Also, in December 1997, the
Company commenced payment of salaries to its officers. Prior to December 1997,
the Company had not incurred any significant cash compensation for its officers
since its inception. Additionally, the Company recognized a charge of
approximately $1.2 million in 1997 for non-cash compensation expense to
officers, as a result of issuance of Common Stock to these officers at deemed
values which exceeded the total consideration received by the Company. In
addition to the foregoing, future compensation expenses are expected to increase
materially based on: (i) the planned significant increase in number of
employees, (ii) estimated compensation levels necessary to attract highly
qualified individuals, in the Company's early stages, from a limited pool of
qualified candidates, in a competitive marketplace.
In January 1998, the Company moved into a larger facility in preparation
for the increased level of business activity and personnel anticipated by
management. The Company also has plans to open several new regional offices,
which will all involve some amount of fixed overhead.
During the quarter ending March 31, 1998, the Company will recognize an
extraordinary charge of approximately $112,000, related to repayment of the
Bridge Financing. This represents a write-off of the unamortized balances of
debt discount and deferred finance charges remaining upon repayment of the
Bridge
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<PAGE> 13
Notes. 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 may be subject to substantial
variations in any given year and from quarter to quarter. See "Risk
Factors-Fluctuations in Quarterly Operating Results."
In late September 1997, the Company hired its first two regional sales
representatives and began selling activities. Based on its experience to date,
the Company believes that actual Year 2000 compliance efforts by potential
customers have fallen short of expectations. This appears to be consistent with
general industry trends noted by analysts, experts, and competitors. As a
result of the Company's experience to date, 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 prior to
the end of the second 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 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 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 products and 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
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 requiring 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
are currently non-existent. In the future such costs are not expected to be
significant and would be accrued if appropriate.
The Company recognizes revenue from the sale of software and hardware
products upon delivery of the product to customers. 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.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's statements of operations as a percentage of total revenues:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION PERIOD FROM
(SEPTEMBER INCEPTION
17, 1996) (SEPTEMBER 17,
THROUGH YEAR ENDED 1996) THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
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 administrative 488.2% 2283.8% 2086.3%
expenses
---------- ---------- ----------
Operating loss (452.5%) (2242.9%) (2046.0%)
Interest expense -- 31.3% 27.8%
---------- ---------- ----------
Loss before taxes (452.5%) (2274.2%) (2073.8%)
Provision for income taxes -- 4.3% 3.8%
---------- ---------- ----------
Net loss (452.5%) (2278.5%) (2077.6%)
========== ========== ==========
</TABLE>
FISCAL YEAR ENDED DECEMBER 31, 1997.
Revenues. The Company's revenues of $79,283 consist of fees for
consulting 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 consulting services. Cost of revenues also
includes third party royalties relating to licensed technology, and cost of
products sold. Cost of revenues for the year ended December 31, 1997 was
approximately 59% of revenues.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $1,810,623 for the year ended December 31, 1997,
which includes a non-cash charge of $1,199,999, recognized for financial
statement purposes, as a result of sales of common stock to key employees at
below the deemed value. Other selling, general and administrative expenses
related primarily to personnel costs 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
progressively throughout 1998 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.
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<PAGE> 15
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 basic infrastructure and
internal operations.
LIQUIDITY AND CAPITAL RESOURCES
From Inception through December 31, 1997, the Company has financed its
operations externally, primarily with the proceeds from the issuance of Common
Stock and a Bridge Financing, completed in October 1997, which have provided
total cash of $958,000. These funds, along with approximately $45,000 advanced
from a former stockholder, have provided the Company with aggregate cash to date
of $1,003,000.
The Company used net cash flow for operating activities of $41,343 and
$275,389 in the period from Inception (September 17, 1996) through December 31,
1996 and for the year ended December 31, 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 year ended December 31, 1997 as a result of the
expansion of the Company's operations, with no significant increase in
corresponding revenue. Operational cash requirements from Inception through
December 31, 1997, including personnel costs, used approximately $600,000 of
cash, of which $560,000 was used during the year ended December 31, 1997. This
use was offset by the net change in working capital balances of approximately
$283,000, substantially all of which occurred in the year ended December 31,
1997.
The Company's investing activities have consisted primarily of equipment
purchases to support the additional personnel being hired, and amounted to
$23,028 and $42,205 for the periods ended December 31, 1996 and December 31,
1997, respectively. The Company's current plans reflect significant capital
expenditures during 1998; however, there are no material purchase commitments
outstanding at March 31, 1998. These plans assume that the Company will
experience a significant increase in the demand for its services, resulting in a
corresponding increase in personnel, and reflect the establishment of several,
strategically located, regional operation centers, throughout the continental
U.S. during 1998.
Based on the Company's current operating plan and anticipated personnel
increases, the Company expects to invest approximately $500,000 over the next
year in capital equipment. This includes approximately $250,000 for general
office equipment, furniture and fixtures and approximately $250,000 for computer
equipment, including software. A portion of the total amount projected for
future capital expenditures is variable, based on the Company's ability to
achieve targeted revenue levels and successfully recruit qualified individuals.
However, certain capital expenditures are not based on the level of business
activity, or may involve commitments or terms which preclude or limit the
Company's ability to subsequently reduce or modify such commitments in response
to changes in the business.
The Company's financing activities provided $80,838 and $599,950 for the
periods ending December 31, 1996 and 1997, respectively. The Company received an
advance from a former stockholder of $45,000, of which it repaid $24,162 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 debt and equity securities were issued, providing the
Company with $800,000 in cash. The Company used approximately $287,000 of this
cash to pay for financing costs totaling $26,820 in connection with the Bridge
Financing, which occurred in 1997, and $259,906 related to its initial public
offering, which occurred in 1998. Also, the Company used $10,712 of cash in 1997
to repay the advance from the former stockholder.
