<PAGE>
Filed Pursuant to Rule 424B(4)
Registration No. 333-47741
[LOGO]
1,200,000 Shares of Common Stock
Prior to this offering, there has been no public market for the Common
Stock and there can be no assurance that any such market will develop. The
Common Stock will be quoted on the Nasdaq SmallCap Market ("Nasdaq") under the
symbol IBSX. For a discussion of the factors considered in determining the
initial public offering price, see "Underwriting."
-------------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR
ENTIRE INVESTMENT. SEE "RISK FACTORS" COMMENCING ON PAGE 6.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
================================================================================
Price Underwriting Proceeds
to Discounts and to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
Per Share ......... $ 6.00 $ .60 $ 5.40
- --------------------------------------------------------------------------------
Total(3) .......... $7,200,000 $720,000 $6,480,000
================================================================================
(1) In addition, the Company has agreed to pay to the Underwriter a 3%
nonaccountable expense allowance and to sell to the Underwriter warrants
(the "Underwriter's Warrants") to purchase up to 120,000 shares of Common
Stock. The Company has also agreed to indemnify the Underwriter against
certain liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $701,000,
including the Underwriter's nonaccountable expense allowance in the amount
of $216,000 ($248,400 if the Underwriter's over-allotment option is
exercised in full).
(3) The Company has granted to the Underwriter an option, exercisable within 45
days from the date of this Prospectus, to purchase up to an additional
180,000 shares of Common Stock on the same terms set forth above, solely
for the purpose of covering over-allotments, if any. If the Underwriter's
over-allotment option is exercised in full, the total price to public,
underwriting discounts and commissions, and proceeds to Company will be
$8,280,000, $828,000 and $7,452,000, respectively. See "Underwriting."
-------------------------
The shares of Common Stock are being offered, subject to prior sale, when,
as and if delivered to and accepted by the Underwriter and subject to approval
of certain legal matters by counsel and to certain other conditions. The
Underwriter reserves the right to withdraw, cancel or modify the offering and
to reject any order in whole or in part. It is expected that delivery of
certificates representing the shares will be made against payment therefor at
the offices of the Underwriter, 650 Fifth Avenue, New York, New York 10019, on
or about May 20, 1998.
----------------
Whale Securities Co., L.P.
The date of this Prospectus is May 14, 1998.
<PAGE>
IBS Interactive, Inc. provides a broad range of computer networking,
programming, applications development and Internet services primarily to
businesses and organizations.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS,
ON NASDAQ, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE, WHICH STABILIZE,
MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE
UNDERWRITER MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR AND
PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. SUCH ACTIVITIES, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Each prospective investor is
urged to read this Prospectus in its entirety. Except as otherwise indicated,
the information in this Prospectus (i) gives effect to each of an approximate
1,029-for-1 stock split effected in March 1998, a subsequent approximate
1.19-for-1 stock split effected in April 1998 and the issuance upon the
consummation of this offering of 25,000 shares of Common Stock upon conversion
of $150,000 of indebtedness (the "Debt Conversion") and (ii) assumes no
exercise of the Underwriter's over-allotment option to purchase up to 180,000
additional shares of Common Stock. See "Underwriting" and Notes 7 and 14 to
Notes to the Company's Financial Statements.
The Company
IBS Interactive, Inc. (the "Company") provides a broad range of computer
networking, programming, applications development and Internet services
primarily to businesses and organizations. The Company has adopted a business
model that includes Systems Integration; Programming and Applications
Development; and Internet services. These services are designed to permit
clients to outsource a variety of business needs such as computer networking,
programming, maintenance and technical support. The Company believes that by
combining computer consulting and Internet related services, it is positioned
to capitalize on increasing demand by businesses and organizations for
comprehensive, cost-effective information technology solutions.
The Systems Integration services offered by the Company include systems
consulting, analysis and design; implementation and integration; and
maintenance. The Company's Programming and Applications Development services
consist primarily of custom programming for Internet and Intranet applications,
including distance learning and on-line trading applications and Web-site
development and maintenance. Internet services offered by the Company include
dedicated leased line and frame relay connections, Web hosting, dial-up access
and electronic mail services. For the year ended December 31, 1997, Systems
Integration, Programming and Applications Development and Internet services
accounted for approximately 55%, 9% and 36%, respectively, of the Company's
revenues.
The Company's principal marketing efforts are focused on large businesses
and organizations with systems development and maintenance needs. The Company's
clients during the year ended December 31, 1997 included Aetna U.S. Healthcare
Inc. ("Aetna"); Mobil Oil Corporation ("Mobil"); Black & Decker Corp.; TRW,
Inc.; Bell Atlantic Corporation ("Bell Atlantic"); Unilever; Scientific
Applications International Corporation; the City of Fairfax, Virginia; certain
agencies of the U.S. Department of Defense; and The Archdiocese of New York
(Catholic Healthcare Network).
The Company's telecommunications network is comprised of a secure network
operations center ("NOC") in Cedar Knolls, New Jersey, leased high-speed data
lines and ten points-of-presence ("POPs") serving the northern New Jersey and
New York City metropolitan area. The proximity of a POP to subscribers enables
subscribers in the area in which a POP is located to access the Internet
through a local telephone call. The Company currently supports 56k and ISDN
technologies at each of its POPs. The Company has approximately 3,300 dial-up
subscribers as of the date of this Prospectus. For the year ended December 31,
1997, dial-up access services accounted for approximately 15% of the Company's
revenues.
The Company commenced operations in June 1995 as an Internet service
provider offering Web-site hosting services. Since April 1996, the Company has
acquired Interactive Networks, Inc. ("Interactive Networks"), Mordor
International ("Mordor") and AllNet Technology Services, Inc. ("AllNet"), each
an Internet service provider principally offering dial-up access services. The
Company began to provide Systems Integration and Programming and Applications
Development services in April 1996 and has increasingly emphasized such
services. In January 1998, the Company acquired Entelechy, Inc. ("Entelechy"), a
3
<PAGE>
provider of programming and applications development services, including
distance learning and on-line trading applications. During the twelve months
following the consummation of this offering, the Company will seek to continue
to expand its operations through internal growth and acquisitions.
The Company believes that worldwide competition and rapid technological
advancements, coupled with a trend by businesses to outsource non-core business
functions, have created increasing demand for computer consulting and Internet
related services. The Company's strategy is to capitalize on such increasing
demand by (i) pursuing opportunities to expand its existing service offerings,
the scope of its operations and client base through selective acquisitions of
systems integrators, programmers, applications developers and Internet service
providers; (ii) expanding the capacity and geographic scope of its network
through the establishment or acquisition of additional POPs and network
upgrades; (iii) hiring and retaining additional qualified network engineering,
programming and technical personnel; and (iv) expanding its marketing and sales
efforts through enhanced cross-marketing of its service offerings. There can be
no assurance that the Company will be able to successfully implement this
strategy or otherwise expand its operations.
The Company was incorporated under the name Internet Broadcasting System,
Inc. in February 1995 under the laws of the State of Delaware. The Company's
principal executive offices are located at 2 Ridgedale Avenue, Suite 350, Cedar
Knolls, New Jersey 07927, and its telephone number is (973) 285-2600. The
Company maintains a Web-site at http://www.interactive.net. Information
contained in the Company's Web-site does not constitute a part of this
Prospectus.
The Offering
Common Stock offered..... 1,200,000 shares
Common Stock to be outstanding
after the offering(1)... 3,074,237 shares
Use of Proceeds.......... The Company intends to use the net proceeds of
this offering for potential acquisitions; network
expansion and upgrade; sales and marketing;
repayment of indebtedness; and the balance for
working capital and general corporate purposes. See
"Use of Proceeds."
Risk Factors............. The shares offered hereby are speculative and
involve a high degree of risk and immediate and
substantial dilution and should not be purchased by
investors who cannot afford the loss of their entire
investment. See "Risk Factors" at page 6 and
"Dilution."
Nasdaq SmallCap
Market Symbol........... IBSX
- -------------
(1) Does not include (i) 120,000 shares reserved for issuance upon exercise of
the Underwriter's Warrants; (ii) 48,872 shares reserved for issuance upon
exercise of warrants (the "Warrants") issued in connection with a private
financing consummated in October 1997 (the "1997 Financing"); (iii)
130,124 shares reserved for issuance in connection with the acquisition of
Entelechy in January 1998; (iv) 129,750 shares reserved for issuance upon
exercise of options granted under the Company's 1998 Stock Option Plan
(the "1998 Stock Option Plan"); (v) 20,000 shares reserved for a
restricted stock award; and (vi) 200,250 shares reserved for issuance upon
the exercise of options available for future grant under the 1998 Stock
Option Plan. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Management--Employment Agreements,"
"--1998 Stock Option Plan," "Description of Securities--Warrants" and
"Underwriting."
4
<PAGE>
Summary Financial Information
The following summary financial information for the years ended December
31, 1996 and 1997 and balance sheet data (actual) as of December 31, 1997 has
been derived from audited financial statements of the Company and should be
read in conjunction with "Management's Discussion and Analysis of Results of
Operations" and the financial statements, including the notes thereto,
contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Statement of Operations Data(1):
Revenues ................................................ $1,023,000 $2,741,000
Cost of services ........................................ 650,000 1,099,000
Gross profit ............................................ 373,000 1,642,000
Net income (loss) ....................................... (251,000) 198,000
Net income (loss) per share - basic and diluted ......... (.17) .12
Weighted average number of shares outstanding -
diluted ................................................ 1,507,047 1,721,664
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------
Actual Pro Forma(2) As Adjusted(3)
------------ -------------- ------------------
<S> <C> <C> <C>
Balance Sheet Data:
Working capital .............. $ 567,000 $ 425,000 $ 6,250,000
Total assets ................. 2,451,000 3,295,000 8,726,000
Total liabilities ............ 1,312,000 1,486,000 1,009,000
Stockholders' equity ......... 1,139,000 1,809,000 7,717,000(4)
</TABLE>
- -------------
(1) Includes the results of operations of (i) Interactive Networks since the
beginning of the periods presented, (ii) Mordor subsequent to May 31,
1996, and (iii) AllNet subsequent to March 1, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Note 3 to Notes to the Company's Financial Statements.
(2) Gives effect to the acquisition of Entelechy in January 1998 including the
issuance of 147,310 shares of Common Stock in connection therewith.
(3) Gives effect to (i) the Debt Conversion and (ii) the sale of the shares
offered hereby and the anticipated application of the estimated net
proceeds therefrom. See "Use of Proceeds," "Management Discussion and
Analysis of Financial Condition and Results of Operations" and "Certain
Transactions."
(4) Gives effect to a non-recurring charge of $35,000 ($21,000, net of tax
benefit) relating to the 1997 Financing which will be incurred upon
consummation of this offering. See Note 6 to Notes to the Company's
Financial Statements.
Notices to California Investors. Each purchaser of Common Stock in
California must be an "accredited investor" as that term is defined in Rule
501(a) of Regulation D promulgated under the Securities Act of 1933, as amended
(the "Securities Act"), or satisfy one of the following suitability standards:
(i) minimum annual gross income of $65,000 and a net worth (exclusive of home,
home furnishings and automobiles) of $250,000; or (ii) minimum net worth
(exclusive of home, home furnishings and automobiles) of $500,000.
5
<PAGE>
RISK FACTORS
The shares offered hereby are speculative and involve a high degree of
risk. Each prospective investor should carefully consider the following risk
factors before making an investment decision.
Limited Operating History. The Company commenced operations in June 1995
as an Internet service provider and began to offer systems integration,
programming and applications services in April 1996. Accordingly, the Company
has a limited operating history upon which an evaluation of its prospects and
performance can be made. The Company's prospects must be considered in light of
the risks, uncertainties, expenses, delays, problems and difficulties
frequently encountered in the establishment of a new business enterprise in a
rapidly evolving industry characterized by intense competition and an
increasing and substantial number of new market entrants and technologies and
services. The Company is subject to the risks associated with an evolving
business and the management of both internal and acquisition based growth. See
"Business."
Prior Operating Losses; Lack of Substantial Profitability; Future
Operating Results. The Company incurred losses of $39,000 and $251,000,
respectively, for the period from inception (February 28, 1995) to December 31,
1995 and the year ended December 31, 1996 and has an accumulated deficit at
December 31, 1997 of $85,000. On a pro forma basis, the Company would have
incurred a loss in the amount of $113,000 for the year ended December 31, 1997
after giving effect to the acquisition of Entelechy. The Company achieved only
limited profitability for the year ended December 31, 1997 despite generating
steadily increasing levels of revenues. The Company's operating expenses have
increased and will continue to increase significantly in connection with any
expansion activities undertaken by the Company, including those relating to
acquisitions, network development and marketing. Accordingly, the Company's
future profitability will depend on corresponding increases in revenues from
operations. The Company's expense levels are based in part on the Company's
expectations concerning future revenues and are fixed to a large extent. Any
decline in demand for the Company's services or increases in the Company's
expenses which are not offset by corresponding increases in revenue could have
a material adverse effect on the Company. The Company expects to incur a
non-recurring charge of $35,000 relating to the 1997 Financing upon the
consummation of this offering, and charges of approximately $180,000, $197,000,
$197,000 and $17,000 relating to the Entelechy acquisition in each of the years
ending December 31, 1998, 1999, 2000 and 2001, respectively. Additionally, the
Company expects to incur annual charges in the amount of $27,000 through the
year ending December 31, 2001 in connection with the award of a restricted
stock grant to an executive officer. There can be no assurance that the
Company's recent rate of revenue growth will continue or that the Company's
future operations will be profitable. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Management -- Employment
Agreements" and Financial Statements.
Dependence on Aetna; Non-Recurring Revenues. The Company is dependent on a
limited number of clients for a substantial portion of its revenues. For the
year ended December 31, 1997, the Company's largest clients, Aetna (which
engaged the Company in October 1997) and Mobil accounted for approximately
54.2% and 5.2%, respectively, of the Company's revenues. Revenues derived from
the Company's consulting contracts are generally non-recurring in nature. The
Company's contract with Aetna provides for the Company to render services
pursuant to purchase orders, each of which constitutes a separate contractual
commitment by Aetna. As of the date of this Prospectus, the Company has not
received any purchase orders from Aetna for work to be performed subsequent to
April 30, 1998. Non-renewal or termination of the Company's contract with Aetna
or the failure by Aetna to issue additional purchase orders under the existing
contract would have a material adverse effect on the Company. There can be no
assurance that the Company will obtain additional contracts for projects
similar in scope or profitability to those previously obtained from Aetna or
any other client, that the Company will be able to retain existing clients or
attract new clients or that the Company will not remain largely dependent on a
limited client base which may continue to account for a substantial portion of
the Company's revenues. In addition, the Company generally will be subject to
delays in client funding; lengthy client review processes for awarding
contracts; nonrenewal; delay, termination, reduction or modification of
contracts in the event of changes in client policies or as a result of
budgetary constraints; and increased or unexpected costs resulting in losses in
the event of "fixed-price" contracts. See "Business -- Clients."
Subscriber Attrition. The Company's operating results may be affected by
dial-up subscriber attrition rates. Subscribers may discontinue service without
penalty at any time, and there can be no assurance that subscribers will
continue to purchase services from the Company or that the Company will not be
subject to subscriber
6
<PAGE>
attrition. Historically, the Company has not retained data enabling it to
accurately compute subscriber attrition levels. Significant levels of
subscriber attrition in the future could have a material adverse effect on the
Company's operating results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Limited Number of POPs; Geographic Concentration; Uncertainty of Network
Expansion. The Company currently has ten points-of-presence ("POPs") in
operation in the northern New Jersey and New York City metropolitan areas.
Consequently, the results achieved to date by the Company may not be indicative
of the prospects or market acceptance of a larger number of POPs in wider and
more geographically dispersed areas. The process of acquiring existing POPs or
identifying suitable sites and establishing additional POPs can be lengthy.
There can be no assurance that the Company will be successful in acquiring
existing POPs or identifying suitable sites and establishing additional POPs.
Failure to obtain and install telephone lines and network equipment on a timely
and cost-effective basis could materially delay the Company's plans with
respect to the establishment of additional POPs in target markets. The Company
has relatively limited experience in establishing POPs and has limited
financial, technical and other resources. There can be no assurance that the
Company will be able, for financial or other reasons, to successfully expand
its network of POPs or that any expansion will not be subject to unforeseen
delays and costs. See "Business -- Network Infrastructure."
Emerging and Evolving Markets; Uncertainty of Market Acceptance; Limited
Marketing, Service and Support Capabilities. The markets for the Company's
services are relatively new and evolving and are characterized by consolidating
trends. As a result, the ultimate level of demand for the Company's services is
subject to a high degree of uncertainty. Any significant decline in demand for
computer networking services or in the computer industry generally or in
particular market segments could have a material adverse effect on the
Company's business and prospects. The Company's success will be largely
dependent upon its ability to continually attract and retain additional clients
and subscribers and replace terminating clients and subscribers. Achieving
significant market acceptance will require substantial efforts and expenditures
to create enhanced awareness of the services offered by the Company. The
successful implementation of the Company's business plans will also require the
Company to expand client service and support capabilities to satisfy
increasingly sophisticated client requirements. The Company currently has
limited marketing experience and limited marketing, service, client support and
other resources. To date, the Company has relied principally on the efforts of
its executive officers to market its services. There can be no assurance that
the Company will be able to successfully expand its marketing activities,
client service or support capabilities, or that the Company's efforts will
result in continued market acceptance for the Company's services. See "Business
- -- Sales and Marketing."
Competition. The markets for the Company's services are highly
competitive. There are no substantial barriers to entry and the Company expects
that competition will intensify in the future. The Company believes that its
ability to compete successfully will be significantly affected by the
availability of highly skilled engineers, programmers and technicians;
continuing referrals by clients; the geographic scope of the Company's network;
and industry and general economic trends. The Company competes with numerous
large companies that have substantially greater market presence and financial,
technical, marketing and other resources than the Company, including (i) large
information technology consulting and service providers and application
software firms such as Andersen Consulting, Cambridge Technology Partners,
Electronic Data Systems Corporation and American Management Systems; (ii)
international, national, regional and commercial Internet service providers
such as Performance Systems International, Inc., Digex, Inc. and UUNET
Technologies, Inc.; ("UUNET"); (iii) established on-line services companies
such as America Online, Inc., and Prodigy Service Company; (iv) computer
hardware and software and other technology companies such as IBM and Microsoft
Corp.; (v) national long distance carriers such as AT&T Corp., MCI
Communications Corp. and Sprint Corp. and regional telephone companies,
including Bell Atlantic, and cable operators; and (vi) major accounting firms.
Many of these competitors have announced plans to expand their service
offerings and increase their focus on markets relating to computer networking
and Internet related services. As a result, competition is expected to
intensify for highly skilled network engineers, programmers and technicians.
There can be no assurance that competitors will not develop or offer services
that provide performance, price or other advantages over those offered by the
Company, that the Company will be able to attract, hire or retain highly
skilled network engineers, programmers and technicians or that the Company will
have the financial resources, technical expertise or marketing and support
capabilities to compete successfully. See "Business -- Competition."
7
<PAGE>
Rapid Technological Change. The markets for the Company's services are
characterized by rapid technological change, changes in client requirements and
preferences, frequent new product and service introductions embodying new
processes and technologies and evolving industry standards and practices that
could render the Company's existing practices and methodologies obsolete or
less attractive to existing and prospective clients. The Company's success will
depend on its ability to improve existing and develop new services and
solutions that address the increasingly sophisticated and varied needs of its
current and prospective clients, and respond to technological advances,
emerging industry standards and practices and competitive service offerings.
There can be no assurance that the Company will be successful in responding
quickly, cost-effectively and sufficiently to these developments. The Company's
dial-up access service is also subject to fundamental changes in the manner in
which Internet access services are delivered. Currently, the Internet is
accessed primarily by computers and telephone lines. To the extent that the
Internet becomes increasingly accessible by screen-based telephones, television
or other consumer electronic devices which change the way Internet access is
routinely provided, the Company may be required to acquire or develop new
technology or modify its existing technology to accommodate these developments.
The pursuit of these technological advances may require substantial time and
expense, and there can be no assurance that the Company will succeed in
adapting its Internet access service to alternate access devices and conduits.
See "Business -- Competition."
Capacity Constraints; System Failure and Security Risks. The Company's
operations will depend upon the capacity, reliability and security of its
network infrastructure. The Company currently has limited network capacity and
will be required to continually expand its network infrastructure to
accommodate significant numbers of users and increasing amounts of information.
Expansion of the Company's network infrastructure will require significant
financial, operational and management resources. There can be no assurance that
the Company will be able to expand its network infrastructure to meet potential
demand on a timely basis, at a commercially reasonable cost, or at all. Failure
by the Company to expand its network infrastructure on a timely basis would
have a material adverse effect on the Company. The Company's operations will
also be dependent on the Company's ability to protect its computer equipment
against damage from fire, power loss, telecommunications failures and similar
events. The Company currently does not maintain redundant capacity. The
Company's network infrastructure will be vulnerable to computer viruses,
break-ins and similar disruptions from unauthorized tampering with the
Company's computer systems. Computer viruses or problems caused by third
parties could lead to material interruptions, delays or cessation in service.
Inappropriate use of the Internet by third parties could also potentially
jeopardize the security of confidential information stored in computer systems.
Security and privacy concerns may limit the Company's ability to develop a
significant subscriber base. See "Business -- Network Infrastructure."
Dependence on Third-Party Suppliers and Manufacturers; Possible Service
Interruptions and Equipment Failures. The Company is dependent on Bell Atlantic
and WorldCom, Inc. ("WorldCom") to provide leased telecommunications lines on a
cost-effective and continuous basis, and on UUNET to provide Internet access.
As is customary in the industry, the Company has not entered into interconnect
agreements with these suppliers. Increases in rates charged by such suppliers
could adversely affect the Company's operating margins. Failure to obtain
continuing access to such networks resulting in material business interruptions
would also have an adverse effect on the Company. The Company also is dependent
on third-party manufacturers of hardware components. Except for a limited
number of non-exclusive reseller agreements with certain suppliers, the Company
has not entered into agreements with any equipment manufacturer. Failure by
manufacturers to deliver quality equipment on a timely basis or any inability
to obtain alternative sources of supply, could materially adversely affect the
Company's business and limit the Company's ability to expand its network. In
addition, the Company's operations require that its POPs and its third-party
telecommunications networks operate on a continuous basis. It is possible that
the Company's POPs and third-party telecommunications networks may from time to
time experience service interruptions or equipment failures. Service
interruptions and equipment failures resulting in material delays would
adversely affect client and subscriber confidence as well as the Company's
business operations and reputation. See "Business -- Network Infrastructure."
Risks Associated with Expansion and Unspecified Acquisitions. The Company
intends to use a portion of the proceeds of this offering to expand its
operations through internal growth and acquisitions. The Company plans to
establish or acquire additional POPs, upgrade and expand its network capacity,
attract additional clients and subscribers, expand its work force and its
presence in selected geographic markets. Such growth is expected
8
<PAGE>
to place a significant strain on its management, administration, operational,
financial and other resources. To successfully manage growth, the Company will
be required to continue to implement and improve its administrative, operating
and financial systems, train and manage its employees, monitor operations,
control costs and maintain effective quality controls. The Company has limited
experience in effectuating rapid expansion and in managing operations which are
geographically dispersed, and there can be no assurance that the Company will
be able to successfully expand its operations or manage growth. The Company
intends to pursue opportunities by making selective acquisitions of systems
integraters, programmers, applications developers and Internet service
providers. While the Company regularly evaluates possible acquisition
opportunities, as of the date of this Prospectus, the Company has no plans,
agreements, commitments, understandings or arrangements with respect to any
such acquisition. There can be no assurance that the Company will ultimately
effect any acquisition, that it will be able to successfully integrate into its
operations any personnel, businesses, clients or subscribers which it may
acquire, that the Company will not incur significant charges related to an
acquisition, goodwill amortization expense or write-offs associated with
attrition of newly acquired subscribers or clients or be able to retain
acquired key personnel. Additionally, stockholders will generally not have any
opportunity to evaluate or approve any acquisition. See "Use of Proceeds" and
"Business -- Strategy."
Recruitment and Retention of Qualified Personnel. The Company's business
is labor intensive. The Company's success will depend upon its ability to
identify, hire, train and retain professional engineers, programmers and
technicians who can provide the strategy, technology and creative skills
required by clients. Qualified professionals are in high demand and are likely
to remain a limited resource for the foreseeable future. The Company is
currently dependent on the services of temporary personnel to satisfy increased
client requirements. The Company competes intensely for qualified personnel
with other companies, and there can be no assurance that the Company will be
able to attract or retain other highly qualified engineers, programmers and
technical personnel in the future. Failure to attract and retain qualified
professionals in sufficient numbers would severely limit the Company's ability
to complete existing projects and expand its operations. See "Business."
Dependence on Offering Proceeds to Implement Proposed Expansion; Possible
Need for Additional Financing. The Company's business is capital intensive. The
Company is dependent on and intends to use a substantial portion of the
proceeds of this offering to implement its expansion plans. Based on proposed
plans and assumptions relating to its operations, the Company believes that the
proceeds of this offering, together with projected cash flow from operations,
will be sufficient to satisfy its contemplated cash requirements for at least
twelve months following the consummation of this offering. In the event that
the Company's plans change, its assumptions change or prove to be inaccurate or
if the proceeds of this offering or cash flow prove to be insufficient to
implement its business plans, the Company may be required to seek additional
financing or curtail its expansion activities. There can be no assurance that
the proceeds of this offering will be sufficient to permit the Company to
implement its business plans, that any assumptions relating to the
implementation of such plans will prove to be accurate or that any additional
financing would be available to the Company on commercially reasonable terms,
or at all. The inability to obtain additional financing, if required, would
have a material adverse effect on the Company. The Company may determine to
seek additional debt or equity financing to fund the cost of continuing
expansion. To the extent that the Company finances an acquisition with equity
securities, the issuance of such equity securities would result in dilution to
the interests of the Company's stockholders. Additionally, if the Company
incurs indebtedness or issues debt securities in connection with any
acquisition, the Company will be subject to risks that interest rates may
fluctuate and cash flow may be insufficient for the payment of principal and
interest on any such indebtedness. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Possible Fluctuations in Operating Results; Lengthy Sales Cycle. The
Company's operating results may fluctuate significantly from period to period
as a result of the length of the Company's sales cycle, as well as from client
budgeting cycles; the introduction of new products and services by competitors;
the timing of expenditures; pricing changes in the industry; technical
difficulties; and general economic conditions. The Company's business is
generally subject to lengthy sales cycles, which requires the Company to make
expenditures and use significant resources prior to receipt of corresponding
revenues. Historically, the Company's revenues have been higher in the fourth
quarter as a result of client budgeting and expenditures cycles. There can be
no assurance that the foregoing factors will not result in significant
fluctuations in future operating results. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
9
<PAGE>
Outstanding Accounts Receivable, Credit and Collection Risks. The
Company's accounts receivable, less allowance for doubtful accounts, at
December 31, 1997, were $1,636,000, compared to $310,000 at December 31, 1996.
Of such 1997 receivables, approximately 93% were due from Aetna, all of which
were collected in January 1998. At December 31, 1997, the Company's allowance
for doubtful accounts was $66,000. Delays in collection or uncollectibility of
accounts receivable could have an adverse effect on the Company and could
require the Company to increase its allowance for doubtful accounts. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Government Regulation; Potential Liability for Content. Recently enacted
federal, state and local legislation aimed at limiting the use of the Internet
to transmit certain content and materials could result in significant liability
to Internet service providers. These types of legislative actions present the
potential for increased scrutiny and attempts to impose liability upon Internet
service providers for information disseminated through their networks. The
adoption or strict enforcement of any such laws or regulations may limit the
growth of the Internet, which could decrease demand for the Company's services
and increase the Company's cost of doing business. Additionally, the
applicability to the Internet of existing laws governing issues such as
property ownership, libel and personal privacy is uncertain. As a result, it is
possible that the adoption of new legislation or regulation or the application
to the Internet of existing laws and regulations relating to property
ownership, libel and personal privacy could have a material adverse effect on
the Company. Changes in the regulatory environment relating to Internet access,
including regulatory changes which directly or indirectly affect
telecommunication costs or increase the likelihood or scope of competition from
local and regional telephone companies or others, could also have a material
adverse effect on the Company. See "Business."
Limited Intellectual Property Protection. The Company relies on a
combination of copyright and trademark laws, trade secrets and nondisclosure
agreements to protect its proprietary information. The Company currently has no
registered copyrights or patents or patent applications pending. It may be
possible for unauthorized third parties to copy aspects of, or otherwise obtain
and use, the Company's proprietary information without authorization. In
addition, there can be no assurance that any confidentiality agreements between
the Company and its employees or any agreements with its customers will provide
meaningful protection for the Company's proprietary information in the event of
any unauthorized use or disclosure of such proprietary information. The
majority of the Company's current agreements with its clients contain
provisions granting to the client intellectual property rights to certain of
the Company's work product, including customized programming that is created
during the course of a project. The Company anticipates that agreements with
future clients may contain similar provisions. Other existing agreements to
which the Company is a party are, and future agreements may be, silent as to
the ownership of such rights. To the extent that the ownership of such
intellectual property rights is expressly granted to a client or is ambiguous,
the Company's ability to reuse or resell such rights will or may be limited.
See "Business -- Intellectual Property."
Potential Liability to Clients. The Company's consulting engagements often
involve development, implementation and maintenance of applications that are
critical to the operations of its clients' businesses. The Company's failure or
inability to meet a client's expectations in the performance of its services
could harm the Company's business reputation or result in a claim for
substantial damages against the Company, regardless of the Company's
responsibility for such failure or inability. In addition, in the course of
performing services, the Company's personnel often gain access to technologies
and content which include confidential or proprietary client information.
Although the Company has implemented policies to prevent such client
information from being disclosed to unauthorized parties or used
inappropriately, any such unauthorized disclosure or use could result in a
claim for substantial damages. The Company attempts to limit contractually its
damages arising from negligent acts, errors, mistakes or omissions in rendering
services and, although the Company maintains general liability insurance
coverage in the amount of $1,000,000, including coverage for errors and
omissions, there can be no assurance that such coverage will continue to be
available on reasonable terms or will be available in sufficient amounts to
cover one or more large claims. The successful assertion of one or more large
claims against the Company that are uninsured, exceed available insurance
coverage or result in changes to the Company's insurance policies, including
premium increases or the imposition of a large deductible or co-insurance
requirements, would adversely affect the Company. See "Business -- Insurance."
Dependence on Key Personnel. The success of the Company will be dependent
on the personal efforts of Nicholas R. Loglisci, Jr., its President and Chief
Operating Officer; Clark D. Frederick, its Chief Technical
10
<PAGE>
Officer; Frank R. Altieri, Jr., its Chief Information Officer and other key
personnel. Although the Company has entered into employment agreements with
Messrs. Loglisci, Frederick and Altieri, the loss of the services of any of
such individuals, as a result of extended leaves due to military service or
otherwise, could have a material adverse effect on the Company. Prior to the
consummation of this offering, the Company intends to obtain "key-man"
insurance on the life of each of Messrs. Loglisci, Frederick and Altieri in the
amount of $2,000,000. See "Management."
Dependence on Personal Guarantees. Certain of the Company's equipment
leases have been personally guaranteed by each of Messrs. Loglisci, Frederick
and Altieri. Additionally, the Company's bank indebtedness has been personally
guaranteed by each of Messrs. Loglisci and Altieri. At December 31, 1997, the
aggregate obligations of the Company personally guaranteed by these executive
officers amounted to $117,000. None of these individuals nor any other person
has any obligation to make personal guarantees available to the Company in the
future and it is expected that such persons will not personally guarantee
obligations of the Company following the consummation of this offering. There
can be no assurance that the absence of such personal guarantees will not
adversely affect the Company's ability to borrow funds or lease equipment in
the future. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Certain Transactions."
Broad Discretion in Application of Proceeds; Allocation of Proceeds to
Repay Indebtedness; Benefits to Related Parties. Approximately $1,972,000
(34.1%) of the estimated net proceeds of this offering has been allocated to
working capital and general corporate purposes. Accordingly, the Company's
management will have broad discretion as to the application of such proceeds.
The Company also intends to use $307,000 of the net proceeds of this offering
to repay outstanding indebtedness, including indebtedness owing to Steven
Loglisci, Nicholas R. Loglisci, Sr., Frank R. Altieri, Sr., each a member of
the family of an executive officer of the Company, and Barrett Wissman, a
nominee for director of the Company, in the amount of $18,750, $10,000, $25,000
and $50,000, respectively. Additionally, a portion of the proceeds of this
offering allocated to working capital may be used to pay the salaries of
executive officers (which is anticipated to approximate $395,000 during the
twelve months following this offering) to the extent cash flow from operations
is insufficient for such purpose. See "Use of Proceeds" and "Certain
Transactions."
Control by Current Stockholders. Upon consummation of this offering, the
Company's current stockholders will beneficially own, in the aggregate,
approximately 60.2% of the outstanding shares of Common Stock. Accordingly,
such persons, acting together, will be in a position to control the Company,
elect all of the Company's directors, change the Company's authorized capital
or cause the dissolution, merger or sale of the assets of the Company, and
generally direct the affairs of the Company. See "Management" and "Principal
Stockholders."
Potential Conflicts of Interest. The Company has entered into certain
transactions or arrangements with its affiliates, including borrowings and
personal guarantees made on behalf of the Company, which could result in
conflicts of interest. Although the Company believes that all such transactions
or arrangements were on terms no less favorable to the Company than could have
been obtained from unaffiliated third parties, there can be no assurance that
conflicts of interest will not arise with respect to future transactions or
arrangements or that such conflicts will be resolved in a manner favorable to
the Company. Any such future transactions will be approved by a majority of the
independent and disinterested members of the Board of Directors and, to the
extent deemed necessary or appropriate by the Board of Directors, the Company
will obtain fairness opinions or stockholder approval in connection with any
such transactions. See "Certain Transactions."
No Dividends. To date, the Company has not paid any dividends on its
Common Stock and does not expect to declare or pay dividends on the Common
Stock in the foreseeable future. See "Dividend Policy."
Limitation on Liability. The Company's Restated Certificate of
Incorporation (the "Restated Certificate") includes provisions to limit, to the
full extent permitted by Delaware General Corporation Law (the "DGCL"), the
personal liability of directors of the Company for monetary damages arising
from a breach of their fiduciary duties as directors. As a result of such
provisions in the Restated Certificate, stockholders may be unable to recover
damages against the directors of the Company for actions taken by them which
constitute negligence,
11
<PAGE>
gross negligence or a violation of certain of their fiduciary duties, which may
reduce the likelihood of stockholders instituting derivative litigation against
directors and may discourage or deter stockholders from suing directors for
breaches of their duty of care, even though such an action, if successful,
might otherwise benefit the Company and its stockholders. See "Management --
Indemnification of Directors and Officers."
Immediate and Substantial Dilution. This offering involves an immediate
and substantial dilution of $3.76 per share (62.7%) between the net tangible
book value per share after the offering and the initial public offering price
per share. See "Dilution."
Authorized Preferred Stock. The Restated Certificate authorizes the
Company's Board of Directors to issue one million shares of "blank check"
preferred stock, par value $.01 per share (the "Preferred Stock"), and to fix
the rights, preferences, privileges and restrictions, including voting rights,
of such shares of Preferred Stock, without further stockholder approval. The
rights of the holders of Common Stock will be subject to and may be adversely
affected by the rights of holders of any Preferred Stock that may be issued in
the future. The ability to issue Preferred Stock without stockholder approval
could have the effect of making it more difficult for a third party to acquire
a majority of the voting stock of the Company thereby delaying, deferring or
preventing a change in control of the Company. See "Description of Securities."
Shares Eligible for Future Sale; Registration Rights. Upon consummation of
this offering, the Company will have 3,074,237 shares of Common Stock
outstanding, of which the 1,200,000 shares of Common Stock offered hereby will
be freely tradable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"), except for any
shares purchased by an "affiliate of the Company" (in general, a person who has
a controlling position with regard to the Company), which will be subject to
the resale limitations of Rule 144 promulgated under the Securities Act. All of
the remaining 1,874,237 shares of Common Stock which will be outstanding upon
the consummation of this offering are "restricted securities," as that term is
defined under Rule 144. Subject to the contractual restrictions described
below, 1,701,927 shares of Common Stock will be eligible for sale pursuant to
Rule 144 commencing 90 days following the date of this Prospectus, 147,310
shares will become eligible for sale pursuant to Rule 144 on January 31, 1999
and 25,000 shares will become eligible for sale pursuant to Rule 144 on the
first anniversary of the date of consummation of this offering. The holders of
1,548,102 of such shares (and holders of 48,872 shares issuable upon the
exercise of the Warrants) have agreed not to sell or otherwise dispose of such
shares for a period of twelve months from the date of this Prospectus without
the Underwriter's prior written consent. The Company has granted certain
"piggy-back" registration rights to the holders of 354,330 shares of Common
Stock (including 48,872 shares issuable upon the exercise of Warrants), and
certain demand and "piggy-back" registration rights to the Underwriter with
respect to the securities issuable upon exercise of the Underwriter's Warrants.
No prediction can be made as to the effect, if any, that sales of shares of
Common Stock or even the availability of such shares for sale will have on the
market prices prevailing from time to time. The possibility that substantial
amounts of Common Stock may be sold in the public market may adversely affect
the prevailing market price for the Common Stock and could impair the Company's
future ability to raise capital through the sale of its equity securities. See
"Shares Eligible for Future Sale" and "Underwriting."
No Assurance of Public Market; Arbitrary Determination of Offering Price;
Possible Volatility of Market Price of Common Stock; Underwriter's Potential
Influence on the Market. Prior to this offering, there has been no public
trading market for the Common Stock. There can be no assurance that a regular
trading market for the Common Stock will develop after this offering or that,
if developed, it will be sustained. Moreover, the initial public offering price
of the Common Stock has been determined by negotiations between the Company and
the Underwriter and, as a result, such initial public offering price has been
arbitrarily determined and may not bear any relationship to the assets, book
value or potential earnings of the Company or any other recognized criteria of
value and may not be indicative of the prices that may prevail in the future in
the public market. The market price of the Common Stock following this offering
may be highly volatile. Factors such as the Company's operating results,
announcements by the Company or its competitors and new products and services
affecting the computer networking and Internet industry may have a significant
impact on the market price of the Company's securities. In addition, in recent
years, the stock market has experienced a high level of price and volume
volatility and the market price for the stock of many companies have
experienced wide price fluctuations which have not necessarily been related to
the operating performance of such companies. Although it has no obligation to
12
<PAGE>
do so, the Underwriter intends to make a market in the Common Stock and may
otherwise effect transactions in the Common Stock. If the Underwriter makes a
market in the Common Stock, such activities may exert a dominating influence on
the market and such activity may be discontinued at any time. The prices and
liquidity of the Common Stock may be significantly affected to the extent, if
any, that the Underwriter participates in such market. See "Underwriting."
Possible Delisting of Common Stock from Nasdaq SmallCap Market; Risks
Relating to Low-Priced Stocks. The Common Stock will be eligible for quotation
on the Nasdaq SmallCap Market upon the completion of this offering. For the
Common Stock to remain eligible for continued quotation on the Nasdaq SmallCap
Market, the Company must maintain net tangible assets in the minimum amount of
$2,000,000, a market value of the public float in the minimum amount of
$1,000,000, two market makers and a minimum bid price of $1.00 per share.
Failure to meet these maintenance criteria may result in the delisting of the
Common Stock from the Nasdaq SmallCap Market, and trading, if any, in the
Common Stock would thereafter be conducted in the non-Nasdaq over-the-counter
market. As a result of such delisting, an investor would find it more difficult
to dispose of, or to obtain accurate quotations as to the market value of, the
Common Stock. In addition, if the Common Stock were to become delisted from
quotation on the Nasdaq SmallCap Market and the trading price of the Common
Stock were to fall below $5.00 per share on the date the Common Stock was
delisted, trading in the Common Stock would also be subject to the requirements
of certain rules promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
penny stock (generally, any non-Nasdaq equity security that has a market price
of less than $5.00 per share, subject to certain exceptions). Such rules
require the delivery, prior to any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated therewith,
and impose various sales practice requirements on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). For these types of transactions, the broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transaction prior to sale. The
additional burdens imposed upon broker-dealers by such requirements may
discourage broker-dealers from effecting transactions in the Common Stock,
which could materially adversely effect the market price and severely limit
liquidity of the Common Stock and the ability of purchasers in this offering to
sell Common Stock in the secondary market.