As of December 31, 1997, the Company had cash of $298,823 and a working
capital (deficit) of $(491,588). In February and March 1998, the Company
received the proceeds from its initial public offering, including sales of
securities subject to the underwriter's over-allotment options. Gross offering
proceeds were $7,015,000, and resulted in net cash to the Company of $6,148,050,
after deducting the underwriter's 10% discount and 3% non-accountable expense
allowance (net of the $45,000 previously paid by the Company), but before
payment of other offering expenses estimated at $345,000.
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<PAGE> 16
The Company believes that net proceeds from the sale of Common Stock and
Warrants in the initial public offering, together with existing cash and
anticipated funds from operations, less the amount used to repay the Bridge
Notes, including interest accrued thereon, will be sufficient to fund capital
expenditures, working capital and other cash requirements for approximately 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 (through at least the end of the third quarter of 1998). 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 financing 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.
BUSINESS RISKS AND UNCERTAINTIES
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; Possible Delisting
from Nasdaq; Going Concern Opinion
The Company has experienced significant operating losses since its
inception in September 1996. As of December 31, 1997, the Company's accumulated
deficit was approximately $1,851,000, which includes a 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 its initial public offering,
together with its existing capital resources, will enable it to fund its
operations for approximately the next 12 months. The Company will be required to
seek additional capital to continue its operations beyond that time. The Company
has no commitments for any future funding, and there can be no assurance that
the Company will be able to obtain
16
<PAGE> 17
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.
The Company is required to meet certain financial tests to maintain its
listing on the Nasdaq SmallCap Market. If continued losses by the Company cause
the Company to fail to meet such continued listing requirements, the Company's
securities may be delisted from the Nasdaq SmallCap Market and the liquidity of
the Company's securities could be impaired.
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.
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<PAGE> 18
Fluctuations in Quarterly Operating Results
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.
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 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
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<PAGE> 19
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
year ended December 31, 1997 from three customers and 100% of its revenues for
the period ended December 31, 1996 from one customer. As of December 31, 1996,
100% of the accounts receivable balance related to one customer. The Company had
no outstanding accounts receivable at December 31, 1997. In addition, the
Company has experienced a supplier concentration, with 99% of its total cost of
revenues for the year ended December 31, 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, who is also a
former stockholder. 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 costs 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, a particular 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 limited number of past or current 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 generate future revenues, the Company must identify
and obtain business from 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."
19
<PAGE> 20
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 been with the Company since September 1997. The loss of
services of any of these executive officers may 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 has 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, 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
20
<PAGE> 21
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.
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.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements and related notes thereto required by this item
are listed and set forth in a separate section of this report following the
index to exhibits.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
21
<PAGE> 22
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
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
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) 55 Director
David Tendler (1) 60 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. 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 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
22
<PAGE> 23
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.
The Company's Certificate of Incorporation provides that the Board of
Directors is divided into three classes. Each class of directors consists 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. The Class I directors, whose terms will end in 1998,
are Mr. Beretz and Mr. Goh; the Class II director, whose term will end in 1999,
is Mr. Tendler; and the Class III director, whose term will end in 2000, is 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.
Section 16(a) Beneficial Ownership Reporting Compliance. The Company did
not have a class of equity securities registered under the Securities Exchange
Act until after its most recent fiscal year end. As such, no director, executive
officer or beneficial owner of securities was required to file a report required
by Section 16(a) of the Exchange Act during the year ended December 31, 1997.
23
<PAGE> 24
ITEM 10. 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
------------
Annual Compensation Securities
------------------- 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
Percent of at Assumed Annual Rates
Number of Total Options of Stock Purchase
Securities Granted to Appreciation for
Underlying Employees Exercise Option Term(1)
Options in Fiscal Price Expiration ----------------------
Name Granted Year Per Share Date 5% 10%
- ----------------------- ------ ---------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
John Anthony Whalen, Jr 62,000 24% $ 2.50 6/01/07 $97,479 $247,030
------ -- -------- ------- ------- --------
</TABLE>
- --------
(1) The 5% and 10% assumed compounded annual rates of stock price
appreciation are mandated by rules of the Securities and Exchange
Commission. There can be no assurance that the actual stock price
appreciation over the ten-year option term will be at the assumed 5%
and 10% levels or at any other defined level. Unless the market price
of the Common Stock appreciates over the option term, no value will be
realized from the option grants.
24
<PAGE> 25
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values.
The following table sets forth, as to the Company's Chief Executive
Officer, certain stock option information concerning the number of shares
subject to both exercisable and unexercisable stock options and the value of
unexercised options as of December 31, 1997. No options were exercised by the
Company's Chief Executive Officer during the fiscal year ended December 31,
1997.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at Fiscal Year End at Fiscal Year End ($)(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 initial public offering price of
$6.00 per share and the exercise price.
STOCK PLANS
1997 Stock Option Plan. The Company's Board of Directors and
stockholders have approved the 1997 Stock Option Plan which has 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.
In January 1998, the Company granted nonqualified options to purchase an
aggregate of 20,500 shares to two consultants and incentive stock options to
purchase an aggregate of 20,000 shares to two employees under the Option Plan.
Nonqualified options to purchase 20,500 shares vest ratably over four years and
incentive stock options to purchase 20,000 shares vest ratably over three years.
All of these options have exercise prices of $5.50 per share and expire ten
years from the date of grant or earlier in the event of termination of
employment or consulting engagement.
Prior to the adoption of the Option Plan, the Company 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."