Potential Litigation. A former employee has threatened to institute legal
action against the Company for breach of contract and wrongful termination on
the basis of racial and gender discrimination and is seeking salary and
attorney's fees aggregating $20,000. Additionally, certain persons have
threatened to institute legal action against the Company for unspecified
damages and expenses in connection with the Company's termination of service to
an Internet subscriber. There can be no assurance that these matters will be
resolved in a manner favorable to the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Legal Proceedings."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares offered hereby
are estimated to be approximately $5,779,000 ($6,719,000 if the Underwriter's
over-allotment option is exercised in full). The Company intends to use the net
proceeds during the twelve months following this offering approximately as
follows:
<TABLE>
<CAPTION>
Approximate Approximate Percentage
Application of Proceeds Dollar Amount of Net Proceeds
- ----------------------------------------------------------- --------------- -----------------------
<S> <C> <C>
Potential acquisitions(1) ................................. $ 2,000,000 34.6%
Network expansion and upgrade(2) .......................... 1,000,000 17.3
Sales and marketing(3) .................................... 500,000 8.6
Repayment of indebtedness(4) .............................. 307,000 5.4
Working capital and general corporate purposes(5) ......... 1,972,000 34.1
----------- -----
Total .......................................... ......... $ 5,779,000 100.0%
=========== =====
</TABLE>
- ------------
(1) Represents estimated expenditures to acquire systems integrators,
programmers, applications developers and Internet service providers which
the Company believes will enhance its prospects. In January 1998, the
Company acquired Entelechy and certain assets of JDT WebwerX LLC. As of
the date of this Prospectus, the Company has no plans, agreements,
commitments, understandings or arrangements with respect to any
acquisition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Strategy."
(2) Represents anticipated expenditures associated with (i) the acquisition of
additional computer hardware and software used to support network
infrastructure, including backup and redundant capacity, (ii) the
establishment of additional POPs in selected geographic locations and
(iii) salaries of three additional technical support personnel. See
"Business -- Network Infrastructure."
(3) Includes costs associated with increased print and radio advertising and
the salaries for up to four additional marketing and sales personnel,
including a Director of Marketing. See "Business -- Sales and Marketing."
(4) Includes the repayment of (i) $200,000 principal amount of unsecured
promissory notes (the "1997 Notes") issued in October 1997, together with
accrued interest at the rate of 8% per annum, payable on the earlier of
(a) the consummation of this offering, (b) a private placement of
securities resulting in net proceeds to the Company in the minimum amount
of $1,000,000 or (c) October 31, 1999; and (ii) $95,000 outstanding
principal amount of unsecured promissory notes (the "1995 Notes") issued
in August 1995, together with accrued interest at the rate of 6% per
annum, payable on July 31, 1998. The proceeds of the 1997 Notes were used
for working capital and general corporate purposes. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Certain Transactions."
(5) Working capital may be used, among other things, to pay salaries of the
Company's executive officers (which is anticipated to be approximately
$395,000 during the twelve months following this offering), rent,
telecommunications expenses, trade payables, consulting and professional
fees and other expenses.
If the Underwriter exercises the over-allotment option in full, the
Company will realize additional net proceeds of $940,000, which will be
allocated among the categories set forth above. See "Underwriting."
<PAGE>
The allocation of the net proceeds set forth above represents the
Company's best estimates based on proposed plans and assumptions relating to
its operations and growth strategy and general economic conditions. The Company
believes that the proceeds of this offering, together with projected cash flow
from operations, will be sufficient to satisfy its contemplated cash
requirements for at least twelve months following the consummation of this
offering. In the event that the Company's plans change (due to changes in
market conditions, competitive factors or new opportunities that may become
available in the future), its assumptions change or prove to be inaccurate or
if the proceeds of this offering or cash flow prove to be insufficient to
implement its business plans (due to unanticipated expenses, technical
difficulties or otherwise), the Company may be required to reallocate the
proceeds among the categories set forth above, use proceeds for other purposes,
seek additional
14
<PAGE>
financing or curtail its expansion activities. There can be no assurance that
the proceeds of this offering will be sufficient to permit the Company to
implement its business plans, that any assumptions relating to the
implementation of such plans will prove to be accurate or that any additional
financing would be available to the Company on commercially reasonable terms,
or at all.
Proceeds not immediately required for the purposes described above will be
invested principally in short-term United States Government securities,
short-term certificates of deposit, money market funds or other short-term
interest bearing investments.
DILUTION
The difference between the initial public offering price per share and the
net tangible book value per share of Common Stock after this offering
constitutes the dilution to investors in this offering. Net tangible book value
per share is determined by dividing the net tangible book value of the Company
(total tangible assets less total liabilities) by the number of outstanding
shares of Common Stock.
At December 31, 1997, the Company had a net tangible book value of
$1,003,000, or $.59 per share ($.48 per share, on a pro forma basis, after
giving effect to the issuance of 147,310 shares of Common Stock in connection
with the Entelechy acquisition in January 1998). After giving further effect to
(i) the Debt Conversion and (ii) the sale by the Company of the 1,200,000
shares offered hereby and after deducting estimated underwriting discounts and
expenses of the offering, the net tangible book value of the Company at
December 31, 1997 would have been $6,881,000, or $2.24 per share, representing
an immediate increase in net tangible book value of $1.76 per share to the
existing stockholders and an immediate dilution of $3.76 (62.7%) per share to
new investors.
The following table illustrates the foregoing information with respect to
dilution to new investors on a per share basis:
<TABLE>
<S> <C> <C>
Initial public offering price ............................... $ 6.00
Pro forma net tangible book value before offering ......... $ .48
Increase attributable to new investors. ................... 1.76
------
Net tangible book value after offering ...................... 2.24
------
Dilution to new investors. .................................. $ 3.76
======
</TABLE>
<PAGE>
The following table sets forth with respect to the Company's existing
stockholders (giving effect to the Entelechy acquisition and the Debt
Conversion) and new investors, a comparison of the number of shares of Common
Stock acquired from the Company, the percentage ownership of such shares, the
total consideration paid, the percentage of total consideration paid and the
average price per share.
<TABLE>
<CAPTION>
Average Price
Shares Purchased Total Consideration per Share
----------------------- -------------------------- --------------
Number Percent Amount Percent
----------- --------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Existing Stockholders ......... 1,874,237 61.0% $1,327,000 15.6% $ .71
New Investors ................. 1,200,000 39.0 7,200,000 84.4 6.00
--------- ----- ---------- -----
Total ........................ 3,074,237 100.0% $8,527,000 100.0%
========= ===== ========== =====
</TABLE>
The above table assumes no exercise of the Underwriter's over-allotment
option. If such option is exercised in full, it is estimated that the new
investors will have paid $8,280,000 for 1,380,000 shares offered by the
Company, representing approximately 86.2% of the total consideration, for 42.4%
of the total number of shares of Common Stock outstanding. In addition, the
above table does not give effect to the shares issuable upon exercise of the
Warrants. The Warrants represent the right to purchase 48,872 shares of Common
Stock at an exercise price of $3.54 per share. To the extent the Warrants are
fully exercised, there will be reduced dilution to new investors of $.02. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Management--1998 Stock Option Plan," "Description of
Securities--Warrants" and "Underwriting."
15
<PAGE>
DIVIDEND POLICY
Since its inception, the Company has not declared or paid any dividends on
the Common Stock and does not in the foreseeable future expect to declare or
pay any cash or other dividends on the Common Stock. The future declaration and
payment of dividends is within the discretion of the Board of Directors and
will depend upon the Company's earnings, if any, its capital requirements,
financial condition, the terms of then existing indebtedness, general economic
conditions and such other factors as are considered relevant by the Board of
Directors.
CAPITALIZATION
The following table sets forth the short-term indebtedness and the
capitalization of the Company as of December 31, 1997 on (i) an actual basis,
(ii) a pro forma basis giving effect to the issuance of 147,310 shares of
Common Stock in connection with the acquisition of Entelechy in January 1998
and (iii) an as adjusted basis giving effect to the Debt Conversion and the
sale by the Company of 1,200,000 shares offered hereby and the anticipated
application of the estimated net proceeds therefrom. See "Use of Proceeds,"
"Description of Securities" and Financial Statements.
<TABLE>
<CAPTION>
At December 31, 1997
----------------------------------------------------
Actual Pro Forma As Adjusted
-------------- ------------- -------------------
<S> <C> <C> <C>
Debt and capital leases including current maturities ............... $ 413,000 $ 563,000 $ 106,000
========== ========== ===========
Stockholders' equity(1):
Preferred Stock, par value $.01 per share, 1,000,000 shares
authorized; no shares issued or outstanding, actual or as
adjusted ........................................................ $ -- $ -- $ --
Common Stock, par value $.01 per share, 11,000,000 shares
authorized; 1,701,967 shares issued and outstanding, actual;
1,849,237 shares issued and outstanding, pro forma;
3,074,237 shares issued and outstanding, as adjusted(2) ......... 17,000 18,000 31,000
Additional paid-in capital ......................................... 1,214,000 1,883,000 7,799,000
Unearned compensation .............................................. (7,000) (7,000) (7,000)
Accumulated deficit ................................................ (85,000) (85,000) (106,000)(3)
---------- ---------- -----------
Total Stockholders' Equity ........................................ 1,139,000 1,809,000 7,717,000
---------- ---------- -----------
Total Capitalization ............................................ $1,552,000 $2,372,000 $ 7,823,000
========== ========== ===========
</TABLE>
- ------------
(1) Gives effect to an increase in the Company's authorized capital stock
effected in March 1998. See Note 7 to Notes to the Company's Financial
Statements.
(2) Does not include (i) 120,000 shares reserved for issuance upon exercise of
the Underwriter's Warrants; (ii) 130,124 shares reserved for issuance in
connection with the acquisition of Entelechy in January 1998; (iii) 48,872
shares reserved for issuance upon exercise of the Warrants; (iv) 129,750
shares reserved for issuance upon exercise of options granted under the
1998 Stock Option Plan; (v) 20,000 shares reserved for a restricted stock
award; and (vi) 200,250 shares reserved for issuance upon exercise of
options available for future grant under the 1998 Stock Option Plan. See
"Management Discussion and Analysis and Results of Operations,"
"Management -- Employment Agreements," "-- 1998 Stock Option Plan,"
"Description of Securities -- Warrants" and "Underwriting."
(3) Gives effect to a non-recurring charge of $35,000 ($21,000, net of tax
benefit) relating to the 1997 Financing which will be incurred upon
consummation of this offering. See Note 6 to Notes to the Company's
Financial Statements.
16
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data is derived from the audited financial
statements of the Company, and should be read in conjunction with such
financial statements, including the notes thereto, contained elsewhere in this
Prospectus. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1996 1997
------------- -----------------------------
Actual Actual Pro Forma(2)
------------- ------------- -------------
<S> <C> <C> <C>
Statement of Operations Data(1):
Revenues ......................................................... $1,023,000 $2,741,000 3,065,000
Cost of services ................................................. 650,000 1,099,000 1,356,000
Gross profit ..................................................... 373,000 1,642,000 1,709,000
Operating expenses:
Selling, general and administrative ............................. 670,000 1,296,000 1,411,000
Amortization of intangible assets ............................... 1,000 12,000 168,000
Compensation expense -- Entelechy ............................... -- -- 197,000
Operating income (loss) .......................................... (298,000) 334,000 (67,000)
Net income (loss) ................................................ (251,000) 198,000 (113,000)
Net income (loss) per share -- basic and diluted ................. (.17) .12 (.06)
Weighted average number of shares outstanding -- diluted ......... 1,507,047 1,721,664 1,890,661
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1996 1997
----------- --------------------------------------------------
Actual Pro Forma(3) As Adjusted(4)
------------ -------------- ------------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Working capital .............. $393,000 $ 567,000 $ 425,000 $ 6,250,000
Total assets ................. 935,000 2,451,000 3,295,000 8,726,000
Total liabilities ............ 214,000 1,312,000 1,486,000 1,009,000
Stockholders' equity ......... 721,000 1,139,000 1,809,000 7,717,000(5)
</TABLE>
- ------------
(1) Includes the results of operations of (i) Interactive Networks since the
beginning of the periods presented, (ii) Mordor subsequent to May 31,
1996, and (iii) AllNet subsequent to March 1, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and Note 3 to Notes to the Company's Financial Statements.
(2) Gives effect to the acquisition of Entelechy as if such acquisition had
occurred on January 1, 1997.
(3) Gives effect to the acquisition of Entelechy in January 1998 including the
issuance of 147,310 shares of Common Stock in connection therewith.
(4) Gives effect to (i) the Debt Conversion and (ii) the sale of the shares
offered hereby and the anticipated application of the estimated net
proceeds therefrom. See "Use of Proceeds," "Management Discussion and
Analysis of Financial Condition and Results of Operations" and "Certain
Transactions."
(5) Gives effect to a non-recurring charge of $35,000 ($21,000, net of tax
benefit) relating to the 1997 Financing which will be incurred upon
consummation of this offering. See Note 6 to Notes to the Company's
Financial Statements.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company provides a broad range of computer networking, programming,
applications development and Internet services primarily to businesses and
organizations. The Company's revenues are derived principally from consulting
fees earned in connection with the performance of systems integration services,
recurring monthly Internet connectivity fees and consulting fees earned in
connection with programming and applications development services.
The Company recognizes revenue as services are provided to its clients and
subscribers. Deferred revenue in the amount of $238,000 at December 31, 1997
related to unearned consulting fees. These fees were recognized in full as of
January 31, 1998. See Note 2 to Notes to the Company's Financial Statements.
The Company commenced operations in June 1995 as an Internet service
provider offering Web-site hosting services. Since April 1996, the Company has
acquired Interactive Networks, Mordor and AllNet, each an Internet service
provider principally offering dial-up access services. The Company began to
provide Systems Integration and Programming and Applications Development
services in April 1996 and has increasingly emphasized such services. In
January 1998, the Company acquired Entelechy, a provider of programming and
applications development services, including distance learning and on-line
trading applications. The Company's consulting services generally produce
higher profit margins than the Company's Internet services. For the year ended
December 31, 1997, Systems Integration, Programming and Applications
Development and Internet services accounted for approximately 55%, 9% and 36%,
respectively, of the Company's revenues.
The Company has achieved only limited profitability for the year ended
December 31, 1997. Operating expenses have increased and will continue to
increase significantly in connection with any expansion activities undertaken
by the Company, including those relating to acquisitions, network development
and marketing. Accordingly, the Company's future profitability will depend on
corresponding increases in revenues from operations.
The Company's expense levels are based in part on its expectations
concerning future revenues and are fixed to a large extent. Any decline in
demand for the Company's services or increases in expenses which are not offset
by corresponding increases in revenues could have a material adverse effect on
the Company. The Company expects to incur a non-recurring charge of $35,000
relating to the 1997 Financing upon the consummation of this offering, and
charges of approximately $180,000, $197,000, $197,000 and $17,000 relating to
the acquisition of Entelechy in each of the years ending December 31, 1998,
1999, 2000 and 2001, respectively. Additionally, the Company expects to incur
annual charges in the amount of $27,000 through the year ending December 31,
2001 in connection with the award of a restricted stock grant to an executive
officer. See "Management -- Employment Agreements" and Notes 6 and 14 to Notes
to the Company's Financial Statements.
The Company anticipates that growth in its client and subscriber base will
increase operating costs (including expenses relating to network infrastructure
and client support) and will require the Company to hire additional network
engineers, programmers and technical personnel. The Company currently has 49
full-time employees. The Company has entered into employment agreements with
eighteen of its employees, including its executive officers, which provide for
aggregate salaries of $1,113,000 during the year ending December 31, 1998. See
Note 9 to Notes to the Company's Financial Statements.
During the twelve months following this offering, the Company anticipates
that it will use a portion of the proceeds of this offering to hire up to four
additional employees to market and sell the Company's services. The Company
also intends to hire up to three additional technical and support personnel.
Acquisitions
In April 1996, the Company acquired all of the outstanding capital stock
of Interactive Networks in consideration of the issuance of 377,536 shares of
Common Stock. At the time of the combination, Interactive had approximately 400
dial-up subscribers, two POPs in northern New Jersey and one POP in New York
City. The combination has been accounted for as a pooling of interests.
Accordingly, the Company's financial statements have been restated to include
the results of operations and financial position of Interactive Networks.
18
<PAGE>
In May 1996, the Company acquired all the assets of Mordor in
consideration of a $20,000 cash payment. At the time of the acquisition, Mordor
had approximately 400 dial-up subscribers and network equipment valued at
$15,000. The acquisition was accounted for as a purchase.
In March 1997, the Company acquired substantially all of the assets of
AllNet in consideration of (i) a $75,000 cash payment and (ii) the issuance of
15,883 shares of Common Stock. At the time of the acquisition, AllNet had
approximately 1,000 dial-up subscribers and five POPs in the northern New
Jersey area. AllNet's computer and network equipment was valued at $65,000. The
acquisition was accounted for as a purchase.
In January 1998, the Company acquired all of the issued and outstanding
capital stock of Entelechy in consideration of the issuance of an aggregate of
277,434 shares of Common Stock, of which 147,310 shares were issued at the
closing and 130,124 shares are to be issued ratably on each of the first,
second and third anniversary of the acquisition closing date, provided, that,
the former Entelechy stockholders to whom such shares are issuable remain
employees of the Company on each respective anniversary. The Company expects to
incur charges of approximately $180,000, $197,000, $197,000 and $17,000
relating to the issuance of such Common Stock in each of the years ending
December 31, 1998, 1999, 2000 and 2001, respectively. The acquisition was
accounted for as a purchase. See Note 14 to Notes to the Company's Financial
Statements.
In January 1998, the Company acquired substantially all of the assets of
JDT WebwerX LLC (consisting primarily of computer equipment and intangible
assets) in consideration of a $35,000 cash payment. See Note 14 to Notes to the
Company's Financial Statements.
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of the Company's revenues represented by certain items reflected in the
Company's income statement data:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
Revenues ............................................ 100.0% 100.0%
Cost of services .................................... 63.5 40.1
Gross Profit ........................................ 36.5 59.9
Selling, general and administrative expense ......... 65.5 47.3
Amortization expense ................................ -- .5
Operating income (loss) ............................. (29.0) 12.1
Interest and other expenses ......................... 1.0 1.8
Income (loss) before income taxes ................... (30.0) 10.3
Income tax (provision) benefit ...................... 5.7 ( 3.0)
Net income (loss) ................................... (24.3)% 7.3%
</TABLE>
Year Ended December 31, 1996 compared to Year Ended December 31, 1997
Revenues. Revenues increased by $1,718,000, or 168%, from $1,023,000 for
the year ended December 31, 1996 to $2,741,000 for the year ended December 31,
1997, principally as a result of services rendered to Aetna since October 1997.
The fees for such services accounted for 54.2% of the Company's revenues for
1997. The increase in revenues was also attributable in part to an increase in
the number of clients utilizing the Company's systems integration and
programming and applications development services. Additionally, the continued
expansion of the Company's network infrastructure during 1997 resulted in
additional Internet access subscribers and related revenue.
19
<PAGE>
Cost of Services. Cost of services consists primarily of expenses relating
to the operation of the network, including telecommunications and Internet
access costs, costs associated with monitoring network traffic and quality and
providing technical support to clients and subscribers, cost of equipment and
applications sold to clients and subscribers, salaries and expenses of
engineering, programming and technical personnel and fees paid to outside
consultants. Cost of services increased by $449,000, or 69%, from $650,000 for
1996 to $1,099,000 for 1997. This is a result principally of increases in
salaries and expenses paid to engineering, programming and technical personnel
whose services are billed by the Company to clients and which are directly
related to the provision of services offered. Additionally, the Company
incurred increased telecommunications and Internet access costs due to
expansion of the Company's network and an increase in the number of Internet
access subscribers. The Company expects that these costs will continue to
increase in the future to the extent the Company offers additional consulting
services and its network expands.
Selling, general and administrative. Selling, general and administrative
expenses consist primarily of salaries and costs associated with marketing
literature, advertising, direct mailings and the Company's management,
accounting, finance and administrative functions. Selling, general and
administrative expenses increased by $626,000, or 93.4%, from $670,000 in 1996
to $1,296,000 for 1997. This increase is primarily attributable to the hiring
of additional personnel whose salaries, in whole or in part, are not directly
allocable to hours billed for services rendered to clients and additional costs
incurred in connection with expanded administrative functions. The Company
expects to incur charges in the amount of approximately $180,000, $197,000,
$197,000 and $17,000 in each of the years ending December 31, 1998, 1999, 2000
and 2001, respectively, in connection with the acquisition of Entelechy.
Additionally, the Company expects to incur annual charges in the amount of
$27,000 through the year ending December 31, 2001 in connection with the award
of a restricted stock grant to an executive officer. See "Management --
Employment Agreements."
Amortization of Intangible Assets. Amortization of intangible assets
increased by $11,000, or 1,100%, from $1,000 for 1996 to $12,000 for 1997. This
increase is primarily attributable to the amortization of intangible assets,
including customer lists and goodwill, acquired by the Company in connection
with its purchase of Mordor and AllNet which were consummated in May 1996 and
April 1997, respectively.
Interest. Interest expense consists of interest on indebtedness and
capital leases and financing charges in connection with the 1997 Financing.
Interest expense increased by $26,000, or 236%, from $11,000 for 1996 to
$37,000 for 1997. This increase was principally attributable to expenses
incurred in connection with the 1997 Financing. The Company will incur
additional interest expense in the aggregate amount of $35,000 relating to the
1997 Financing, upon the consummation of this offering.
Net Income. As a result of the foregoing, the Company achieved net income
of $198,000 for the year ended December 31, 1997 compared to a net loss of
$251,000 for the year ended December 31, 1996.
Liquidity and Capital Resources
The Company's primary cash requirements have been to fund expenses in
connection with providing consulting services to clients and Internet access to
subscribers. The Company has historically satisfied its working capital
requirements principally through the issuance of debt and equity securities and
borrowings. At December 31, 1997, the Company had working capital of $567,000,
compared to working capital of $393,000 at December 31, 1996.
The Company received net proceeds of $200,000 in connection with the
issuance and sale of the 1997 Notes and Warrants to purchase an aggregate of
48,872 shares of Common Stock at an exercise price of $3.54 per share. The 1997
Notes bear interest at the rate of 8% per annum and are due on the earliest to
occur of (a) the consummation of this offering, (b) a private placement of
securities resulting in net proceeds to the Company in a minimum amount of
$1,000,000, or (c) October 31, 1999. The proceeds of the 1997 Notes were used
for working capital and general corporate purposes. The Company intends to use
a portion of the net proceeds of this offering to repay the entire principal
amount of and interest accrued on the 1997 Notes. See "Certain Transactions"
and Note 6 to Notes to the Company's Financial Statements.
In January 1997, the Company completed a private placement (the "1996
Financing") pursuant to which it received net proceeds in the amount of
$1,000,000 in connection with the issuance and sale of an aggregate of 305,451
shares of Common Stock. See "Certain Transactions."
20
<PAGE>
During the period from May to August 1995, the Company received net
proceeds in the amount of $100,000 in connection with the issuance and sale of
48,870 shares of Common Stock and the 1995 Notes ($95,000 of which are
currently outstanding). The Company intends to use a portion of the net
proceeds of this offering to repay the entire principal amount of and interest
accrued on the remaining outstanding 1995 Notes. See "Certain Transactions."
Net cash used in operating activities decreased from $406,000 for 1996 to
$78,000 for 1997. This change was primarily attributable to the increased
operational activity undertaken by the Company in 1997 which resulted in net
income in the amount of $198,000, increases in accounts payable in the amount
of $440,000 and increases in deferred revenue in the amount of $238,000, offset
by increases in accounts receivable in the amount of $1,064,000.
Net cash used in investing activities decreased from $360,000 for 1996 to
$229,000 for 1997. The change was attributable, in part, to a decrease in
capital expenditures in 1997 as compared to 1996 when the Company established
its NOC and network. The change was also a result of increases in acquisitions
of equipment during 1997 in the amount of $70,000 relating principally to
assets acquired in connection with the Company's purchase of the assets of
AllNet.
Net cash provided by financing activities decreased from $907,000 for 1996
to $223,000 for 1997. This change is primarily attributable to the net proceeds
of $927,000 received in connection with the 1996 Financing as compared to the
net proceeds of $200,000, received in connection with the 1997 Financing.
At December 31, 1997, the Company had outstanding indebtedness owing to
Interchange State Bank in the amount of $12,000. This debt bears interest at
the rate of 10% per annum, is due and payable in December 1998 and is secured
by a lien on substantially all the assets of the Company and the personal
guarantees of Messrs. Loglisci and Altieri. The Company has not allocated any
proceeds of this offering to repay such indebtedness. See "Certain
Transactions."
At December 31, 1997, the Company had obligations pursuant to capital
lease obligations in the aggregate amount of $105,000. These capital lease
obligations are secured by the personal guarantees of Messrs. Loglisci,
Frederick and Altieri and, in addition, certain of these capital lease
agreements are secured by the equipment which is the subject of the capital
lease. See "Certain Transactions."
In connection with the acquisition of Entelechy in January 1998, the
Company assumed debt in the principal amount of $150,000 which will
automatically convert into 25,000 shares of Common Stock upon the consummation
of this offering.
The Company believes that the proceeds of this offering, together with
projected cash flow from operations, will be sufficient to satisfy its
contemplated cash requirements for at least twelve months following the
consummation of this offering. In the event that the Company's plans change
(due to changes in market conditions, competitive factors or new opportunities
that may become available in the future), its assumptions change or prove to be
inaccurate or if the proceeds of this offering or cash flow prove to be
insufficient to implement its business plans (due to unanticipated expenses,
technical difficulties or otherwise), the Company may be required to seek
additional financing or curtail its expansion activities. There can be no
assurance that the proceeds of this offering will be sufficient to permit the
Company to implement its business plans, that any assumptions relating to the
implementation of such plans will prove to be accurate or that any additional
financing would be available to the Company on commercially reasonable terms,
or at all.
Fluctuations in Operating Results
The Company's operating results may fluctuate significantly from period to
period as a result of the length of the Company's sales cycle, as well as from
client budgeting cycles; the introduction of new products and services by
competitors; the timing of expenditures; pricing changes in the industry;
technical difficulties; and general economic conditions. The Company's business
is generally subject to lengthy sales cycles, which requires the Company to
make expenditures and use significant resources prior to receipt of
corresponding revenues. Historically, the Company's revenues have been higher
in the fourth quarter as a result of client budgeting and expenditure cycles.
Inflation
Inflation has not had a significant impact on the Company's results of
operations.
21
<PAGE>
Year 2000 Issue
The Company has assessed the potential computer sotfware issues associated
with the year 2000 and believes that its cost to address such issues will not
be material. The Company also believes that the costs or consequences of an
incomplete or untimely resolution would not result in the occurrence of a
material event or uncertainty reasonably likely to have a material adverse
effect on the Company.
22
<PAGE>
BUSINESS
Overview
The Company provides a broad range of computer networking, programming,
applications development and Internet services primarily to businesses and
organizations. The Company has adopted a business model that includes Systems
Integration; Programming and Applications Development; and Internet services.
These services are designed to permit clients to outsource a variety of
business needs such as computer networking, programming, maintenance and
technical support. The Company believes that by combining computer consulting
and Internet related services, it is positioned to capitalize on increasing
demand by businesses and organizations for comprehensive, cost-effective
information technology solutions.
The Systems Integration services offered by the Company include systems
consulting, analysis and design; implementation and integration; and
maintenance. The Company's Programming and Applications Development services
consist primarily of custom programming for Internet and Intranet applications,
including distance learning and on-line trading applications, and Web-site
development and maintenance. Internet services offered by the Company include
dedicated leased line and frame relay connections, Web hosting, dial-up access
and electronic mail services. For the year ended December 31, 1997, Systems
Integration, Programming and Applications Development and Internet services
accounted for approximately 55%, 9% and 36%, respectively, of the Company's
revenues.
The Company's principal marketing efforts are focused on large businesses
and organizations with systems development and maintenance needs. The Company's
clients during the year ended December 31, 1997 included Aetna; Mobil; Black &
Decker Corp.; TRW, Inc.; Bell Atlantic; Unilever; Scientific Applications
International Corporation; the City of Fairfax, Virginia; certain agencies of
the U.S. Department of Defense; and The Archdiocese of New York (Catholic
Healthcare Network).
The Company's telecommunications network is comprised of a secure NOC in
Cedar Knolls, New Jersey, leased high-speed data lines and ten POPs serving the
northern New Jersey and New York City metropolitan area. The proximity of a POP
to subscribers enables subscribers in the area in which a POP is located to
access the Internet through a local telephone call. The Company currently
supports 56k and ISDN technologies at each of its POPs. The Company has
approximately 3,300 dial-up subscribers as of the date of this Prospectus. For
the year ended December 31, 1997, dial-up access services accounted for
approximately 15% of the Company's revenues.
The Company commenced operations in June 1995 as an Internet service
provider offering Web-site hosting services. Since April 1996, the Company has
acquired Interactive Networks, Mordor and AllNet, each an Internet service
provider principally offering dial-up access services. The Company began to
provide Systems Integration and Programming and Applications Development
services in April 1996 and has increasingly emphasized such services. In
January 1998, the Company acquired Entelechy, a provider of programming and
applications development services, including distance learning and on-line
trading applications. During the twelve months following the consummation of
this offering, the Company will seek to continue to expand its operations
through internal growth and acquisitions.
Strategy
The Company believes that worldwide competition and rapid technological
advancements, coupled with a trend to outsource non-core business functions,
have created increasing demand for computer consulting and Internet related
services. The Company's strategy is to capitalize on such increasing demand by
(i) pursuing opportunities to expand its existing service offerings, the scope
of its operations and client base through selective acquisitions of systems
integrators, programmers, applications developers and Internet service
providers; (ii) expanding the capacity and geographic scope of its network
through the establishment or acquisition of additional POPs and network
upgrades; (iii) hiring and retaining additional qualified network engineering,
programming and technical personnel; and (iv) expanding its marketing and sales
efforts through enhanced cross-marketing of its service offerings. There can be
no assurance that the Company will be able to successfully implement this
strategy or otherwise expand its operations.
23
<PAGE>
Pursue opportunities to expand its service offerings, the scope of its
operations and client base through selective acquisitions of systems
integrators, programmers, application developers and Internet service
providers. The Company intends to continue to seek to acquire systems
integrators, programmers, applications developers and Internet service
providers. The Company believes that it may most effectively increase the
services it offers, expand the scope of its knowledge base to include new
networking protocols, endeavor to maintain its existing systems engineering
capabilities at the highest possible levels and acquire significant numbers of
new Internet access subscribers through selective acquisitions. The Company
also believes that the selective acquisitions are an effective way to hire the
additional qualified network engineers, programmers and technical personnel
that are necessary to meet the needs of its new and existing clients and
subscribers.
Expand the capacity and geographic scope of the Company's network through
the establishment or acquisition of additional POPs and network upgrades. The
Company believes that the continued development and geographic expansion of its
network through the establishment or acquisition of additional POPs and network
upgrades is among the most effective methods of acquiring clients in new
geographic markets. The Company believes that the establishment or acquisition
of additional POPs within the mid-Atlantic and northeastern United States may
increase both the Company's subscriber base and market awareness of the broad
range of services offered by the Company. The Company further believes that
ongoing network upgrades may enhance the Company's ability to offer its
subscribers fast, robust and reliable Internet services.
Hire and retain additional qualified network engineering, programming and
technical personnel. The Company relies upon qualified network engineering and
programming personnel to offer its services, and upon such personnel's ability
to provide timely and consistently high-quality, cost-effective services to the
Company's clients. To meet the needs of its increasingly large and
sophisticated base of clients, the Company must hire and retain additional
personnel. The Company routinely recruits personnel who have significant
technical knowledge, and offers such personnel ongoing professional training.
Additionally, in connection with the commencement of new projects, the Company
routinely hires temporary employees to satisfy increased demand for personnel.
The Company believes that the utilization of temporary employees provides it
with an opportunity to evaluate the skills and knowledge of such persons and
maximize the utilization of its resources by determining that long term demand
for additional personnel is sufficient prior to hiring such persons as
permanent employees.
Expand its marketing and sales efforts through enhanced cross marketing of
its service offerings. The Company believes that the goodwill it has
established with its existing clients and subscribers provides it with enhanced
opportunities to cross market the broad range of services offered by the
Company. The Company intends to continue expanding its services to be better
able to offer to its existing and prospective clients and subscribers the
increasing array of computer networking, programming, applications development
and Internet services which are becoming available.
Industry Overview
The computer networking, Internet and information technology industries
are dynamic and rapidly changing. Both business and consumer use of computer
networks and the Internet are growing quickly and hardware and software
companies are increasingly creating new applications and technologies to more
fully and easily exploit the potential opportunities created by the Internet.
This evolving landscape provides opportunities for enterprises to develop
platforms and specialized services to take advantage of new markets and
clients.
The Company believes that the utilization of Internet and Intranet
technology by businesses and organizations has resulted in significant changes
in computing environments as such entities move from SNA, mainframes and
dedicated lines to TCP/IP, Web servers and the Internet and virtual private
networks. The Company believes that the migration from one model to another
creates increased opportunities for outsourcing service providers such as the
Company.
Internet Services. Use of on-line services is expected to grow
dramatically through the year 2000 and beyond. Business and organizational use
of the Internet is expected to rise significantly as a result of the
availability of on-line services that fully exploit the Internet's commercial
applications and growth in consumer usage. Notwithstanding the growth in usage
of on-line services, consolidation in the Internet services providers market is
also anticipated as smaller Internet service providers are acquired by medium-
to larger-size Internet service
24
<PAGE>
providers and other related companies offering Internet access services. An
industry source has predicted that worldwide revenue for commercial Internet
access services, exclusive of hosting, security and global planning will have
reached $1.5 billion in 1997 and will exceed $15 billion by the year 2000.
Systems Integration. The market for systems integration design and
consulting services is growing simultaneously with the growth of on-line
services. An industry source has predicted that the market for Internet
software and hardware, on-premises equipment and services will grow from $2.7
billion in 1995 to approximately $20 billion by the year 2000. An Intranet is a
network that is virtually identical to the Internet, except that access to such
network is private and not available to users outside the network. Intranets
are commonly used by enterprises to allow personnel better access to
proprietary information and to allow collaborative work-sharing among users at
different or remote locations. An industry source projects that the number of
Intranet users will increase from 18 million in 1997 to 133 million users in
2001. As Intranet applications become more complex, systems integrators are
expected to play a critical role in resolving system wide issues including
those related to the integration of legacy databases and systems and enterprise
business processes.
Programming and Applications Development. The Company believes that the
market for programming and applications development is also growing in
connection with the growth in computer networking and Internet services. New
programming and applications have assisted and exploited the growth of Internet
and Intranet usage. The four key areas of Internet software and applications
development are: (i) browser software enabling the retrieval of information or
use of communication service, (ii) server software allowing enhancement and
retrieval of information as well as uses of communication services, (iii)
development/authoring tools to provide better products for both
creators/authors and programmers, and (iv) back-end process and database
companies that are able to meet the demands for classification and distribution
of information.
Company Services
Systems Integration
The Company provides a broad range of systems integration services,
including network planning, design, implementation, operations, optimization,
consulting and training.
Network Planning. Network planning focuses on providing clients with
strategic and tactical reviews of their current network operations and future
network requirements. Network planning services provided by the Company
encompass a number of critical planning elements including: (i) defining client
business requirements; (ii) developing strategic information architectures;
(iii) performing network baseline audits; (iv) preparing capacity plans for the
physical network, logical transport and services; (v) selecting preferred
technologies; and (vi) conducting network security audits and planning.
Network Design. Network design includes services that assist in the design
of physical, logical and operational information infrastructures. These
services involve detailing the network specifications and implementation
tactics necessary to achieve clients' business objectives. To accomplish this
task, the Company generates a set of work papers that identify the specific
technologies to be used and the manner in which such technologies will be
configured and implemented. These work papers also provide an analysis of the
manner in which new technology will be integrated with the client's existing
hardware and software and the manner in which such integrated components will
be managed on an ongoing basis. Examples of network design services offered by
the Company include: (i) life-cycle planning; (ii) developing future technology
integration plans; (iii) defining functional requirements; (iv) developing
multi-vendor integration plans; (v) preparing technical design documentation;
(vi) developing engineering specifications and documents; (vii) preparing
specifications in connection with requests for proposals or other make/buy
criteria; and (viii) providing detailed component purchasing lists.
Network Implementation. Network implementation includes high value-added
network services such as IP addressing and router configuration, as well as
traditional system integrator functions such as hardware and software
installation and procurement. To serve its clients' networking needs, the
Company maintains affiliation and reseller arrangements with various hardware
and software vendors, including Hewlett Packard Co., Cisco Systems, and
MicroAge, Inc. The Company customizes an implementation plan for each client,
which may include the following activities: (i) project management; (ii)
integrating new hardware and software products and systems; (iii) building
network operations and management centers; (iv) re-configuring and upgrading
network elements, systems and facilities; and (v) implementing installation
documentation, conformance testing and compliance certification.
25
<PAGE>
Network Operations. Network operations includes ongoing tasks necessary to
keep the client's network fully operational. The Company provides network
operations services to a range of clients, including those with client/server
networks running both Internet (TCP/IP) and workgroup (Novell and Microsoft)
protocols intermingled with existing (SNA) networks. The Company performs
specific operations activities in accordance with individual client
requirements only after analyzing the client's existing operating practices.
Examples of network operation activities undertaken by the Company include: (i)
network administration, including management of user accounts, service levels,
and client administrative practices; (ii) network utilization analysis,
involving ongoing measurement of network activity against established network
baselines; (iii) ongoing management of documentation, including physical
assets, policies and procedures; (iv) network trouble shooting, involving fault
detection, isolation, repair and restoration; (v) alarm management, including
setting alarm levels, cross-correlation, problem diagnosis and dispatch of
service resources; (vi) network backup, including design and supervision of
backup processes and policies and exercise of disaster recovery procedures; and
(vii) routine moves, additions, and changes to network elements, infrastructure
and services.
Network Optimization. Network optimization involves maximizing a client's
rate of return on network investments through such means as reduction of
operating costs and increases in network utilization. Optimization is closely
related to each of the other phases of network development. Optimization
services may be long term in nature, address issues such as cost containment
and utilization and are often designed to optimize local area network
infrastructures. Network optimization services offered by the Company can also
be packaged as discrete projects, designed to present alternatives for
optimization of workgroup, departmental, building or campus network
investments. Additionally, the Company can provide assistance to clients in
optimizing "logical" networks, by addressing a protocol, service or application
operating in the larger context of the client's network. Examples of network
optimization services provided by the Company include: (i) recommendations for
efficient allocation of bandwidth; (ii) network traffic analysis,
identification of bottlenecks and recommendations for change; (iii) network
process re-engineering; and (iv) knowledge transfer to client operations
personnel on topics such as basic practices, or operations of network
management tools and stations.
Consulting. Consulting consists of providing businesses and organizations
with detailed reports and recommendations regarding any or all aspects of their
network operations, from a review of the entire network to an audit of a
particular protocol. Consulting services provided by the Company are closely
related to network optimization and include: (i) security audits and protocol
recommendations; (ii) disaster recovery plan audit and protocol
recommendations; (iii) network programming and applications; (iv) network cost
audits; and (v) strategic plan development.
Training. Training services are provided to businesses and organizations
seeking information and guidance with respect to the manner in which such
entities may effectively utilize computer networks, the Internet and other
information technology prior to the time such businesses make investments of
capital, time and/or personnel. The Company also offers customized educational
programs that are designed to provide an opportunity for an entity to
conceptualize and determine how computer networks and the Internet can best be
utilized to serve the entity's needs. Additionally, the Company assists
organizations that need technical support in establishing and maintaining
internal network operations. Training services offered by the Company include:
(i) Internet strategy development; (ii) basic Internet consulting; (iii)
one-on-one Internet training for executives; and (iv) group training for
non-computer professionals.
Programming and Applications Development
Programming for Intranet and Internet applications requires knowledge of
several different programming languages. These include PERL scripting and UNIX,
Windows NT, C++, JAVA, HTML and customized database and applications
programming. The Company maintains a full range of network and applications
programming expertise to: (i) ensure that clients' networks and applications
are specifically tailored to meet their requirements; (ii) develop and maintain
clients' Web-sites; (iii) provide clients with technical assistance; (iv)
provide consulting services; and (v) ensure the secure and continuous running
of the Company's Internet hosting and access networks. Examples of programming
and applications development services provided by the Company include
customized applications development, web-site development and maintenance and
chat room hosting and development.
Customized Applications Development. Customized application development
includes services such as: Oracle and Microsoft Access database development of
full-featured "shopping cart" style on-line catalogs to
26
<PAGE>
enhance Web-sites and Intranets; and Distance Learning and on-line trading
applications development. Distance Learning applications allow businesses and
organizations to distribute course material, administer training evaluations,
and manage employee-student status from a single (or multiple) location via the
Internet or an Intranet. Distance Learning also allows for a globally deployed,
instantaneously up-datable, training management system. Distance Learning
applications development incorporates the latest technologies in Internet
programming development, including integration of desk-top virtual reality,
streaming audio/video segments and database applications that track
employee-student status and performance. On-line trading applications allow a
brokerage client to review stock quotations and account positions, manage
portfolios and place trade orders through the brokerage's Web-site.