25
<PAGE> 26
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.
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.
26
<PAGE> 27
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
beneficial ownership of the Company's capital stock as of March 1, 1998, (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 Beneficially Percentage
Beneficial Owner Owned (1) Beneficially Owned(2)
- ----------------------- ------------------- ---------------------
<S> <C> <C>
John Anthony Whalen, Jr.(3) 1,467,960 43.0%
Frank Vukmanic(4) 345,333 10.1%
Clyde Wooten(5) 348,333 10.2%
Konrad Witt 267,750 7.9%
Hal H. Beretz(6) 14,583 *
David Tendler(7) 14,583 *
Kim P. Goh(8) 9,740 *
All directors and executive
officers as a group 2,208,310 63.4%
(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 3,391,338 shares of Common Stock outstanding as of March 1,
1998.
(3) Mr. Whalen is the President and Chief Executive Officer of the Company.
Includes 18,944 shares subject to options exercisable within 60 days of
March 1, 1998.
(4) Mr. Vukmanic resigned from his position as Senior Vice President, Sales
and Marketing, of the Company in March, 1998. Includes 12,000 shares
subject to options exercisable within 60 days of March 1, 1998.
(5) Mr. Wooten is the Senior Vice President, Operations and Chief
Technology Officer of the Company. Includes 15,000 shares subject to
options exercisable within 60 days of March 1, 1998.
(6) Mr. Beretz is a director of the Company. Includes 14,583 shares subject
to options exercisable within 60 days of March 1, 1998.
(7) Mr. Tendler is a director of the Company. Includes 14,583 shares
subject to options exercisable within 60 days of March 1, 1998.
(8) Mr. Goh is a director of the Company. Includes 9,740 shares subject to
options exercisable within 60 days of March 1, 1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the period from Inception to December 31, 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.
27
<PAGE> 28
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, former 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.
In July, 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 December 31, 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. In February 1998, the Company paid off this Bridge Note plus accrued
interest of $616.
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
28
<PAGE> 29
than could be obtained from independent parties. The Company intends to maintain
at least two independent directors on its Board of Directors.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
Exhibit Number Description of Document
- -------------- -----------------------
<S> <C>
3.1(1) Certificate of Incorporation.
3.2(1) Bylaws.
4.1(1) Form of Warrant Agreement between the Company and
the Warrant Agent, including the form of Warrants.
10.1(1) Form of Indemnity Agreement for officers and directors.
10.2(1) The Company's 1997 Stock Option Plan and Agreements
thereunder.
10.3(1) Form of Bridge Note and accompanying Bridge Warrant.
10.4(1) Employment Agreement dated June 1, 1997 between the Company
and John Anthony Whalen, Jr.
10.5(1) Letter Agreement dated August 4, 1997 between the Company,
David Tendler and Hal Beretz.
10.6(1) Letter Agreement dated August 20, 1997 between the Company
and Kim P. Goh.
10.7(1) Letter Agreement dated November 3, 1997 between the Company
and Kim P. Goh.
10.8 Sublease Agreement dated December 16, 1997 between the
Company and Road Runner Sports, Inc.
10.9(1) Master Services Agreement dated January 16, 1998 by
and between the Company and United Guaranty
Corporation.
27.1 Financial Data Schedule.
</TABLE>
- ----------
(1) Incorporated by reference from the Company's Registration Statement on
Form SB-2 (No. 333-39425) declared effective by the Commission on
February 13, 1998.
29
<PAGE> 30
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 1997....................................F-3
Statements of Operations for the period from Inception (September 17, 1996)
through December 31, 1996, year ended December 31, 1997 and for the period from
Inception (September 17, 1996) through December 31, 1997...........................F-4
Statements of Stockholders' Equity (Deficit) for the periods ended December 31,
1996 and 1997......................................................................F-5
Statements of Cash Flows for the period from Inception (September 17, 1996)
through December 31, 1996, year ended December 31, 1997 and for the period from
Inception (September 17, 1996) through December 31, 1997...........................F-6
Notes to Financial Statements......................................................F-7
</TABLE>
F-1
<PAGE> 31
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
C2i Solutions, Inc.
We have audited the accompanying balance sheets of C2i Solutions, Inc. (a
development stage company) as of December 31, 1996 and 1997, and the related
statements of operations, stockholders' equity (deficit), and cash flows for the
period from Inception (September 17, 1996) through December 31, 1996 and the
year ended December 31, 1997. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of C2i Solutions, Inc. at December
31, 1996 and 1997, and the results of its operations and its cash flows for the
period from Inception (September 17, 1996) through December 31, 1996 and the
year ended December 31, 1997, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
San Diego, California
February 27, 1998,
except for the last paragraph of Note 3 and the fourth
paragraph of Note 7, as to which the date is
March 17, 1998
F-2
<PAGE> 32
C2i Solutions, Inc.
(a development stage company)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 16,467 $ 298,823
Accounts receivable 9,797 --
Capital subscriptions receivable from stockholders 97,500 --
Prepaid expenses and other 1,823 40,702
----------- -----------
Total current assets 125,587 339,525
----------- -----------
Property and equipment, net 17,485 64,065
Deferred offering costs -- 259,906
Deferred finance charges, net -- 24,412
Other assets, net 1,325 2,775
----------- -----------
Total assets $ 144,397 $ 690,683
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bridge Notes payable, net $ -- $ 438,397
Bridge Notes payable to employees, net -- 63,301
Current portion of capital lease obligations -- 5,326
Accounts payable 2,955 248,942
Accrued payroll and related 1,142 59,276
Accrued interest payable (including $1,577 to employees) -- 12,500
Accrued royalty due to former stockholder 6,300 1,345
Advance from former stockholder 20,838 --
Other current liabilities -- 2,026
----------- -----------
Total current liabilities 31,235 831,113
----------- -----------
Capital lease obligations, net of current portion -- 12,251
----------- -----------
Commitments [Note 3]
Stockholders' equity (deficit):
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 shares issued
and outstanding in 1996 and 1997, respectively 1,050 2,391
Additional paid-in capital 156,450 1,910,516
Warrants to acquire common stock -- 108,000
Deficit accumulated during the development stage (44,338) (1,850,776)
Deferred compensation -- (322,812)
----------- -----------
Total stockholders' equity (deficit) 113,162 (152,681)
=========== ===========
Total liabilities and stockholders' equity (deficit) $ 144,397 $ 690,683
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 33
C2i Solutions, Inc.
(a development stage company)
Statements of Operations
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(SEPTEMBER 17, (SEPTEMBER 17,
1996) THROUGH YEAR ENDED 1996) THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Products $ 9,798 $ 32,250 $ 42,048
Services -- 47,033 47,033
----------- ----------- -----------
Total revenues 9,798 79,283 89,081
----------- ----------- -----------
Cost of revenues:
Products:
Customers -- 10,613 10,613
Former stockholder 6,300 11,352 17,652
Services -- 24,929 24,929
----------- ----------- -----------
Total cost of revenues 6,300 46,894 53,194
----------- ----------- -----------
Gross profit 3,498 32,389 35,887
Selling, general and administrative expenses 47,836 1,810,623 1,858,459
----------- ----------- -----------
Operating loss (44,338) (1,778,234) (1,822,572)
Interest expense -- 21,699 21,699
Interest expense to employees -- 3,105 3,105
----------- ----------- -----------
Loss before income taxes (44,338) (1,803,038) (1,847,376)
Provision for income taxes -- 3,400 3,400
=========== =========== ===========
Net loss $ (44,338) $(1,806,438) $(1,850,776)
=========== =========== ===========
Loss per share (basic and diluted) $ (0.04) $ (1.03)
=========== ===========
Shares used in computing loss per share 1,050,000 1,753,141
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 34
C2i Solutions, Inc.
(a development stage company)
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
DEFICIT
COMMON STOCK WARRANTS ACCUMULATED TOTAL
----------------------- ADDITIONAL TO ACQUIRE DURING THE STOCKHOLDERS'
PAID-IN COMMON DEVELOPMENT DEFERRED EQUITY
SHARES AMOUNT CAPITAL STOCK STAGE COMPENSATION (DEFICIT)
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <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 1,333,332 1,333 1,398,666 -- -- -- 1,399,999
Issuance of common stock for
services rendered 8,006 8 9,075 -- -- -- 9,083
Issuance of warrants -- -- -- 94,373 -- -- 94,373
Issuance of warrants to employees -- -- -- 13,627 -- -- 13,627
Deferred compensation -- -- 346,325 -- -- (322,812) 23,513
Net loss -- -- -- -- (1,806,438) -- (1,806,438)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 2,391,338 $ 2,391 $ 1,910,516 $ 108,000 $(1,850,776) $ (322,812) $ (152,681)
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes
F-5
<PAGE> 35
C2i Solutions, Inc.
(a development stage company)
Statements of Cash Flows
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(SEPTEMBER 17, (SEPTEMBER 17,
1996) THROUGH YEAR ENDED 1996) THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1997
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (44,338) $(1,806,438) $(1,850,776)
Adjustments to reconcile net loss
to net cash used for operating
activities:
Depreciation and amortization 4,218 24,556 28,774
Amortization of deferred
compensation -- 23,513 23,513
Non-cash compensation and other
expenses -- 1,198,370 1,198,370
Changes in operating assets and
liabilities:
Accounts receivable (9,797) 9,797 --
Prepaid expenses and other (1,823) (38,879) (40,702)
Accounts payable 2,955 245,987 248,942
Accrued payroll and related 1,142 58,134 59,276
Accrued interest payable -- 10,923 10,923
Accrued interest payable to -- 1,577 1,577
employees
Accrued royalty, due to 6,300 (4,955) 1,345
former stockholder
Other current liabilities -- 2,026 2,026
----------- ----------- -----------
Net cash used for operating
activities (41,343) (275,389) (316,732)
----------- ----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment (21,633) (39,400) (61,033)
Other assets (1,395) (2,805) (4,200)
----------- ----------- -----------
Net cash used for investing
activities (23,028) (42,205) (65,233)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 60,000 200,000 260,000
Proceeds from issuance of Bridge Notes
and warrants -- 600,000 600,000
Repayment of capital lease obligations -- (698) (698)
Deferred finance charges -- (26,820) (26,820)
Deferred offering costs -- (259,906) (259,906)
Advance from former stockholder 45,000 586 45,586
Repayment of advance from former
stockholder (24,162) (10,712) (34,874)
Collection of capital subscriptions
receivable from stockholders -- 97,500 97,500
----------- ----------- -----------
Net cash provided by financing
activities 80,838 599,950 680,788
----------- ----------- -----------
Net increase in cash 16,467 282,356 298,823
Cash at beginning of period -- 16,467 --
=========== =========== ===========
Cash at end of period $ 16,467 $ 298,823 $ 298,823
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES
NON-CASH FINANCING ACTIVITIES:
Capital subscriptions receivable
from stockholders $ 97,500 $ 100,000 $ 197,500
Equipment acquired under capital
lease obligations -- 18,276 18,276
OTHER CASH FLOW INFORMATION:
Interest paid -- 198 198
Income taxes paid -- 2,400 2,400
</TABLE>
See accompanying notes.