Web-Site Development and Maintenance. Web-site development involves the
design and development of a client's Web-site production. Working with clients
and outside graphic designers and programmers, the Company designs, creates and
maintains multi-media, interactive Web-sites for its clients, using the latest
applications and development tools, such as Oracle and Cold Fusion.
Chat-Room Hosting and Development. "Chat" allows geographically disbursed
people to conduct meetings and hold forums on-line via the Internet. The "chat"
hosting and development services provided by the Company include both public
"chat-rooms," which allow anyone with access to the Internet to participate in
the discussion, and private "chat-rooms," to which access is limited by
security protocols. Private "chat-rooms" are routinely used by businesses and
organizations to conduct private, secure meetings via the Internet or
Intranets.
Internet Services
The Company provides a broad range of Internet services, including T-3 and
T-1 service, dedicated leased lines, dial-up services and hosting services.
Internet Access. The Internet access options offered by the Company to its
subscribers include: (i) 56 kbps, T-1 and T-3 service; (ii) integrated services
digital networks (ISDN); (iii) dedicated modems for SLIP/PPP access; and (iv)
dial-up accounts. The Company's high-speed, digital communications network
provides business and consumer subscribers with direct access to the full range
of Internet applications and resources, including global electronic mail, the
Web, USENET news groups, chat-rooms and file transfer protocols.
Hosting. Internet hosting is a multi-media Internet service that permits
clients to have a continued presence on the Web directly through the Company's
high-speed servers and a T-3 telecommunications line. Hosting services provided
by the Company include virtual hosting and co-location. Virtual hosting allows
a client's Web-site (which may be hosted on either a UNIX or NT server
platform) to be connected to the Internet via the Company's NOC. Co-location
permits a client's Internet content to be hosted on a dedicated server located
at the Company's NOC which server is either owned by or leased by the Company
to the client. Co-location at the Company eliminates or substantially reduces
the capital investments a client would otherwise be required to make to
purchase and manage necessary hardware, software and network operations and
eliminates certain of the client's security concerns associated with connection
of the client's private network(s) to a Web server.
Network Infrastructure
The Company facilitates access to the Internet by means of a regional
telecommunications network consisting of high-speed dedicated
telecommunications links (including a T-3 and multiple T-1 links), computer
hardware and software, one physical and nine virtual POPs in locations
throughout the northern New Jersey and New York City metropolitan area, and the
NOC which securely houses the Company's backend server and is the point of
interconnectivity of the Company's T-3 line and T-1 lines which are leased from
Bell Atlantic and WorldCom.
The Company's POPs, external interconnect links and NOC are interconnected
by a robust, router-based TCP/IP network which includes interconnection of POPs
via a T-1 rate facility. Physical local loop connectivity is provided over
fault tolerant SONET fiber facilities and diverse-route conventional
facilities. The Company maintains one high-bandwidth path to the Internet with
UUNet. Each physical POP includes network access server (dial-access terminal
server) hardware, a router and leased-line interface equipment. The virtual
POPs are
27
<PAGE>
local telephone numbers (outside of the local calling area of the physical
POPs) through which calls are aggregated by a local exchange carrier or other
service provider prior to transfer to the Company via a dedicated trunk route.
For clients located in geographic areas not serviced by either a physical or
virtual POP, the Company provides worldwide remote access to its network
through Ipass, a consortium of regional Internet service providers. The
availability of Ipass remote access permits the Company to provide high quality
worldwide Internet access to its clients while permitting it to benefit from
the economies of scale attributable to a regional network.
The Company operates numerous application specific server systems to
provide assist-functionality for client applications and to support Web-site
hosting and other business services. The Company has made and expects to
continue to make significant investments in its computing hardware which
includes Pentium PC and BSDI UNIX servers (running Windows NT and BSDI UNIX).
To efficiently and effectively serve its clients and subscribers, the Company
utilizes two types of operating systems. The Internet Services network
(dial-access consumer, e-mail, news and consumer Web) utilizes UNIX for its
scalability and security features, while business clients are served through
either of UNIX or Microsoft-based technologies.
The Company is currently dependent upon Bell Atlantic and WorldCom to
provide leased telecommunication lines on a cost-effective and continuous basis
and on UUNET to provide Internet access. In accordance with industry custom,
the Company does not maintain interconnect agreements with these suppliers. The
temporary discontinuation or termination of service to the Company by any of
these suppliers, would result in interruptions in the Company's provision of
service to its clients which would adversely affect its business.
The Company expects to use a portion of the proceeds of this offering to
purchase additional software to upgrade its network and network component
management capabilities. Such software will enhance the Company's ability to
monitor its routers, switches and other network and server components, and
provide "real time" identification of service outages and delays. Certain other
software purchases will allow the Company to analyze its network functionality
from the viewpoint of a subscriber, measuring such factors as the ability to
dial-in without blockage, speed and reliability of authentification, and
availability and adequacy of the servers and connectivity. By testing these
factors objectively and quantitatively, the Company believes that it will be
better able to monitor the adequacy of its existing service and provide
proactive trending reports for use in planning future system expansion.
Technical Support
The Company believes that reliable technical support is critical to
retaining existing and attracting new clients and subscribers. Currently, the
Company provides (i) live telephone assistance, (ii) e-mail-based assistance,
(iii) help sites and Internet guide files on the Company's Web-site, and (iv)
printed reference material. The Company intends to use a portion of the
proceeds of this offering to enhance its monitoring of the network by
increasing staffing at its NOC and making technical personnel available to its
clients and subscribers 24 hours a day, seven days a week.
Sales and Marketing
The Company's sales and marketing strategy is driven by the Company's
ability to offer its clients comprehensive computer consulting and Internet
related services ranging from Internet access, Web-site development and hosting
to computer networking, systems consultation, integration and management. The
Company's marketing efforts are primarily focused on large- and medium-sized
businesses and organizations, and to a lesser extent, on small businesses and
consumers. The Company utilizes both direct and third-party distribution
channels to market its services. The Company plans to increase its print and
radio advertising and enlarge its sales staff in existing and new geographic
markets. The Company also intends to hire a Director of Marketing, whose
responsibilities will include overseeing and developing existing and new
marketing strategies. The Company intends to use a portion of the proceeds of
this offering to effectuate such plans.
The Company currently employs three full-time sales people, with two
assigned to the northern New Jersey and New York City metropolitan area and one
assigned to the Washington, D.C. metropolitan area. The Company believes that
the technical knowledge of its executive officers and network engineers enhance
the efforts of its sales staff and enables the Company to develop sales
proposals meeting the specific needs and budgets of its prospective clients.
The Company also conducts sales and marketing activities from an office
maintained by the Company in Huntsville, Alabama.
28
<PAGE>
The Company's marketing efforts principally involve print, radio and
direct mailing in areas within the geographic scope of the Company's network.
The Company believes that its ability to expand its print, radio and targeted
direct mailings, will be important factors in its ability to continue to expand
its business and compete effectively.
The Company also generates sales leads through referrals from clients,
responses to request for proposals, referrals from other computer consulting
businesses and Internet service providers, the Company's own Web-site and
associated links and industry seminars and trade shows. In addition, the
Company believes it has significant opportunities to cross-sell its various
services to its existing client base. As a result of the continued extension of
services offered by the Company, including systems integration and programming
and applications development, the Company has been able to offer its clients a
wider range of solutions and capitalize on opportunities which it previously
outsourced. Utilizing a portion of the proceeds of this offering, the Company
intends to implement marketing and advertising campaigns that focus on the
Company's broad range of computer consulting and Internet related services
which the Company believes enables it to provide turnkey solutions for its
clients.
Clients
The Company's clients during the year ended December 31, 1997 included
Aetna; Mobil; Black & Decker Corp.; TRW, Inc.; Bell Atlantic; Unilever; SAIC;
the City of Fairfax, Virginia; certain units of the U.S. Department of Defense
and The Archdiocese of New York (Catholic Healthcare Network). As of the date
of this Prospectus, the Company has in excess of 3,300 dial-up subscribers, the
majority of which are consumers, in the northern New Jersey and New York City
metropolitan area.
The Company is dependent on a limited number of clients for a substantial
portion of its revenues. For the year ended December 31, 1997, the Company's
largest clients, Aetna (which engaged the Company in October 1997) and Mobil,
accounted for approximately 54.2% and 5.2%, respectively, of the Company's
revenues. Revenues derived from the Company's consulting contracts are
generally non-recurring in nature. The Company's contract with Aetna provides
for the Company to render services pursuant to purchase orders, each of which
constitutes a separate contractual commitment by Aetna. As of the date of this
Prospectus, the Company has not received any purchase orders from Aetna for
work to be performed subsequent to April 30, 1998. Non-renewal or termination
of the Company's contract with Aetna or the failure by Aetna to issue
additional purchase orders to the Company under the existing contract would
have a material adverse effect on the Company. There can be no assurance that
the Company will obtain additional contracts for projects similar in scope to
those previously obtained, that the Company will be able to retain existing
clients or attract new clients or that the Company will not remain largely
dependent on a limited client base which may continue to account for a
substantial portion of the Company's revenues.
Competition
The markets for the Company's services are highly competitive. The Company
believes that competition in the systems integration and programming and
applications development consulting market is based upon quality of service,
responsiveness to client demands, the number and availability of qualified
engineers and programmers, price, project management capability, technical
expertise, size and reputation. Additionally, the Company further believes that
competition in the Internet services market is primarily based upon quality of
service; access to local POPs; range of services; technical support; and
experience.
The Company competes with numerous large companies that have substantially
greater market presence and financial, technical, marketing and other resources
than the Company, including (i) large information technology consulting and
service providers and application software firms such as Andersen Consulting,
Cambridge Technology Partners, Electronic Data Systems Corporation and American
Management Systems; (ii) international, national, regional and commercial
Internet service providers such as Performance Systems International, Inc.,
Digex, Inc. and UUNET; (iii) established on-line services companies such as
America Online, Inc. and Prodigy Service Company; (iv) computer hardware and
software and other technology companies such as IBM and Microsoft Corp.; (v)
national long distance carriers such as AT&T Corp., MCI Communications Corp.
and Sprint Corp. and regional telephone companies, including Bell Atlantic, and
cable operators; and (vi) major accounting
29
<PAGE>
firms. Many of the Company's competitors have announced plans to expand their
service offerings and increase their focus on the computer networking and
Internet related services' markets. As a result, competition is expected to
intensify for highly skilled network engineers, programmers and technicians.
As a result of increased competition, the Company also expects to
encounter significant pricing pressure, which in turn could result in
significant reductions in the average selling price of the Company's services.
There can be no assurance that the Company will be able to offset the effects
of any such price reductions through an increase in the number of clients,
higher revenue from enhanced services, cost reductions, or otherwise. In
addition, the Company believes that continuing consolidation in the Internet
services market could result in increased price and other competition in the
industry. Increased price or other competition could make it difficult for the
Company to gain additional clients and subscribers and could have a material
adverse effect on the Company. There can be no assurance that the Company will
be able to compete successfully.
Employees
As of April 15, 1998, the Company had 49 full-time employees, including
four executive officers, five programmers, 25 network engineers and
technicians, seven persons devoted exclusively to providing technical support
to clients, three persons dedicated to sales and marketing activities and five
administrative personnel. In connection with the anticipated expansion of its
operations and network and the growth of its client and subscriber base, the
Company expects to use a portion of the proceeds of this offering to hire
additional network engineers, programmers and technical personnel to enable the
Company to more effectively monitor the network by physically staffing its NOC
24 hours a day, seven days a week and better respond to client demands for
service and technical support. Such skilled personnel are currently in high
demand. There can be no assurance that the Company will be able to successfully
recruit, hire and retain such personnel. None of the Company's employees are
represented by a labor union and the Company is not a party to any collective
bargaining agreement. The Company believes that its employee relations are
good.
To maximize the utilization of its resources and evaluate the skills and
knowledge of certain prospective employees, the Company routinely hires
temporary personnel to satisfy increased demand for personnel in connection
with the commencement of new projects. As of April 15, 1998, the Company had 15
temporary employees in its service.
Properties
The Company serves its clients through its corporate headquarters and NOC,
each located in Cedar Knolls, New Jersey, and its regional offices located in
Fairfax, Virginia, and Huntsville, Alabama, as well as its network of nine POPs
located throughout the northern New Jersey and New York City metropolitan area.
The Company's corporate headquarters and NOC are located in a 9,830 square
foot leased facility in Cedar Knolls. The lease extends through March 31, 2003
and provides for monthly rental payments in the amount of $12,954, subject to
increase in proportion to facility operating costs.
The Company's Huntsville office is located in a 1,800 square foot facility
pursuant to a lease which extends through December 31, 2001. The monthly rental
payment for such space is $1,500 which amount is paid through the rendering by
the Company of services to the lessor. The Company believes that the terms of
the lease are no less favorable than those that could have been obtained from
an unaffiliated third party.
The Company's regional office in Fairfax is located in a 170 square foot
leased facility. The lease, originally for a one-year term, expires May 1998.
The monthly rental payment under the Fairfax lease is $275. The Company does
not expect to renew this lease upon its expiration or seek other space in the
Fairfax area.
In addition to its office space, the Company currently leases the site at
which its physical POP is located. In consideration of space to locate its
physical POP, the Company provides Internet access services to the lessor. The
Company believes that it would be readily able to locate other space in which
to house its corporate headquarters and NOC, regional offices and its physical
POP if any leased space currently being utilized were to become unavailable.
30
<PAGE>
Legal Proceedings
In January 1998, the Company became aware of a threatened suit for breach
of contract and wrongful termination on the basis of race and gender
discrimination in connection with its dismissal of an employee in December
1997. The claimant has asserted that she is entitled to the full amount of
compensation payable under a two year employment agreement between the claimant
and the Company. The employment agreement has a two-year term and provides for
the payment by the Company of an annual salary in the amount of $38,000. The
claimant is seeking an amount equivalent to six months salary, plus attorneys'
fees of $1,000, aggregating $20,000 in settlement of the matter. There can be
no assurance that this matter will be resolved in a manner favorable to the
Company.
In February 1998, the Company became aware of a threatened suit for
damages and expenses allegedly incurred by an individual and other persons
and/or companies that the individual claims to represent resulting from the
Company's termination of a subscriber's Internet access service. The claimant
also alleges that the Company's termination of service was a violation of the
claimant's civil rights. The claimant seeks an unspecified amount of expenses
and damages. There can be no assurance that this matter will be resolved in a
manner favorable to the Company.
31
<PAGE>
MANAGEMENT
Executive Officers and Directors
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------------ ----- ------------------------------------------------
<S> <C> <C>
Nicholas R. Loglisci, Jr. .......... 36 President, Chief Operating Officer and Director
Clark D. Frederick ................. 35 Chief Technical Officer and Director
Frank R. Altieri, Jr. .............. 31 Chief Information Officer and Director
Brian W. Seidman ................... 35 General Counsel and Secretary
Jeffrey E. Brenner ................. 50 Chief Financial Officer
John J. Brighton ................... 55 Director
Susan Holloway Torricelli .......... 52 Director
Barrett N. Wissman ................. 35 Director
</TABLE>
Nicholas R. Loglisci. Mr. Loglisci, a founder of the Company, has served
as the Company's President and Chief Operating Officer and as a director since
the Company's inception in February 1995. Prior to founding the Company, Mr.
Loglisci was employed by Allen Telecom Group from June 1994 to June 1995 as the
New York Metropolitan Area Sales Manager. From November 1990 to June 1994, Mr.
Loglisci was employed in a variety of sales, marketing and management positions
with Motorola, Inc. Prior to his corporate experience, Mr. Loglisci served as
an officer in the U.S. Army from May 1985 to July 1990. Mr. Loglisci is a
graduate of both the U.S. Army's Airborne and Ranger schools. Mr. Loglisci
holds a B.S. in Engineering from the United States Military Academy and an
M.B.A. from New York University's Stern School of Business.
Clark D. Frederick. Mr. Frederick, a founder of the Company, has served as
the Company's Chief Technical Officer and as a director since the Company's
inception. Prior to founding the Company, Mr. Frederick was employed from June
1991 to April 1995 by Bell Atlantic where he was responsible for designing and
managing Bell Atlantic's first Center for Networked Multimedia. Mr. Frederick
was also responsible for managing Bell Atlantic's Business Development Task
Force and coordinating research activities for video dial tone and Internet
access technologies. Prior to his corporate experience, Mr. Frederick served as
an officer in the U.S. Army from May 1985 to June 1991. Mr. Frederick holds a
B.S. in Aerospace Engineering from the United States Military Academy and a
Masters in Information Systems from the University of Southern California.
Frank R. Altieri, Jr. Mr. Altieri has been Chief Information Officer and a
director of the Company since joining the Company in April 1996. From 1993 to
1996, Mr. Altieri was the President of Interactive Networks, an Internet
service provider which was acquired by the Company in April 1996. From 1989 to
1993, Mr. Altieri served as the Management Information Systems Director for
Nutronic Circuit Co., Inc.
Brian W. Seidman. Mr. Seidman has served as the General Counsel and
Secretary, and was a director of the Company from inception to February 1998.
From February 1994 to present, Mr. Seidman has also been of counsel to the law
firm of Seidman, Silverman and Seidman. From March 1993 to January 1994, Mr.
Seidman served as counsel to the New York State Senate Transportation
Committee. During 1992, Mr. Seidman served as a legislative assistant to U.S.
Representative Ron Wyden and also served as counsel to the U.S. House of
Representatives Small Business Committee Subcommittee on Regulation Business,
Opportunity and Technology. From November 1989 to December 1991 Mr. Seidman was
associated with the law firm of Cahill, Gordon and Reindel and from October
1988 to November 1989 Mr. Seidman was associated with the law firm of
Cadwalader, Wickersham and Taft. Mr. Seidman holds a Bachelor of Arts in
Political Science from Colgate University, summa cum laude, and a J.D. from the
Harvard Law School.
Jeffrey E. Brenner. Mr. Brenner has been the Chief Financial Officer of
the Company since March 1998. From January 1985 to March 1998, Mr. Brenner
served as a Senior Vice President and as Chief Financial
32
<PAGE>
Officer of Database America Companies, Inc., a corporation providing direct
marketing, information and computer services. Prior to joining Database America
Companies, Inc., Mr. Brenner served as Director of Financial Administration
from 1981 to 1985 and as Controller from 1974 to 1980 of Automatic Data
Processing (ADP). Mr. Brenner holds a B.B.A. in Finance and Marketing from
George Washington University.
John J. Brighton. Mr. Brighton has agreed to become a director of the
Company upon the consummation of this offering. Since October 1997, Mr.
Brighton has served as Chief Information Officer, Information Technology of
Aetna. From July 1996 to October 1997, Mr. Brighton served as the Co-Chief
Information Officer, Information Technology of Aetna. Prior to the merger of
Aetna and U.S. Healthcare, Inc., Mr. Brighton served from 1994 to 1996 as Chief
Information Officer of U.S. Healthcare, Inc. From September 1984 to November
1994, Mr. Brighton served as the Vice President-Information Processing of Bell
Atlantic. Mr. Brighton holds a B.S. in Business Administration from Seton Hall
University and an M.B.A. from St. John's University.
Susan Holloway Torricelli. Ms. Torricelli has agreed to become a director
of the Company upon the consummation of this offering. Since 1988, Ms.
Torricelli has been the President of the Susan Holloway Torricelli Company, a
consulting firm providing development and financial management, governmental
affairs, media relations and special event consulting services. Ms. Torricelli
holds a B.A. in English and Spanish from the University of Oklahoma.
Barrett N. Wissman. Mr. Wissman has agreed to become a director of the
Company upon the consummation of this offering. Since January, 1993, Mr.
Wissman has served as a Managing Director of the general partner of HW
Partners, an investment firm. From 1987 to December 1992, Mr. Wissman served as
Chief Executive Officer of Athena Products Corporation, an international
manufacturer of chemicals and household consumer products. Mr. Wissman holds a
B.S. in Economics and Political Science from Yale University, cum laude, and an
M.A. from Southern Methodist University.
The Company intends to appoint an additional outside director within 30
days following the consummation of this offering.
All directors hold office until the next annual meeting of stockholders
and the election and qualification of their successors. Executive officers are
elected by the Board of Directors to hold office for such term as may be
prescribed by the Board of Directors.