F-6
<PAGE> 36
C2i Solutions, Inc.
(a development stage company)
Notes to Financial Statements (Continued)
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.
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
December 31, 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.
Fiscal Year End
The Company's fiscal year end is December 31.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable, Bridge Notes payable, and capital subscriptions receivable
from stockholders (none of which are held or issued for trading purposes). The
carrying amounts of these instruments at December 31, 1996 and 1997, approximate
their fair values, because of the relatively short maturity of these
instruments.
F-7
<PAGE> 37
C2i Solutions, Inc.
(a development stage company)
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Concentration of Credit Risk
Financial instruments which potentially expose the Company to concentrations of
credit risk include accounts receivable. 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, all of which was outstanding at December 31,
1996. Revenue from three customers accounted for 62%, 19% and 10%, respectively,
of the Company's total revenue for the year ended December 31, 1997, none of
which was outstanding at December 31, 1997.
Significant Suppliers
Purchases from a single supplier, Gordon Parnell, 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 sheets. 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 year ended December 31, 1997. At December 31, 1997,
$1,345 of these costs were outstanding and have been included in accrued royalty
due to former stockholder in the accompanying balance sheets.
Property and Equipment
Property and equipment are stated at cost. Equipment under capital leases is
stated at the present value of future minimum lease payments at the inception of
the lease. Depreciation and amortization are calculated using the straight-line
method over the estimated useful lives or lease terms of the property and
equipment, which range from three to seven years.
Deferred Offering Costs
The Company has deferred certain legal, accounting, and other costs incurred
during 1997 associated with its initial public offering. These items are stated
at cost and will be netted with the proceeds of the offering upon its
completion, in February 1998 (See Note 7).
Deferred Finance Charges
The Company incurred certain costs totaling $26,820 in 1997, in connection with
a Bridge Financing, which it has capitalized. These charges are stated at cost,
and are being charged to expense using the interest method over the term of the
Bridge Notes (approximately 24 months). Accumulated amortization totaled $2,408
at December 31, 1997. In the event of early retirement, the unamortized,
deferred finance charge balance will be charged to expense as an extraordinary
item.
Organization Costs
Organization costs which totaled $1,395 and $607 at December 31, 1996 and 1997,
respectively, are stated at cost and are included in other assets. Organization
costs are amortized using the straight-line method over five years. Amortization
expense was $70, $1,355, and $1,425 for the period from Inception
F-8
<PAGE> 38
C2i Solutions, Inc.
(a development stage company)
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(September 17, 1996) through December 31, 1996, the year ended December 31,
1997, and for the period from Inception (September 17, 1996) through December
31, 1997, respectively, and has been included in selling, general and
administrative expenses in the accompanying statements of operations.
Accumulated amortization totaled $70 and $30 at December 31, 1996 and 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, and
is included with amortization expense.
Discount on Bridge Notes Payable
The Company recorded a discount of $108,000 on the Bridge Notes it issued in
connection with a Bridge Financing. This discount is being amortized using the
interest method over the term of the Bridge Notes (approximately 24 months). In
the event of early retirement, the unamortized, debt discount will be charged to
expense as an extraordinary item.
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.
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, "Accounting for Stock-Based
Compensation" ("SFAS 123" ) (See Note 4).
F-9
<PAGE> 39
C2i Solutions, Inc.
(a development stage company)
Notes to Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Effective with its change to a "C" corporation, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS 109"). SFAS 109 utilizes the liability method, and
deferred taxes are determined based on the estimated future tax effects of
differences between financial statement and tax bases of assets and liabilities
given the provisions of the enacted tax laws.
Loss Per Share
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. Earnings (loss) per share
amounts for all periods presented have been restated to conform to the SFAS 128
requirements.
<TABLE>
<CAPTION>
Period from
Inception
(September 17,
1996) through Year Ended
December 31, December 31,
1996 1997
----------- -----------
<S> <C> <C>
Numerator:
Net loss for period and
numerator for EPS $ (44,338) $(1,806,438)
----------- -----------
Denominator:
Weighted average shares and
denominator for EPS 1,050,000 1,753,141
----------- -----------
Loss per share (basic and diluted) $ (0.04) $ (1.03)
=========== ===========
</TABLE>
The above calculations do not reflect any potential shares relating to options
or warrants due to the Company's losses for these periods. The assumed issuance
of any additional shares would be anti-dilutive.
F-10
<PAGE> 40
C2i Solutions, Inc.
(a development stage company)
Notes to Financial Statements (continued)
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
Estimated December 31,
useful lives -----------------------
(Years) 1996 1997
-------- --------
<S> <C> <C> <C>
Equipment 3-7 $ 13,988 $ 49,347
Furniture and fixtures 5-7 7,645 29,962
-------- --------
21,633 79,309
Accumulated depreciation and
amortization (4,148) (15,244)
-------- --------
$ 17,485 $ 64,065
======== ========
</TABLE>
At December 31, 1997, gross equipment under capital leases totaled $18,276, with
related accumulated depreciation of $834. This equipment was subject to related
capital lease obligations of $17,577 at December 31, 1997. (See Note 5).
Depreciation expense was $4,148 and $11,096 for the period from Inception
through December 31, 1996, and the year ended December 31, 1997, respectively,
including equipment under capital leases.
3. BRIDGE FINANCING
In October 1997, the Company completed a Bridge Financing in which it sold, to
36 accredited investors, an aggregate of $600,000 face value, unsecured
promissory notes ("Bridge Notes") and 600,000 warrants ("Bridge Warrants") and
received net proceeds of $573,180, after expenses of the offering. For financial
statement purposes, the Bridge Financing has been allocated $108,000 to
warrants, $492,000 to Bridge Notes payable and $26,820 to deferred finance
charges (See Notes 1 and 4).