The Company has agreed, for a period of five years from the date of this
Prospectus, if so requested by the Underwriter, to nominate and use its best
efforts to elect a designee of the Underwriter as a director of the Company or,
at the Underwriter's option, as a non-voting adviser to the Company's Board of
Directors. The Company's officers, directors and principal stockholders have
agreed to vote their shares of Common Stock in favor of such designee. The
Underwriter has not yet exercised its right to designate such a person.
Committees
Prior to the date of this Prospectus, the Board of Directors intends to
establish a Compensation Committee and Audit Committee. The Compensation
Committee will be responsible for reviewing the compensation for all officers
and directors of the Company and reviewing general policy matters relating to
the compensation and benefits of all employees. The Committee will also
administer the 1998 Stock Option Plan.
The Audit Committee will be responsible for recommending to the Board of
Directors the annual engagement of a firm of independent accountants and for
reviewing with the independent accountants the scope and results of audits, the
internal accounting controls of the Company and audit practices and
professional services rendered to the Company by the independent accountants.
Directors' Compensation
Directors who are officers or employees of the Company receive no
additional compensation for service as members of the Board of Directors or
committees thereof. Directors are reimbursed for their reasonable expenses in
connection with attendance at meetings of the Board of Directors. All directors
who are not employees of the Company (the "Eligible Directors") are eligible to
participate in the 1998 Stock Option Plan. Upon the consummation of this
offering and subsequently upon the initial election of an Eligible Director,
such directors will be granted an option to purchase 10,000 shares of Common
Stock (the "Initial Options"). The Initial Options will become exercisable in
full on the first anniversary of the date of grant. In addition, immediately
after the annual
33
<PAGE>
meeting of stockholders of the Company, each Eligible Director elected or
reelected at such meeting will receive an option to purchase 3,000 shares of
Common Stock (the "Annual Options"). The Initial Options and Annual Options
have a term of ten years and an exercise price payable in cash or shares of
Common Stock. The exercise price for the Initial Options granted on the date of
consummation of this offering will be equal to the initial public offering
price of the shares offered hereby. The exercise price of additional Initial
Options and the Additional Options granted after the Common Stock is quoted on
Nasdaq will be equal to the market price of the Common Stock on the date of
grant. Outside directors will receive such additional compensation for their
service as the Board of Directors may determine from time to time.
Executive Compensation
The following table sets forth the aggregate compensation paid to the
Company's President and Chief Operating Officer, Chief Technical Officer and
Chief Information Officer for the year ended 1997. During 1997, none of the
Company's executive officers received compensation, including bonuses, in
excess of $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------------
Other
Name and Principal Position Year Salary Bonus Compensation(1)
- -------------------------------------- ------ ---------- ----------- ----------------
<S> <C> <C> <C> <C>
Nicholas R. Loglisci, Jr. ............ 1997 $53,000 $ 15,000 $3,600
President and Chief Operating Officer
Clark D. Frederick ................... 1997 $53,000 $ 15,000 $3,600
Chief Technical Officer
Frank R. Altieri, Jr. ................ 1997 $53,000 $ 15,000 $3,600
Chief Information Officer
</TABLE>
- ------------
(1) Represents payment of automobile allowances.
Employment Agreements
In April 1998, the Company entered into four-year employment agreements
with each of Messrs. Loglisci, Frederick and Altieri, pursuant to which Mr.
Loglisci is employed as the Company's President and Chief Operating Officer,
Mr. Frederick is employed as the Company's Chief Technical Officer and Mr.
Altieri is employed as the Company's Chief Information Officer. Pursuant to the
employment agreements, each executive is entitled to compensation consisting of
an annual base salary in the amount of $90,000, a bonus based on the
achievement of certain performance criteria, including the profitability of the
Company and a monthly automobile allowance. Each executive is also subject to
certain non-competition, confidentiality and disclosure of invention
obligations pursuant to the employment agreement.
In April 1998, the Company entered into a four-year employment agreement
with Mr. Brenner pursuant to which Mr. Brenner is employed as the Company's
Chief Financial Officer. Pursuant to the employment agreement, Mr. Brenner is
entitled to compensation (subject to annual review) consisting of an initial
annual base salary in the amount of $125,000, a bonus based on the achievement
of certain performance criteria, including profitability of the Company, and a
monthly automobile allowance. On the date Mr. Brenner entered into the
employment agreement, the Company granted to Mr. Brenner options to purchase
40,000 shares of Common Stock at an exercise price equal to the initial public
offering price of the shares sold in this offering and the Company agreed to
grant to Mr. Brenner an award of 20,000 shares of restricted stock. In the
event Mr. Brenner's employment is terminated for any reason, Mr. Brenner will
be entitled to receive compensation accrued and unpaid as of the date of
termination. In the event Mr. Brenner is terminated by the Company for other
than cause, or there is a change in control of the Company, the Company will be
required to pay Mr. Brenner his annual base salary for a period of one year
after termination and options and restricted stock then held by Mr. Brenner
will automatically vest. Mr. Brenner is also subject to certain
non-competition, confidentiality and disclosure of inventions obligations
pursuant to the employment agreement.
34
<PAGE>
1998 Stock Option Plan
In March 1998, the directors and stockholders of the Company approved the
1998 Stock Option Plan, pursuant to which employees of the Company are eligible
to receive incentive stock options and officers, directors, employees and
consultants of the Company are eligible to receive non-qualified stock options
to purchase up to an aggregate of 330,000 shares of Common Stock.
With respect to incentive stock options, the 1998 Stock Option Plan
provides that the exercise price of each such option must be at least equal to
100% of the fair market value of the Common Stock on the date of grant (110% in
the case of stockholders who, at the time the option is granted, own more than
10% of the outstanding Common Stock), and requires that all such options have
an expiration date not later than that date which is one day before the tenth
anniversary of the date of the grant (or the fifth anniversary of the date of
grant in the case of 10% stockholders). However, with certain limited
exceptions, in the event that the option holder ceases to be employed by the
Company, or engages in or is involved with any business similar to that of the
Company, such option holder's incentive options immediately terminate. Pursuant
to the provisions of the 1998 Stock Option Plan, the aggregate fair market
value, determined as of the date(s) of grant, for which incentive stock options
are first exercisable by an option holder during any one calendar year cannot
exceed $100,000.
With respect to non-qualified stock options, the 1998 Stock Option Plan
requires that the exercise price of all such options be at least equal to 100%
of the fair market value of the Common Stock on the date such option is granted
and requires that all such options have an expiration date not later than that
date which is one day before the tenth anniversary of the date of the grant of
such option.
As of the date of this Prospectus, options to purchase 129,750 shares of
Common Stock, including the 40,000 shares covered by options granted to Mr.
Brenner, have been granted under the 1998 Stock Option Plan.
Limitation of Liability and Indemnification
Section 145 of the DGCL contains provisions entitling the Company's
directors and officers to indemnification from judgments, fines, amounts paid
in settlement and reasonable expenses (including attorney's fees) as the result
of an action or proceeding in which they may be involved by reason of having
been a director or officer of the Company. In its Restated Certificate of
Incorporation, the Company has included a provision that limits, to the fullest
extent now or hereafter permitted by the DGCL, the personal liability of its
directors to the Company or its stockholders for monetary damages arising from
a breach of their fiduciary duties as directors, Under the DGCL as currently in
effect, this provision limits a director's liability except where such director
(i) breaches his duty of loyalty to the Company or its stockholders, (ii) fails
to act in good faith or engages in intentional misconduct or a knowing
violation of law, (iii) authorizes payment of an unlawful dividend or stock
purchase or redemption as provided in Section 174 of the DGCL, or (iv) obtains
an improper personal benefit. This provision does not prevent the Company or
its stockholders from seeking equitable remedies, such as injunctive relief or
rescission. If equitable remedies are found not to be available to stockholders
in any particular case, stockholders may not have any effective remedy against
actions taken by directors that constitute negligence or gross negligence.
The Restated Certificate of Incorporation also includes provisions to the
effect that (subject to certain exceptions) the Company shall, to the maximum
extent permitted from time to time under the DGCL, indemnify, and upon request
shall advance expenses to, any director or officer to the extent that such
indemnification and advancement of expenses is permitted under the DGCL, as it
may from time to time be in effect. In addition, the Bylaws require the Company
to indemnify, to the fullest extent permitted by law, any director, officer,
employee or agent of the Company for acts which such person reasonably believes
are not in violation of the Company's corporate purposes as set forth in the
Restated Certificate of Incorporation. At present, the DGCL provides that, in
order to be entitled to indemnification, an individual must have acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the Company's best interests.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or other persons controlling the
Company pursuant to the foregoing provisions, the Company has been advised that
in the opinion of the Securities and Exchange Commission (the "Commission"),
such indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable.
35
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company,
as of the date of this Prospectus and as adjusted to reflect the sale by the
Company of 1,200,000 shares offered hereby, with respect to the beneficial
ownership of shares of Common Stock by (i) each person who is known by the
Company to be the beneficial owner of more than five percent of the outstanding
shares of Common Stock, (ii) each director or person who has agreed to become a
director of the Company and (iii) all executive officers and directors of the
Company as a group.
<TABLE>
<CAPTION>
Percentage of Outstanding Shares
Number of Shares of of Common Stock Beneficially Owned
Name and Address Common Stock -----------------------------------
of Beneficial Owner(1) Beneficially Owned(2) Before Offering After Offering
- ----------------------------------------- ----------------------- ----------------- ---------------
<S> <C> <C> <C>
Nicholas R. Loglisci, Jr. ............... 371,435 20.1 12.1
Clark D. Frederick(3) ................... 371,435 20.1 12.1
Frank R. Altieri, Jr. ................... 371,435 20.1 12.1
Brian W. Seidman(4) ..................... 92,858 5.0 3.0
Jeffrey E. Brenner ...................... -- -- --
John J. Brighton ........................ -- -- --
Barrett N. Wissman (5) .................. 12,218 * *
Susan Holloway Torricelli ............... -- -- --
All directors and executive officers as a
group (8 persons) ...................... 1,219,381 65.9% 39.6%
</TABLE>
- ------------
* Less than 1%.
(1) Unless otherwise indicated, the address of each beneficial owner is 2
Ridgedale Avenue, Suite 350, Cedar Knolls, New Jersey 07927.
(2) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities which may be acquired by such person within
60 days from the date of this Prospectus upon the exercise of options,
warrants or convertible securities. Each beneficial owner's percentage
ownership is determined by assuming that the warrants, options or
convertible securities that are held by such person (but not those held by
any other person) and which are exercisable or convertible within 60 days
of the date of this Prospectus, have been exercised.
(3) Mr. Frederick and Carla Frederick own these shares of Common Stock as joint
tenants.
(4) Consists of shares of Common Stock owned of record by Sycamore Equities,
Inc. Mr. Seidman is the President and sole stockholder of Sycamore
Equities, Inc. The address of each of Sycamore Equities, Inc. and Mr.
Seidman is 600 Third Avenue, New York, New York 10016.
(5) Represents shares of Common Stock issuable upon exercise of Warrants
beneficially owned by Mr. Wissman. Mr. Wissman's address is 1601 Elm
Street, Suite 4000, Dallas, Texas 75201.
36
<PAGE>
CERTAIN TRANSACTIONS
In connection with the Company's acquisition of Interactive Networks in
April 1996, the Company issued 371,435 shares of Common Stock to Frank R.
Altieri, Jr., Chief Information Officer and a director of the Company, and
6,109 shares of Common Stock to his father, Frank R. Altieri, Sr., in exchange
for all of the issued and outstanding capital stock of Interactive Networks.
Also in connection with the Company's acquisition of Interactive Networks,
certain bank indebtedness was personally guaranteed by Messrs. Altieri and
Loglisci. At December 31, 1997, the outstanding amount of such indebtedness was
$12,000.
Messrs. Loglisci, Altieri and Frederick are personal guarantors of the
obligations of the Company arising under certain equipment lease agreements.
The original aggregate amount of guaranteed capital lease obligations was
$186,965. At December 31, 1997, the aggregate amount of guaranteed capital
lease obligations was $105,000.
In connection with the 1995 Financing, Nicholas R. Loglisci, Sr., the
father of Nicholas R. Loglisci, Jr., and Steven Loglisci, the brother of
Nicholas R. Loglisci, Jr., each purchased $10,000 principal amount of the 1995
Notes and 4,887 shares of Common Stock. The Company intends to use a portion of
the proceeds of this offering to repay all the outstanding indebtedness arising
under the 1995 Notes, including the 1995 Notes held by Mr. Loglisci, Sr. and
Mr. Steven Loglisci.
In connection with the 1996 Financing, Mr. Loglisci, Sr., Mr. Steven
Loglisci, Terri Frederick, the sister of Clark D. Frederick, Jeanne Frederick,
the sister of Clark D. Frederick, Patsy and Jennifer Loglisci, the uncle and
aunt of Nicholas R. Loglisci, Jr., Joseph Altieri, the brother of Frank R.
Altieri, Jr. and Gloria and Irving Seidman, the parents of Brian W. Seidman,
purchased 3,665; 30,545; 1,222; 1,222; 3,054; 1,222 and 2,443 shares of Common
Stock, respectively, at a price of $3.27 per share.
In connection with the 1997 Financing, Mr. Steven Loglisci, Mr. Frank R.
Altieri, Sr., and Barrett N. Wissman purchased 1997 Notes in the original
principal amount of $18,750, $25,000 and $50,000, respectively, and received
Warrants to purchase 4,581, 6,108 and 12,218 shares of Common Stock,
respectively, at an exercise price of $3.54 per share. The Company intends to
use a portion of the proceeds of this offering to repay the 1997 Notes,
including the 1997 Notes held by Mr. Steven Loglisci, Mr. Altieri, Sr. and Mr.
Wissman.
To facilitate the acquisition of certain computer equipment, Messrs.
Loglisci, Frederick and Altieri periodically advanced personal funds to the
Company. Funds advanced to the Company by Messrs. Loglisci, Frederick and
Altieri amounted to $43,105, $272,212 and $5,300, respectively, during the year
ended December 31, 1996 and $46,054, $349,874 and $7,750, respectively, during
the year ended December 31, 1997. The advanced funds were repaid to each of the
executives without interest. Each of Messrs. Loglisci, Frederick and Altieri
have advised the Company that he does not intend to make advances to the
Company subsequent to the consummation of this offering.
Since the inception of the Company, Sycamore Equities, Inc., a company
wholly-owned by Brian W. Seidman, General Counsel and Secretary of the Company,
has rendered management consulting services to the Company. The fees incurred
by the Company for such services were $16,000 and $14,000 during the years
ended December 31, 1996 and 1997, respectively.
Any future transactions between the Company and its officers will be on
terms no less favorable than could be obtained from unaffiliated third parties
and approved by a majority of the independent and disinterested members of the
Board of Directors.
37
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital of the Company consists of 12,000,000 shares, of
which 11,000,000 shares are Common Stock, and 1,000,000 shares are designated
as Preferred Stock. As of the date of this Prospectus, 1,849,237 shares of
Common Stock are currently issued and outstanding and no shares of Preferred
Stock have been issued or are outstanding. The Common Stock is held of record
by 54 stockholders. Upon consummation of this offering, there will be 3,074,237
shares of Common Stock outstanding and no shares of Preferred Stock
outstanding.
Preferred Stock
The Board of Directors is authorized, without further action by the
stockholders, to issue 1,000,000 shares of Preferred Stock from time to time in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption (including sinking fund provisions),
redemption prices and liquidation preferences and the number of shares
constituting and the designation of any such series. The rights and terms
relating to any new series of Preferred Stock could adversely affect the voting
power or other rights of the holders of Common Stock. Additionally, such
Preferred Stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company.
Common Stock
The holders of Common Stock are entitled to one vote for each share held
of record in the election of directors and with respect to all other matters to
be voted on by stockholders. Holders of shares of Common Stock do not have
cumulative voting rights. Therefore, the holders of more than 50% of such
shares voting for the election of directors can elect all of the directors. The
holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors out of legally available funds. In the event
of liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining available for
distribution after payment of liabilities and after provision has been made for
each class of stock, if any, having preference over the Common Stock. Holders
of shares of Common Stock, as such, have no conversion, preemptive or other
subscription rights, and there are no redemption provisions applicable to the
Common Stock. The rights of the holders of Common Stock are subject to any
rights that may be fixed for holders of Preferred Stock, when and if any
Preferred Stock is issued. All of the shares of Common Stock currently
outstanding are duly authorized, validly issued, fully paid and non-assessable.
Warrants
There are currently outstanding 48,872 Warrants, each to purchase one
share of Common Stock at an exercise price of $3.54 per share. The Warrants
were issued in October 1997 in connection with the 1997 Financing. The
Warrants, which expire on October 31, 2000, are currently exercisable. The
investors in the 1997 Financing have been granted certain registration rights
relating to the shares of Common Stock issuable upon exercise of the Warrants.
See "-- Registration Rights."
Registration Rights
The holders of 305,451 shares of Common Stock issued in connection with
the 1996 Financing (the "Registrable Shares") are currently entitled to certain
piggyback rights with respect to the registration of such shares under the
Securities Act. Holders of 271,246 of such shares have waived their
registration rights in connection with this offer and no holder of such shares
is participating in this offering. Additionally, following the consummation of
this offering, the holders of 48,872 shares of Common Stock issuable upon
exercise of the Warrants will be entitled to piggyback rights with respect to
the registration of such shares under the Securities Act.
Whenever the Company proposes to register any of its securities under the
Securities Act for its own account or for the account of other security
holders, the Company shall be required to promptly notify the holders of each
of the Registrable Shares and the Warrant Shares of the proposed registration
and include all Registrable Shares and Warrant Shares which such holders may
request to be included in such registration, subject to
38
<PAGE>
certain limitations (a "Piggyback Registration"). The holders of the
Registrable Shares and the Warrants have agreed not to request registration of
sell or otherwise dispose of the Registrable Shares or the shares of Common
Stock issuable upon exercise of the Warrants for a period of 12 months
following the date of this Prospectus.
In connection with this offering, the Company has agreed to grant to the
Underwriter certain demand and piggyback registration rights in connection with
the 120,000 shares of Common Stock issuable upon exercise of the Underwriter's
Warrants. See "Underwriting."
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer & Trust Company, whose address is Two Broadway, New York, New York
10004.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering, the Company will have 3,074,237 shares
of Common Stock issued and outstanding of which the 1,200,000 shares offered
hereby will be freely tradeable without restriction or further registration
under the Securities Act, except for any shares purchased by an "affiliate of
the Company" (in general, a person who has a controlling position with regard
to the Company), which will be subject to the resale limitations of Rule 144
promulgated under the Securities Act.
All of the remaining 1,874,237 shares of Common Stock which will be
outstanding upon the consummation of this offering are "restricted securities,"
as that term is defined under Rule 144 promulgated under the Securities Act.
Subject to the contractual restrictions described below, 1,701,927 shares of
Common Stock will be eligible for sale pursuant to Rule 144 commencing 90 days
following the date of this Prospectus, 147,310 shares will become eligible for
sale pursuant to Rule 144 on January 31, 1999 and 25,000 shares will become
eligible for sale pursunt to Rule 144 on the first anniversary of the date of
consummation of this offering. The holders of 1,548,102 of such shares (and
holders of 48,872 shares issuable upon the exercise of the Warrants) have
agreed not to (i) sell or otherwise dispose of such shares or (ii) exercise any
rights held by such holders to cause the Company to register any shares of
Common Stock for sale pursuant to the Securities Act, in each case, for a
period of twelve months from the date of this Prospectus without the
Underwriter's prior written consent.
In general, under Rule 144, as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate of the Company who, has
owned restricted shares of Common Stock beneficially for at least one year is
entitled to sell, within any three month period, such number of shares that
does not exceed the greater of 1% of the then outstanding shares of the
issuer's common stock or the average weekly trading volume during the four
calendar weeks preceding such sale, provided, that, certain public information
about the issuer as required by Rule 144 is then available and the seller
complies with certain other requirements. A person who is not an affiliate, has
not been an affiliate within three months prior to sale and has beneficially
owned the restricted securities for at least two years is entitled to sell such
shares under Rule 144 without regard to any of the limitations described above.
Prior to this offering, there has been no public market for the Common
Stock and no prediction can be made as to the effect, if any, that market sales
of Common Stock or the availability of such shares for sale will have on the
market price prevailing from time to time. Nevertheless, the possibility that
substantial amounts of Common Stock may be sold in the public market may
adversely affect prevailing market prices for the Common Stock and could impair
the Company's ability to raise capital through the sale of its equity
securities.