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 an initial public
offering. The Bridge Warrants entitle the holders thereof to purchase, during
the one-year period, beginning February 24, 1999, one share of common stock at a
purchase price of $4.00 per share. The resulting $134,820 of combined debt
discount and deferred finance charges is being charged to expense using the
interest method over the term of the Bridge Notes.
The bridge investors included four employees of the Company, one of whom was an
executive officer of the Company. The face value of the Bridge Notes payable to
these four employees totaled $75,704.
Bridge Notes payable consist of the following at December 31, 1997:
<TABLE>
<CAPTION>
Unrelated Employees
Third and
Parties Officers Total
--------- --------- ---------
<S> <C> <C> <C>
Face value of Bridge Notes payable $ 524,296 $ 75,704 $ 600,000
Less Debt Discount:
Original debt discount (94,373) (13,627) (108,000)
Accumulated amortization 8,474 1,224 9,698
--------- --------- ---------
Net Debt Discount (85,899) (12,403) (98,302)
--------- --------- ---------
Bridge Notes payable, net $ 438,397 $ 63,301 $ 501,698
========= ========= =========
</TABLE>
F-11
<PAGE> 41
C2i Solutions, Inc.
(a development stage company)
Notes to Financial Statements (continued)
3. BRIDGE FINANCING (CONTINUED)
Interest expense related to the Bridge Financing includes amortization of the
debt discount ($9,698) and deferred finance charges ($2,408), plus accrued
interest ($12,500) and totaled $24,606 for the year ended December 31, 1997. The
effective interest rate on the Bridge Notes payable was 20.27%.
The Bridge Notes payable have been classified as current liabilities in the
accompanying balance sheet based on the timing of completion of the initial
public offering. Subsequent to December 31, 1997, the Company completed its
initial public offering and repaid the Bridge Notes (See Note 7).
4. STOCKHOLDERS' EQUITY (DEFICIT)
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 shares of common stock and up to
1,150,000 warrants for the purchase of common stock to the public.
The Board of Directors also approved the issuance of underwriter's warrants to
purchase up to 100,000 shares of common stock and 100,000 warrants in connection
with this proposed initial public offering.
Description of Capital Stock
General. The Company's authorized capital stock consists of 10,000,000 shares of
common stock, par value $.001 per share ("Common Stock"), and 1,000,000 shares
of preferred stock, par value $.001 per share ("Preferred Stock").
Common Stock. 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. 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 issued in connection with the initial
public offering ("Warrant") is entitled, upon payment of the exercise price of
$7.50, 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 February 24,
1999, provided that at such time a current prospectus relating to 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. The
Warrants expire on February 24, 2003.
Redemption. Commencing February 24, 1999, 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
F-12
<PAGE> 42
C2i Solutions, Inc.
(a development stage company)
Notes to Financial Statements (continued)
4. STOCKHOLDER'S EQUITY (CONTINUED)
the business day immediately prior to the date set for redemption. All of the
outstanding Warrants, except for the underwriter's warrants, must be redeemed if
any of that class are redeemed. 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.
Underwriter's Warrants. The Company has agreed to grant to the underwriter, upon
the closing of an initial public offering, the warrants ("Underwriter's
Warrants") to purchase up to 100,000 shares of Common Stock and/or 100,000
Warrants. These shares and Warrants will be identical to the shares and Warrants
offered to the public. The Underwriter's Warrants cannot be transferred, sold,
assigned or hypothecated for one year, except to officers of the Underwriter or
members of the selling group. The Underwriter's Warrants are exercisable during
the four-year period commencing February 13, 1999, at an exercise price of $8.10
per share of Common Stock and $0.135 per Warrant, subject to adjustment in
certain events to protect against dilution. The holders of the Underwriter's
Warrants and underlying securities have certain demand and piggyback
registration rights. The existence of the Underwriter's Warrants and the
inability of the Company to redeem the Warrants may hinder the Company's future
financing or business transactions.
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 $4.00 per share. The Bridge Warrants are
exercisable for a one-year period beginning February 24, 1999 and expire on
February 24, 2000.
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.
F-13
<PAGE> 43
C2i Solutions, Inc.
(a development stage company)
Notes to Financial Statements (continued)
4. STOCKHOLDERS' EQUITY (CONTINUED)
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 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.
F-14
<PAGE> 44
C2i Solutions, Inc.
(a development stage company)
Notes to Financial Statements (continued)
Common Stock Reserved For Future Issuance
At December 31, 1997, the Company had an aggregate of 3,807,500 shares of Common
Stock reserved for future issuance as follows:
<TABLE>
<CAPTION>
Number of
Shares
---------
<S> <C>
Existing stock options 625,000
"Proposed" 1997 Stock Option Plan 82,500
Bridge Warrants 600,000
Initial Public Offering:
Common Stock and Warrants 2,300,000
Underwriter's Warrants (Common Stock and Warrants) 200,000
---------
3,807,500
=========
</TABLE>
Capital Transactions
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 30, 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 December 1997, the Company granted
nonqualified options to purchase an aggregate of 625,000 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-15
<PAGE> 45
C2i Solutions, Inc.