39
<PAGE>
UNDERWRITING
Whale Securities Co., L.P. (the "Underwriter") has agreed, subject to the
terms and conditions contained in the Underwriting Agreement, to purchase the
1,200,000 shares of Common Stock offered hereby from the Company. The
Underwriter is committed to purchase and pay for all of the shares of Common
Stock offered hereby if any of such securities are purchased. The shares of
Common Stock are being offered by the Underwriter, subject to prior sale, when,
as and if delivered to and accepted by the Underwriter and subject to approval
of certain legal matters by counsel and to certain other conditions.
The Underwriter has advised the Company that it proposes to offer the
shares of Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus. The Underwriter may allow certain dealers
who are member of the National Association of Securities Dealers, Inc. (the
"NASD") concessions, not in excess of $.24 per share, of which not in excess of
$.12 per share may be reallowed to other dealers who are members of the NASD.
The Company has granted to the Underwriter an option, exercisable for 45
days following the date of this Prospectus, to purchase up to 180,000
additional shares at the public offering price set forth on the cover page of
this Prospectus, less underwriting discounts and commissions. The Underwriter
may exercise this option in whole or, from time to time, in part, solely for
the purpose of covering over-allotments, if any, made in connection with the
sale of the shares offered hereby.
The Company has agreed to pay to the Underwriter a non-accountable expense
allowance equal to 3% of the gross proceeds derived from the sale of the shares
offered hereby, including any securities sold pursuant to the Underwriter's
over-allotment option, $50,000 of which has been paid as of the date of this
Prospectus. The Company has also agreed to pay all expenses in connection with
qualifying the shares offered hereby for sale under the laws of such states as
the Underwriter may designate, including expenses of counsel retained for such
purpose by the Underwriter.
The Company has agreed to sell to the Underwriter and its designees, for
an aggregate of $100, warrants (the "Underwriter's Warrants") to purchase up to
120,000 shares of Common stock at an exercise price of $8.10 per share (135% of
the public offering price per share). The Underwriter's Warrants may not be
sold, transferred, assigned or hypothecated for one year following the date of
this Prospectus, except to the offices and partners of the Underwriter and
members of the selling group, and are exercisable at any time and from time to
time, in whole or in part, during the five-year period following the date of
this Prospectus (the "Warrant Exercise Term"). During the Warrant Exercise
Term, the holders of the Underwriter's Warrants are given, at nominal cost, the
opportunity to profit from a rise in the market price of the Common Stock. To
the extent that the Underwriter's Warrants are exercised, dilution to the
interests of the Company's stockholders will occur. Further, the terms upon
which the Company will be able to obtain additional equity capital may be
adversely affected, since the holders of the Underwriter's Warrants can be
expected to exercise them at a time when the Company would, in all likelihood,
be able to obtain any needed capital on terms more favorable to the Company
than those provided in the Underwriter's Warrants. Any profit realized by the
Underwriter on the sale of the Underwriter's Warrants, the underlying shares of
Common Stock or the underlying warrants, or the shares of Common Stock issuable
upon exercise of such underlying warrants, may be deemed additional
underwriting compensation. The Underwriter's Warrants contain a cashless
exercise provision. Subject to certain limitations and exclusions, the Company
has agreed that, upon the request of the holders of the majority of the
Underwriter's Warrants, the Company will (at its own expense), on one occasion
during the Warrant Exercise term, register the Underwriter's Warrants and the
securities underlying the Underwriter's Warrants under the Securities Act and
that it will include the Underwriter's Warrants and all such underlying
securities in any appropriate registration statement which is filed by the
Company under the Securities Act during the seven years following the date of
this Prospectus.
The Company has agreed, for a period of five years from the date of this
Prospectus, if so requested by the Underwriter, to nominate and use its best
efforts to elect a designee of the Underwriter as a director of the Company or,
at the Underwriter's option, as a non-voting adviser to the Company's Board of
Directors. The Company's officers, directors and principal stockholders have
agreed to vote their shares of Common Stock in favor of such designee. The
Underwriter has not yet exercised its right to designate such a person.
40
<PAGE>
The Company has agreed to retain the Underwriter as a financial consultant
for a period of two years following the consummation of this offering. The
consulting agreement will provide that the Underwriter will be entitled to
receive a finder's fee in the event the Underwriter originates a financing,
merger, acquisition, joint venture or other transaction to which the Company is
a party.
All of the Company's officers, directors and securityholders have agreed
not to sell or otherwise dispose of any of their securities for a period of
twelve months from the date of this Prospectus without the Underwriter's prior
written consent.
The Underwriter has informed the Company that it does not expect sales of
the securities offered hereby to discretionary accounts to exceed 1% of the
shares offered hereby.
The Company has agreed to indemnify the Underwriter against certain civil
liabilities, including liabilities under the Securities Act.
Prior to this offering there has been no public market for the Common
Stock. Accordingly, the initial public offering price of the Common Stock will
be determined by negotiation between the Company and the Underwriter and may
not necessarily be related to the Company's asset value, net worth or other
established criteria of value. Factors to be considered in determining such
price include the Company's financial condition and prospects, an assessment of
the Company's management, market prices of similar securities of comparable
publicly-traded companies, certain financial and operating information of
companies engaged in activities similar to those of the Company and the general
condition of the securities market.
In order to facilitate the offering, the Underwriter may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriter may over-allot in connection with
the offering, creating a short position in the Common Stock for its own
account. In addition, to cover over-allotments or to stabilize the price of the
Common stock, the Underwriter may bid for, and purchase, shares of Common Stock
in the open market. The Underwriter may also reclaim selling concessions
allowed to a dealer for distributing the Common Stock in the offering, if the
Underwriter repurchases previously distributed Common Stock in transactions to
cover short positions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriter is not required to engage in these
activities, and may end any of these activities at any time.
LEGAL MATTERS
Certain legal matters with respect to the validity of the securities
offered hereby will be passed upon for the Company by Kelley Drye & Warren LLP,
New York, New York and Stamford, Connecticut. Tenzer Greenblatt LLP, New York,
New York, has acted as counsel for the Underwriter in connection with this
offering.
EXPERTS
The 1997 financial statements of the Company and Entelechy included in
this Prospectus and in the Registration Statement on Form SB-2 filed by the
Company with the Commission (together with all amendments thereto, the
"Registration Statement") have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports appearing elsewhere herein, and are included in reliance upon
such reports given upon the authority of said firm as experts in auditing and
accounting. The 1996 financial statements of the Company included in this
Prospectus and in the Registration Statement have been audited by Milgrom
Galuskin Balmuth & Company, Certified Public Accountants, P.C. to the extent
and for the period set forth in their report appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of said firm
as experts in auditing and accounting.
41
<PAGE>
AVAILABLE INFORMATION
As of the effective date of the Registration Statement of which this
Prospectus forms a part, the Company will become subject to the reporting
requirements of the Exchange Act and in accordance therewith, will file
reports, proxy statements and other information with the Commission. The
Company intends to furnish its stockholders with annual reports containing
audited financial statements and such other periodic reports as the Company
deems appropriate or as may be required by law.
The Company has filed with the Commission the Registration Statement with
respect to the securities offered hereby. This Prospectus, which constitutes a
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement and the exhibits filed therewith, certain
portions of which have been omitted as permitted by the rules and regulations
of the Commission. For further information with respect to the Company and the
Shares offered hereby, reference is hereby made to the Registration Statement
and to the exhibits filed therewith. Statements contained in this Prospectus
regarding the content of any contract or other document referred to are not
necessarily complete and, in each instance, reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement is hereby qualified in its entirety by such
reference. The Registration Statement, including all exhibits thereto, may be
inspected without charge at the principal office of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices located at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511 and at Seven World Trade Center, 13th Floor,
New York, New York 10048. Copies of such material may be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549, upon the payment of prescribed fees.
Additionally, the Commission maintains a site on the World Wide Web at
http://www.sec.gov. The Registration Statement, including all exhibits and
schedules thereto, and such other reports and information filed by the Company
with the Commission may be accessed electronically by means of the Commission's
Web-site.
42
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
IBS INTERACTIVE, INC.
Reports of Independent Certified Public Accountants ...................................... F-2
Balance Sheets as of December 31, 1996 and 1997 .......................................... F-4
Statements of Operations for the years ended December 31, 1996 and 1997 .................. F-5
Statements of Cash Flows for the years ended December 31, 1996 and 1997 .................. F-6
Statements of Stockholders' Equity for the years ended December 31, 1996 and 1997 ........ F-7
Notes to Financial Statements ............................................................ F-8
ENTELECHY INC.
Report of Independent Certified Public Accountants ....................................... F-18
Balance Sheet as of December 31, 1997 ................................................... F-19
Statement of Operations and Accumulated Deficit for the year ended December 31, 1997 .... F-20
Statement of Cash Flows for the year ended December 31, 1997 ............................ F-21
Notes to Financial Statements ........................................................... F-22
PRO FORMA FINANCIAL STATEMENTS
Pro Forma Condensed Statement of Operations for the year ended December 31, 1997
(unaudited) F-24
Pro Forma Condensed Balance Sheet as of December 31, 1997 (unaudited) .................... F-25
Notes to Pro Forma Unaudited Condensed Financial Statements .............................. F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
IBS Interactive, Inc.
We have audited the accompanying balance sheet of IBS Interactive, Inc.
(formerly known as Internet Broadcasting System, Inc.) as of December 31, 1997
and the related statements of operations, stockholders' equity and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of IBS Interactive, Inc. as of
December 31, 1997 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Woodbridge, New Jersey
February 27, 1998
(April 21, 1998 as to the
last paragraph of Note 14)
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
IBS Interactive, Inc.
We have audited the accompanying balance sheet of IBS Interactive, Inc.
(formerly known as Internet Broadcasting System, Inc.) as of December 31, 1996
and the related statements of operations, stockholders' equity and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of IBS Interactive, Inc. as of
December 31, 1996 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Milgrom, Galuskin, Balmuth & Company
Certified Public Accountants, P.C.
Edison, New Jersey
March 31, 1997
(April 21, 1998 as to the
last paragraph of Note 14)
F-3
<PAGE>
IBS INTERACTIVE, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1997
------------- ---------------
<S> <C> <C>
ASSETS
Current Assets:
Cash ................................................................... $ 179,000 $ 95,000
Accounts receivable (net of allowance for doubtful accounts
of $6,000 in 1996 and $66,000 in 1997)................................ 310,000 1,636,000
Prepaid expenses ....................................................... 3,000 --
Deferred tax asset ..................................................... 1,000 50,000
---------- -----------
Total Current Assets ................................................. 493,000 1,781,000
Property and equipment, net ............................................. 364,000 518,000
Intangible assets ....................................................... 6,000 56,000
Deferred tax asset ...................................................... 72,000 --
Deferred offering costs ................................................. -- 45,000
Other assets ............................................................ -- 51,000
---------- -----------
TOTAL ASSETS ............................................................ $ 935,000 $ 2,451,000
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
1997 Notes ............................................................. $ -- $ 200,000
Notes payable, current portion ......................................... 11,000 107,000
Capital lease obligation, current portion .............................. 4,000 42,000
Accounts payable ....................................................... 33,000 145,000
Accrued salaries and related expenses .................................. -- 71,000
Accrued project costs .................................................. 29,000 305,000
Deferred revenue ....................................................... -- 238,000
Accrued interest payable ............................................... 6,000 14,000
Income taxes payable ................................................... -- 25,000
Other current liabilities .............................................. 17,000 67,000
---------- -----------
Total Current Liabilities ............................................ 100,000 1,214,000
Notes payable, less current portion ..................................... 107,000 --
Long term capital lease obligation ...................................... 7,000 64,000
Deferred tax liabilities ................................................ -- 34,000
---------- -----------
Total Liabilities ....................................................... 214,000 1,312,000
---------- -----------
Commitments and contingencies (Note 9)
Stockholders' Equity:
Preferred Stock -- $.01 par value; authorized 1,000,000 shares,
none issued and outstanding .......................................... -- --
Common Stock -- $.01 par value; authorized 11,000,000 shares, issued
and outstanding 1,679,975 shares -- 1996 and 1,701,967 shares -- 1997 17,000 17,000
Additional paid in capital ............................................. 1,088,000 1,214,000
Common Stock -- subscription receivable ................................ (54,000) --
Unearned compensation .................................................. (47,000) (7,000)
Accumulated deficit .................................................... (283,000) (85,000)
---------- -----------
Total Stockholders' Equity ............................................. 721,000 1,139,000
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .............................. $ 935,000 $ 2,451,000
========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
IBS INTERACTIVE, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Revenues .............................................. $1,023,000 $2,741,000
Cost of Services ...................................... 650,000 1,099,000
---------- ----------
Gross Profit .......................................... 373,000 1,642,000
Operating Expenses:
Selling, general and administrative .................. 670,000 1,296,000
Amortization of intangible assets .................... 1,000 12,000
---------- ----------
671,000 1,308,000
---------- ----------
Operating income (loss) ............................... (298,000) 334,000
Interest expense ..................................... 11,000 37,000
Other expense, net ................................... 1,000 15,000
---------- ----------
Income (loss) before income taxes ..................... (310,000) 282,000
Income tax benefit (provision) ........................ 59,000 (84,000)
---------- ----------
Net income (loss) ..................................... $ (251,000) $ 198,000
========== ==========
Earnings (loss) per share
Basic and Diluted .................................... $ (.17) $ .12
========== ==========
Weighted average number of common stock and equivalents
Basic ................................................ 1,507,047 1,692,850
========== ==========
Diluted .............................................. 1,507,047 1,721,664
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
IBS INTERACTIVE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
December 31,
--------------------------------
1996 1997
-------------- ---------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) ...................................... $ (251,000) $ 198,000
Adjustments to Reconcile Net Income (Loss) to Net
Cash Used in Operating Activities:
Depreciation and amortization .......................... 105,000 184,000
Non cash interest expense .............................. -- 24,000
Bad debt provisions .................................... 21,000 60,000
Non cash compensation .................................. 33,000 40,000
Deferred taxes ......................................... (59,000) 57,000
Changes in operating assets and liabilities:
Accounts receivable .................................... (322,000) (1,386,000)
Prepaid expenses ....................................... 5,000 3,000
Other assets ........................................... -- (16,000)
Accounts payable and accrued expenses .................. 48,000 488,000
Deferred revenue ....................................... -- 238,000
Income taxes payable ................................... -- 25,000
Other .................................................. 14,000 7,000
---------- ------------
Net Cash Used in Operating Activities ................ (406,000) (78,000)
---------- ------------
Cash Flows from Investing Activities:
Capital expenditures -- property and equipment ......... (355,000) (154,000)
Assets acquisitions .................................... (5,000) (75,000)
---------- ------------
Net Cash Used in Investing Activities ................ (360,000) (229,000)
---------- ------------
Cash Flows from Financing Activities:
Repayments of notes payable ............................ (15,000) (11,000)
Repayment of stockholder loans ......................... (2,000) --
Issuance of 1997 Notes ................................. -- 200,000
Sales of common stock .................................. 927,000 74,000
Deferred offering costs ................................ -- (25,000)
Payments of capital lease obligations .................. (3,000) (15,000)
---------- ------------
Net Cash Provided by Financing Activities ............ 907,000 223,000
---------- ------------
Net increase (decrease) in Cash ......................... 141,000 (84,000)
Cash, at Beginning of Year .............................. 38,000 179,000
---------- ------------
Cash, at End of Year .................................... $ 179,000 $ 95,000
========== ============
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
IBS INTERACTIVE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
Common Stock
------------------------
Number Additional
of Paid in
Shares Amount Capital
------------ ---------- ------------
<S> <C> <C> <C>
Balance -- January 1, 1996 ......... 977,440 $10,000 $ --
Shares issued for cash,
February 1996 ..................... 1,221 -- 1,000
Shares issued for compensation 24,436 -- 80,000
Shares issued in connection
with pooling of interests,
April 1996 ........................ 377,536 4,000 30,000
Shares issued in connection
with Private Placement ............ 299,342 3,000 977,000
Amortization of shares issued as
compensation ...................... -- -- --
Net loss ........................... -- -- --
------- ------- ----------
Balance -- December 31, 1996 1,679,975 17,000 1,088,000
Shares issued in connection
with acquisitions ................. 15,883 -- 52,000
Payment of common stock
subscription receivable ........... -- -- --
Amortization of shares issued as
compensation ...................... -- -- --
Shares issued in connection
with Private Placement ............ 6,109 -- 20,000
Issuance of warrants associated
with 1997 Notes ................... -- -- 54,000
Net income .........................
Balance -- December 31, 1997 1,701,967 $17,000 $1,214,000
========= ======= ==========
<CAPTION>
Total
Unearned Subscription Accumulated Stockholders'
Compensation Receivable Deficit Equity
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Balance -- January 1, 1996 ......... $ -- $ -- $ (39,000) $ (29,000)
Shares issued for cash,
February 1996 ..................... -- -- -- 1,000
Shares issued for compensation (80,000) -- -- --
Shares issued in connection
with pooling of interests,
April 1996 ........................ -- -- 7,000 41,000
Shares issued in connection
with Private Placement ............ -- (54,000) -- 926,000
Amortization of shares issued as
compensation ...................... 33,000 -- -- 33,000
Net loss ........................... -- -- (251,000) (251,000)
--------- ---------- ---------- -----------
Balance -- December 31, 1996 (47,000) (54,000) (283,000) 721,000
Shares issued in connection
with acquisitions ................. -- -- -- 52,000
Payment of common stock
subscription receivable ........... -- 54,000 -- 54,000
Amortization of shares issued as
compensation ...................... 40,000 -- -- 40,000
Shares issued in connection
with Private Placement ............ -- -- -- 20,000
Issuance of warrants associated
with 1997 Notes ................... -- -- -- 54,000
Net income ......................... 198,000 198,000
---------- -----------
Balance -- December 31, 1997 $ (7,000) $ -- $ (85,000) $ 1,139,000
========= ========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
IBS Interactive, Inc.
Notes to Financial Statements
NOTE 1 -- BACKGROUND
IBS Interactive, Inc. (the "Company") provides a broad range of computer
networking, programming, applications development and Internet services
primarily to businesses and organizations. The Company was incorporated under
the name Internet Broadcasting System, Inc. and changed its name to IBS
Interactive, Inc. on February 27, 1998. The Company, a Delaware corporation,
has its main administrative office in New Jersey with regional offices in
Virginia and Alabama (see Note 14).
The Company contemplates filing a registration statement with the
Securities and Exchange Commission in April 1998 relating to an initial public
offering of 1,200,000 shares of its common stock.
Certain prior year amounts have been reclassified to conform to the
current year's presentation.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue is recognized as services are provided to clients and subscribers.
In the event that there are significant performance obligations yet to be
fulfilled on consulting projects, revenue recognition is deferred until such
conditions are removed.
For the years ended December 31, 1996 and 1997, the Company recognized
revenues of $0 and $252,000, respectively, on projects in process. Such
unbilled amounts are included in accounts receivable, net, at December 31,
1997.
Stock Based Compensation
With respect to common stock issued to employees, the Company follows the
provisions of APB Opinion No. 25 Accounting for Stock Issued to Employees in
accounting and measuring compensation expense related to employee stock grants.
Warrants
The fair values ascribed to the warrants that were granted in connection
with the 1997 Notes (see Note 6) are capitalized and amortized, as interest
expense, over the expected life of the underlying debt.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
Valuation allowances are established against deferred tax assets when
management concludes that the realization of such deferred tax assets cannot be
considered more likely than not.
Financial Instruments and Concentrations
Financial instruments which potentially subject the Company to credit risk
consist primarily of a concentration of unsecured trade accounts receivables.
At December 31, 1996, two customers accounted for 61% and 13%, respectively, of
total net accounts receivable. At December 31, 1997 a single customer accounted
for 93% of total net accounts receivable.
F-8
<PAGE>
IBS Interactive, Inc.
Notes to Financial Statements -- (Continued)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable. The Company
maintains allowances for potential credit losses and such losses have been
within management's expectations.
The Company maintains cash balances at a single bank. Accounts at the bank
are insured by an agency of the Federal government up to $100,000.
The Company maintains substantially all of the fixed assets utilized in
providing Internet access to clients at one location.
Sources of Supplies and Vendors
The Company relies on two telephone companies to provide data
communications services and one company to provide Internet access services to
customers. Although management believes alternative telecommunications
facilities could be found in a timely manner, any disruption or termination of
these services could have an adverse effect on operating results.
Although the Company attempts to maintain multiple vendors for required
product, its modems, terminal servers, and high-performance routers, which are
important components of its network, are each currently acquired from limited
sources. In addition, some of the Company's suppliers have limited resources
and production capacity. If the suppliers are unable to meet the Company's
needs as it builds out its network infrastructure, then delays and increased
costs in the expansion of the Company's network infrastructure could result,
which could have an adverse effect on operating results.