(a development stage company)
Notes to Financial Statements (continued)
The following table summarizes certain information regarding stock options
during the year ended December 31, 1997:
<TABLE>
<CAPTION>
Weighted average
Shares exercise price
-------- ----------------
<S> <C> <C>
Outstanding at beginning of year -- $ --
Granted 625,000 2.96
Exercised -- --
Forfeited -- --
-------- --------
Outstanding at end of year 625,000 $ 2.96
======== ========
Options exercisable at end of year 96,460 $ 3.75
======== ========
</TABLE>
The following summarizes information regarding options outstanding at December
31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
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 4.6 $5.40 41,667 4.6 $5.40
525,000 9.7 $2.50 54,793 9.6 $2.50
</TABLE>
In accordance with APB 25, the Company recognized $23,513 of compensation
expense during the year ended December 31, 1997 related to the grant of options,
as the exercise price of options granted was below the deemed value on the date
of grant. Had compensation cost related to the options been determined based
upon the fair value of options at their grant dates, as prescribed in SFAS 123,
the Company's net loss would have been as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
---------------------------------
<S> <C> <C>
As reported..............................................$(1,806,438) $(1.03) per share
As adjusted..............................................$(1,819,999) $(1.04) per share
</TABLE>
The fair value of options at date of grant was estimated using the minimum value
method with the following weighted average assumptions:
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
-----------------
<S> <C>
Expected life (years)..............................................................................4.0 to 5.0
Risk-free interest rate............................................................................5.5%
Dividend yield.....................................................................................0.0%
Fair value of option grants -- exercise price less than the fair value of the related stock........$1.55
Fair value of option grants -- exercise price equal to or greater than the fair value of
the related stock...............................................................................$0.00
</TABLE>
F-16
<PAGE> 46
C2i Solutions, Inc.
(a development stage company)
Notes to Financial Statements (continued)
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.
5. 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 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%.
Obligations Under Capital Leases
During the year ended December 31, 1997, the Company entered into agreements to
lease certain computer and office equipment under lease agreements which are
classified as capital leases. The lease terms are for thirty-six month periods,
with minimum lease payments as follows:
<TABLE>
<S> <C>
Year Ending December 31:
1998 $ 7,447
1999 7,447
2000 6,550
2001 --
2002 --
Thereafter --
--------
21,444
Less amount representing interest (3,867)
Less current maturities (5,326)
========
Present value of long-term obligations under
capital leases $ 12,251
========
</TABLE>
These obligations are collateralized by the related equipment, which had a net
value of $17,442 at December 31, 1997. (See Note 2).
Operating Lease Commitments
The Company leases its office facilities and certain computer equipment under
lease agreements which are classified as operating leases. At December 31, 1997,
future minimum payments under these noncancelable operating leases are
summarized as follows:
F-17
<PAGE> 47
C2i Solutions, Inc.
(a development stage company)
Notes to Financial Statements (continued)
<TABLE>
<S> <C>
Year Ending December 31:
1998 $ 85,186
1999 2,412
2000 --
2001 --
2002 --
Thereafter --
========
Total future minimum lease payments $ 87,598
========
</TABLE>
Rent expense amounted to $5,643, $30,779, and $36,422 for the period from
Inception (September 17, 1996) through December 31, 1996, the year ended
December 31, 1997, and for the period from Inception (September 17, 1996)
through December 31, 1997, respectively, and has been included in selling,
general and administrative expenses in the accompanying statements of
operations.
6. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary difference
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1997 are
shown below. In 1997, valuation allowance of $146,000 has been recognized to
offset the amount of net deferred tax assets, as realization of such assets is
uncertain.
<TABLE>
<CAPTION>
December 31,
1997
---------
<S> <C>
Deferred tax assets:
Net operating loss carryforward $ 137,000
Other, net 9,000
---------
Total deferred tax assets 146,000
Valuation allowance (146,000)
---------
Net deferred tax asset $ --
=========
</TABLE>
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
Current: 12/31/97 12/31/96
<S> <C> <C>
Federal $ -- $ --
State 3,400 --
========== =========
$ 3,400 --
========== =========
</TABLE>
The reconciliation of income tax attributable to continuing operations computed
at the U.S. statutory rate (34%) to income tax expense is as follows:
<TABLE>
<S> <C>
Loss before income taxes at
statutory rate $ 613,000
Loss of LLC through September 30,
1997, not subject to taxes (487,000)
Permanent differences 20,000
Change in deferred tax asset
valuation allowance (146,000)
State income taxes 3,400
---------
$ 3,400
=========
</TABLE>
F-18
<PAGE> 48
C2i Solutions, Inc.
(a development stage company)
Notes to Financial Statements (continued)
At December 31, 1997, the Company had federal and California tax net operating
loss carryforwards of approximately $340,000. These federal and California tax
loss carryforwards begin expiring in 2012 and 2002, respectively, unless
previously utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, use of the Company's net
operating loss carryforwards may be limited if a cumulative change in ownership
of more than 50% occurs within any three-year period.
7. SUBSEQUENT EVENTS
Stock Plan
In January 1998, the Company's Board of Directors and stockholders approved the
1997 Stock Option Plan ( "Option Plan"), which has an initial share reserve of
82,500 shares of Common Stock. 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 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.
Stock Options
In January 1998, the Company granted nonqualified options to purchase an
aggregate of 20,500 shares to two consultants and incentive stock options to
purchase an aggregate of 20,000 shares to two employees under the Option Plan.
Nonqualified options to purchase 20,500 shares vest ratably over four years and
incentive stock options to purchase 20,000 shares vest ratably over three years.
All of these options have exercise prices of $5.50 per share and expire ten
years from the date of grant or earlier in the event of termination of
employment or consulting engagement.
Initial Public Offering
In February 1998, the Company completed an initial public offering of 1,000,000
shares of Common Stock and 1,150,000 Warrants (which included 150,000 Warrants
pursuant to the underwriter's over-allotment option) of the Company. The Company
received net proceeds of $5,365,050, after deducting an underwriting discount of
10% of the gross proceeds of the offering and a non-accountable expense
allowance of 3% of the gross proceeds of the offering, and before deducting
estimated expenses of $345,000 related to the offering.
In March 1998, the underwriter exercised its over-allotment option with respect
to 150,000 shares of Common Stock of the Company. The Company received
additional net proceeds of $783,000, after deducting an underwriting discount of
10% of the gross proceeds of the offering and a non-accountable expense
allowance of 3% of the gross proceeds of the offering (net of $45,000 previously
paid by the Company).
Bridge Note Repayment
In February 1998, subsequent to closing its initial public offering, the Company
repaid the Bridge Notes, including all interest accrued thereon. In connection
with this repayment, the Company incurred $111,950 of extraordinary expense,
representing the unamortized balance of debt discount and deferred finance
charges.
F-19
<PAGE> 49
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereto duly authorized, on the 31st day of March, 1998.
C2i SOLUTIONS, INC.
By: /S/ JOHN ANTHONY WHALEN, JR.
-------------------------------------
John Anthony Whalen, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
In accordance with the Securities Exchange Act of 1934, this Report 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 March 31, 1998
-------------------------------- Director (Principal
John Anthony Whalen, Jr. Executive Officer)
/S/ DIANE E. HESSLER Chief Financial Officer March 31, 1998
-------------------------------- (Principal Financial and
Diane E. Hessler Accounting Officer)
/S/ HAL H. BERETZ Director March 31, 1998
--------------------------------
Hal H. Beretz
/S/ KIM P. GOH Director March 31, 1998
--------------------------------
Kim P. Goh
/S/ DAVID TENDLER Director March 31, 1998
--------------------------------
David Tendler
</TABLE>
<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: the
initial addendum to Master Lease and the Second Addendum to Master Lease;
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 66/100 Dollars
($12,991.66) 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: except that this Sublease, and not the
Master Lease, shall determine and control the area and location of the
premises demised to Sublessee, the term of the Sublease, the rental payable
hereunder, and the number of parking spaces granted to Sublessee. Further,
Sublessee acknowledges the effect of the second addendum cancelling
Sublessor's rights under paragraph 4, 5, 6 and 7 of the initial addendum to
the Master Lease. 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 M. Wright of CB Commercial Real Estate
Group, Inc., who represents C2i Solutions, Inc. In the event 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
12
<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.
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
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: [SIG] By: [SIG]
------------------------------- --------------------------------
Title: CFO Title: Vice President, Finance - CFO
---------------------------- -----------------------------
By: By:
------------------------------- --------------------------------
Title: Title:
---------------------------- -----------------------------
Date: 3/13/98 Date: 3/12/98
----------------------------- ------------------------------
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: LIMAC REALTY CORP #13
----------------------
By: [SIG]
--------------------------
Title: S.V.P.
-----------------------
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 materials 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 14, 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 16, 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. OPTION TO RENEW: Sublessee shall be granted two (2) three (3) month options
to renew the Sublease under the same terms and conditions with one (1)
month's prior written notice to Sublessor.
7. MAINTENANCE AND REPAIR: 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.
8. 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.
9. 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.
10. 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 makes 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.
11. 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 12.101 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
<PAGE> 5
ADDENDUM BETWEEN ROADRUNNER SPORTS, INC. AND C2i SOLUTIONS, INC.
Page 2 of 2
- --------------------------------------------------------------------------------
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. 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.
12. 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.
13. LESSOR APPROVAL: This Sublease is subject to Lessor's approval which per
the Master Agreement may not be unreasonably withheld.
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
- --------------------------------------------------------------------------------
ROAD RUNNER SPORTS, INC. C2i SOLUTIONS, INC.
By: [SIG] By: [SIG]
-------------------- ------------------
Date: 3/13/98 Date: 3/12/98
------------------ ----------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH INFORMATION CONTAINED IN THE ANNUAL REPORT
FILED ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 298,823
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 339,525
<PP&E> 79,309
<DEPRECIATION> 15,244
<TOTAL-ASSETS> 690,683
<CURRENT-LIABILITIES> 831,113
<BONDS> 12,251
0
0
<COMMON> 2,391
<OTHER-SE> (155,072)
<TOTAL-LIABILITY-AND-EQUITY> 690,683
<SALES> 32,250
<TOTAL-REVENUES> 79,283
<CGS> 21,965
<TOTAL-COSTS> 46,894
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,804
<INCOME-PRETAX> (1,803,038)
<INCOME-TAX> 3,400
<INCOME-CONTINUING> (1,806,438)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,806,438)
<EPS-PRIMARY> (1.03)
<EPS-DILUTED> (1.03)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS FROM INCEPTION (SEPTEMBER 17, 1996) THROUGH DECEMBER 31,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH INFORMATION CONTAINED
IN THE ANNUAL REPORT FILED ON FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31,
1997.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> SEP-17-1996
<PERIOD-END> DEC-31-1996
<CASH> 16,467
<SECURITIES> 0
<RECEIVABLES> 9,797
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 125,587
<PP&E> 21,633
<DEPRECIATION> 4,148
<TOTAL-ASSETS> 144,397
<CURRENT-LIABILITIES> 31,235
<BONDS> 0
0
0
<COMMON> 1,050
<OTHER-SE> 112,112
<TOTAL-LIABILITY-AND-EQUITY> 144,397
<SALES> 9,798
<TOTAL-REVENUES> 9,798
<CGS> 6,300
<TOTAL-COSTS> 6,300
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (44,338)
<INCOME-TAX> 0
<INCOME-CONTINUING> (44,338)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (44,338)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