Property and Equipment
Property and equipment, largely comprising network equipment, is
depreciated over a three year life using the straight line method.
Long-Lived Assets
The Company has adopted SFAS No. 121, Accounting for Impairment of
Long-Lived Assets and for Long-lived Assets to be Disposed of. In accordance
with SFAS No. 121, the carrying values of long-lived assets are periodically
reviewed by the Company and impairments would be recognized if the expected
future operating non-discounted cash flows derived from an asset were less than
its carrying value.
Intangible Assets
Intangible assets are composed primarily of customer lists and other
intangibles arising from various acquisitions. Such values are amortized over
five year lives.
Deferred Offering Costs
Costs incurred in connection with the Company's contemplated initial
public offering of its common stock have been capitalized. Such costs will be
charged to stockholders' equity upon successful completion of the offering or
charged to operations if the offering is not completed.
Estimated Fair Values of Financial Instruments
The carrying amounts reported in the balance sheets for accounts
receivable, accounts payable, accrued liabilities and notes payable approximate
fair value because of the immediate or short-term maturity of these financial
instruments.
F-9
<PAGE>
IBS Interactive, Inc.
Notes to Financial Statements -- (Continued)
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Earnings (Loss) Per Share
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings per Share. 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 the dilutive
effects of options. Basic earnings per share has been computed using the
weighted average number of shares of common stock outstanding for the period.
Diluted earnings per share is very similar to the fully diluted earnings per
share. The Company's diluted earnings (loss) per share includes the effect, if
any, of unissued shares underlying warrants, computed using the treasury stock
method.
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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates. Many of the
Company's estimates and assumptions used in the financial statements relate to
the Company's ability to deliver state of the art technical services, which are
subject to competitive market and technology changes. It is reasonably possible
that changes may occur in the near term that would affect management's
estimates with respect to the values of intangibles and fixed assets.
Effects of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board issued two new
disclosure standards.
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are required
to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements.
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, which supersedes SFAS No. 14, Financial Reporting for Segments of
a Business Enterprise, establishes standards for the way that public companies
report information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of a company
about which separate financial information is available that is evaluated
regularly by management in deciding how to allocate resources and in assessing
performance.
SFAS Nos. 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. Because of the relatively recent issuance of
these standards, management has been unable to fully evaluate the impact, if
any, it may have on future financial statement disclosures. Results of
operations and financial position, however, will be unaffected by
implementation of these standards.
NOTE 3 -- BUSINESS COMBINATIONS (ALSO SEE NOTE 14)
Interactive Networks, Inc.
On April 7, 1996, the Company acquired Interactive Networks, Inc.
("Interactive Networks"), a local Internet service provider, in a business
combination accounted for as a pooling of interests, through an exchange of
377,536 shares of the Company's common stock for all of the issued and
outstanding shares of Interactive Networks. Accordingly, the accompanying 1996
financial statements are based on the assumption that the Company and
Interactive Networks were combined for the full year.
F-10
<PAGE>
IBS Interactive, Inc.
Notes to Financial Statements -- (Continued)
NOTE 3 -- BUSINESS COMBINATIONS (ALSO SEE NOTE 14) -- (Continued)
Summarized results of operations of the Company and Interactive Networks
for the period from January 1, 1996 through April 7, 1996, the date of the
business combination, are as follows:
Company Interactive Networks
------------- ---------------------
Net Sales ........... $ 29,000 $ 53,000
Net (Loss) .......... $ (30,000) $ (2,000)
Mordor International
On May 31, 1996, the Company acquired substantially all the assets of
Mordor International ("Mordor"), an Internet service provider, in a business
combination accounted for as a purchase. The purchase price of $20,000 was
allocated to equipment and intangible assets. The results of operations of
Mordor are included in the accompanying financial statements from the
acquisition date forward. With respect to this acquisition, the results of
operations from January 1, 1996 through the acquisition date were not material
and accordingly, pro forma operating results are not presented.
AllNet Technology Services, Inc.
On March 1, 1997, the Company acquired certain assets of AllNet Technology
Services, Inc. ("AllNet"), an Internet service provider, in exchange for
$75,000 of cash and 15,883 shares of Company common stock in a business
combination accounted for as a purchase. The fair value of the shares issued in
connection with the acquisition approximated $52,000 and was based, in part, on
the fair market value of shares sold in the Company's 1996 private placement of
common stock (see Note 7). Of the total purchase price of $127,000, $65,000 was
allocated to equipment and the balance was assigned to various intangible
assets. The results of operations of AllNet are included in the accompanying
financial statements from the acquisition date forward. With respect to this
acquisition, the results of operations from January 1, 1997 through the
acquisition date were not material and accordingly, pro forma operating results
are not presented.
NOTE 4 -- PROPERTY AND EQUIPMENT
Major classes of property and equipment, net, consist of the following:
December 31,
-----------------------------
1996 1997
------------- -------------
Network equipment ...................... $ 485,000 $ 807,000
Office equipment and fixtures .......... 15,000 17,000
---------- ----------
500,000 824,000
Less: accumulated depreciation ......... (136,000) (306,000)
---------- ----------
$ 364,000 $ 518,000
========== ==========
At December 31, 1996 and 1997, equipment subject to capital leases, less
accumulated depreciation, amounted to $12,000 and $104,000, respectively.
Depreciation expense for the years ended December 31, 1996 and 1997 amounted to
$105,000 and $170,000, respectively, which includes depreciation of equipment
subject to capital lease agreements of $2,000 and $19,000, respectively.
F-11
<PAGE>
IBS Interactive, Inc.
Notes to Financial Statements -- (Continued)
NOTE 5 -- INTANGIBLE ASSETS
Intangible assets, net, are comprised of the following:
December 31,
--------------------------
1996 1997
----------- ------------
Customer List .......................... $ 5,000 $ 67,000
Organizational Costs ................... 2,000 2,000
-------- ---------
7,000 69,000
Less: accumulated amortization ......... (1,000) (13,000)
-------- ---------
$ 6,000 $ 56,000
======== =========
Amortization expense was $1,000 and $12,000 for the years ended December
31, 1996 and 1997, respectively.
NOTE 6 -- BORROWINGS
1997 Notes
On October 31, 1997, the Company entered into a series of 1997 financing
agreements with eight individual investors (collectively, the "1997 Notes").
The 1997 Notes bear interest at the rate of 8% and are payable in full on the
earlier of: (a) the closing of the Company's contemplated initial public
offering of common stock, (b) the closing of a private placement of the
Company's equity securities that result in net proceeds to the Company of at
least $1 million, or (c) October 1999. Due to the Company's contemplated
initial public offering (see Note 14), such debt has been classified as current
in the accompanying December 31, 1997 balance sheet. The loan agreement
relating to the 1997 Notes imposes limitations on the Company's ability to
sell, transfer, dispose or exchange assets, and requires the Company to comply
with certain operational and financial covenants. At December 31, 1997 the
Company was in compliance with such covenants. The outstanding principal
balance of the 1997 Notes amounted to $200,000 at December 31, 1997.
In connection with the issuance of the 1997 Notes, investors also received
warrants to purchase up to 48,872 shares of the Company's common stock at an
exercise price of $3.54 per share through October 2000 (see Note 7). The
Company has capitalized the fair value ascribed to the warrant ($54,000), which
includes a value reflective of the excess of the expected initial public
offering price over the exercise price, and is amortizing such amount over the
expected life of the 1997 Notes. Interest expense for the year ended December
31, 1997, including the amortization of the value ascribed to warrants, totaled
$22,000. The effective interest rate on the 1997 Notes, which includes the
amortization of the value of the warrants, approximates 68% per annum.
Other Debt
In 1995, the Company issued three-year promissory notes in the original
aggregate principal amount of $100,000 of which notes with an aggregate
original principal amount of $95,000 remained outstanding at December 31, 1996
and 1997. These notes bear interest at a rate of 6% and are payable in July
1998. Interest expense for each of the years ended December 31, 1996 and 1997
amounted to $6,000.
Bank borrowings assumed in connection with the acquisition of Interactive
Networks bear interest at the rate of 10% and are payable in December 1998.
Outstanding borrowings assumed from Interactive Networks amounted to $23,000
and $12,000 as of December 31, 1996 and 1997. Such borrowings are secured by
the Company's assets. Interest expense for each of the years ended December 31,
1996 and 1997 amounted to $2,000.
F-12
<PAGE>
IBS Interactive, Inc.
Notes to Financial Statements -- (Continued)
NOTE 6 -- BORROWINGS -- (Continued)
Capital Leases
The Company leases certain equipment in the normal course of operations
which are accounted for as capital leases. Outstanding obligations at December
31, 1996 and 1997 totaled $11,000 and $105,000, respectively. Interest expense
related to such agreements was $2,000 and $7,000 for the years ended December
31, 1996 and 1997, respectively.
Guarantees
Certain executive officers, who are also stockholders of the Company, have
provided, at no cost to the Company, personal guarantees of certain obligations
of the Company. The amount of obligations subject to these guarantees totaled
$117,000 at December 31, 1997. The value ascribed to such guarantees is not
considered material.
Debt and Lease Maturities
At December 31, 1997, aggregate required principal payments, including the
present value of amounts owed under capital leases, are as follows:
Year Ended December 31, Amount
------------------------------
1998 ......................... $349,000
1999 ......................... 43,000
2000 ......................... 21,000
--------
Total ...................... $413,000
========
NOTE 7 -- STOCKHOLDERS' EQUITY
Capital Stock
At December 31, 1997, 48,872 shares of common stock were reserved for the
exercise of warrants.
Private Placement
During 1996 and 1997 the Company sold 299,342 and 6,109 shares of common
stock for net proceeds of approximately $926,000 and $20,000 respectively. At
December 31, 1996, a subscription receivable of $54,000 was owed to the
Company. Such amount was received in January 1997.
Warrants
As discussed in Note 6, the 1997 Note investors also received warrants to
purchase up to 48,872 shares of the Company's common stock. The 1997 Note
investors may exercise the warrants at any time until October 31, 2000 at an
exercise price of $3.54 per share. At the option of the 1997 Note investors,
the warrant exercise price may be paid through: (a) cash payments, (b) the
conversion of the unpaid principal and interest on the 1997 Notes, or (c) a
combination of (a) and (b).
Stock Award
In February 1996, the Company entered into an employment agreement with an
individual which provided for compensation that included the issuance of 24,436
shares of common stock to be issued ratably over a two year period.
Compensation expense associated with such shares (computed using the per share
price of the 1996 private placement) was $33,000 and $40,000 for the years
ended December 31, 1996 and 1997, respectively. At December 31, 1997, the
related unearned compensation was $7,000.
F-13
<PAGE>
IBS Interactive, Inc.
Notes to Financial Statements -- (Continued)
NOTE 8 -- TAXES
(Provisions) benefits for Federal and state income taxes consist of the
following:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1996 1997
----------- -------------
<S> <C> <C>
Current
Federal ...................................... $ -- $ (21,000)
State ........................................ -- (6,000)
-------- ----------
-- (27,000)
Deferred
Federal ...................................... 37,000 (29,000)
State ........................................ 22,000 (28,000)
-------- ----------
59,000 (57,000)
-------- ----------
Total income tax benefit (provision) ......... $ 59,000 $ (84,000)
======== ==========
</TABLE>
Differences between the Federal statutory rate and the Company's effective
tax rate are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1997
------------ --------------
<S> <C> <C>
Statutory rate .................. $ 105,000 $ (96,000)
State taxes, net ................ 22,000 (20,000)
Non-deductible expenses ......... (1,000) (31,000)
Valuation allowance ............. (76,000) 76,000
Other, net ...................... 9,000 (13,000)
--------- ----------
$ 59,000 $ (84,000)
========= ==========
</TABLE>
<PAGE>
Deferred tax assets (liabilities) arise from the following temporary
differences and are classified as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1996 1997
----------- ------------
<S> <C> <C>
Deferred Tax Asset, Current:
Accounts receivable allowances .............. $ 1,000 $ 26,000
Net operating loss carryforwards ............ -- 2,000
Other assets ................................ -- 20,000
Other, net .................................. -- 2,000
--------- --------
$ 1,000 $ 50,000
========= ========
Deferred Tax Asset (Liabilities), Non-Current:
Net operating loss carryforwards ........... $ 145,000 $ --
Other assets ............................... 3,000 --
Property and equipment ..................... -- (34,000)
Valuation allowance ........................ (76,000) --
--------- --------
$ 72,000 ($ 34,000)
========= ========
</TABLE>
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
Legal Matters
The Company is currently evaluating the status of certain threatened legal
claims. Management presently believes that the disposition of such claims,
which have been recently alleged, will not, individually or in the aggregate,
have a material adverse effect on the Company's financial position, results of
operations and liquidity.
F-14
<PAGE>
IBS Interactive, Inc.
Notes to Financial Statements -- (Continued)
NOTE 9 -- COMMITMENTS AND CONTINGENCIES -- (Continued)
Operating Leases
The Company leases facilities and equipment under operating leases and
subleases expiring through December 2002. Some of the leases have renewal
options and most contain provisions for passing through certain incremental
costs. Future net minimum annual rental payments under noncancelable leases are
as follows:
1998 $140,000
1999 155,000
2000 155,000
2001 155,000
2002 and thereafter 310,000
--------
Total minimum lease payments ........... $915,000
========
Total rental expense for the years ended December 31, 1996 and 1997 was
approximately $18,000 and $49,000, respectively.
Employment Agreements
The Company has entered into employment contracts with certain officers
and employees which provide for minimum annual salaries to be paid over
specified terms. Future commitments for such payments which includes amounts
for employment contracts executed through February 27, 1998, are as follows:
Year Ended December 31, Amount
----------------------- ----------
1998 .................. $1,113,000
1999 .................. 983,000
2000 .................. 625,000
2001 .................. 240,000
2002 .................. 131,000
----------
Total ............... $3,092,000
==========
NOTE 10 -- RELATED PARTY TRANSACTIONS (ALSO SEE NOTE 14)
At December 31, 1996 and 1997, the Company's stockholders held promissory
notes issued in 1995 by the Company in the aggregate principal amount of
$95,000. These notes bear interest at the rate of 6% per annum. Interest
expense for each of the years ended December 31, 1996 and 1997 amounted to
$6,000.
Certain relatives of the Company's executive officers are also 1997 Note
investors. The terms of such borrowings are comparable with those afforded to
other investors (see Note 6). Outstanding balances at December 31, 1997
amounted to $43,750.
An entity whose stockholder is also a stockholder of the Company provides
management consulting services to the Company. Fees for such services amounted
to $16,000 and $14,000 for the years ended December 31, 1996 and 1997,
respectively.
NOTE 11 -- SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes are as follows:
1996 1997
--------- ---------
Interest .............. $5,000 $7,000
Income Taxes .......... -- 2,000
In 1996, the Company acquired fixed assets of approximately $34,000,
financed through incurring liabilities. In 1997, the Company acquired certain
assets through the issuance of common stock valued at $52,000. In 1997, the
Company acquired $95,000 of equipment subject to capital lease obligations.
F-15
<PAGE>
IBS Interactive, Inc.
Notes to Financial Statements -- (Continued)
NOTE 12 -- MAJOR CLIENTS OF THE COMPANY
One client generated 54% of the Company's revenues for the year ended
December 31, 1997. One consulting project for this same client generated 45% of
the Company's revenues in the year ended December 31, 1997. Two clients
generated 29% and 15% of the Company's revenues for the year ended December 31,
1996.
NOTE 13 -- SEGMENT INFORMATION
The Company's major businesses are Systems Integration and Programming and
Applications Development and Internet Services. Financial information for the
Company's segments are as follows:
<TABLE>
<CAPTION>
Systems
Integration and
Programming
Year Ended and Applications Internet
December 31, 1996 Development Services
------------------------------------------- ------------------ --------------
<S> <C> <C>
Revenues .................................. $ 438,000 $ 585,000
Cost of Services .......................... 347,000 303,000
---------- ----------
Gross Profit .............................. 91,000 282,000
Selling, General & Administrative ......... 281,000 389,000
Amortization of intangible assets ......... -- 1,000
---------- ----------
Operating Income (Loss) ................... $ (190,000) $ (108,000)
========== ==========
Allocated Assets .......................... $ 382,000 $ 553,000
========== ==========
Year Ended
December 31, 1997
-------------------------------------------
Revenues .................................. $1,750,000 $ 991,000
Cost of services .......................... 208,000 891,000
---------- ----------
Gross Profit .............................. 1,542,000 100,000
Selling, General & Administrative ......... 515,000 781,000
Amortization of intangible assets ......... -- 12,000
---------- ----------
Operating Income (Loss) ................... $1,027,000 $ (693,000)
========== ==========
Allocated Assets .......................... $1,706,000 $ 745,000
========== ==========
</TABLE>
NOTE 14 -- SUBSEQUENT EVENTS
Acquisitions
In January 1998, the Company acquired certain assets of JDT WebwerX LLC, a
business providing programming and applications development and Internet access
services in exchange for $35,000 of cash.
On January 31, 1998, the Company acquired all of the issued and
outstanding capital stock of Entelechy, Inc. ("Entelechy"), in exchange for
277,434 shares of Company common stock in a business combination accounted for
as a purchase. The Company issued 147,310 shares at closing, and will issue a
total of 130,124 shares ( the "Contingent Shares") ratably on each of the
first, second and third anniversary of the acquisition closing date. The
issuance of such shares is contingent upon the former Entelechy stockholders,
to whom such shares are issuable, remaining in the continuous employ of the
Company. The purchase price of Entelechy will be established based upon the
value of shares issued at closing. The Company's final determination of the
Entelechy purchase price is subject to the completion of various valuations,
analyses and closing adjustments. The values ascribed to the Contingent Shares
(assuming that the former Entelechy stockholders remain employees of the
Company) will result in a charge to operations as such shares are earned
through the Company's year ending December 31, 2001. The Company estimates that
the charges to operations will approximate $180,000, $197,000, $197,000 and
$17,000 in the years ending December 31, 1998, 1999, 2000 and 2001,
respectively. During the year ended December 31, 1997, approximately $42,000 of
the Company's cost of services related to services provided by Entelechy. At
December 31, 1997, accounts payable included approximately $38,000 owed to
Entelechy.
F-16
<PAGE>
IBS Interactive, Inc.
Notes to Financial Statements -- (Continued)
NOTE 14 -- SUBSEQUENT EVENTS -- (Continued)
Entelechy had an outstanding note of $150,000 to a relative of one of
Entelechy's principals. The note does not bear interest and is automatically
convertible into 25,000 shares of the Company's common stock, upon the
consummation of the Company's contemplated initial public offering.
The following summarized, unaudited pro forma information for the year
ended December 31, 1997 assumes that the acquisition of Entelechy had occurred
on January 1, 1997:
Unaudited
-------------
Net Revenues ................ $3,065,000
Operating Loss .............. (67,000)
Net Loss .................... $ (113,000)
==========
Loss per Share:
Basic and Diluted .......... $ (.06)
==========
The pro forma operating results reflect estimated pro forma adjustments
for the amortization of intangibles ($156,000) and compensation expense
($197,000) related to the issuance of the Contingent Shares over a one year
period. Pro forma results of operations information is not necessarily
indicative of the results of operations that would have occurred had the
acquisition been consummated at the beginning of 1997, or of future results of
the combined companies.
Capital Stock
On March 10, 1998, the Company effected an approximate 1,029-for-1 stock
split and on April 21, 1998, an approximate 1.19-for-1 stock split. All share
and per share data have been restated for all periods presented to reflect the
splits. On March 10, 1998 the Company's Board of Directors approved an increase
in the number of shares of authorized capital stock to 12,000,000, of which
1,000,000 shares were designated as "blank check" preferred stock and
11,000,000 shares were designated as common stock. On March 10, 1998 the Board
of Directors approved the Company's 1998 Stock Option Plan. Under the terms of
this plan, the Company has reserved 330,000 shares of common stock for future
grants. An additional 20,000 shares of common stock have been reserved for a
restricted stock award to an officer of the Company.
F-17
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Management
Entelechy, Inc.
Huntsville, Alabama
We have audited the accompanying balance sheet of Entelechy, Inc. as of
December 31, 1997, and the related statements of operations and accumulated
deficit and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Entelechy, Inc. as of December
31, 1997, and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Woodbridge, New Jersey
March 14, 1998
F-18
<PAGE>
Entelechy, Inc.
Balance Sheet
December 31, 1997
<TABLE>
<S> <C>
ASSETS
Current:
Cash .................................................................................. $ 28
Accounts receivable ................................................................... 70,284
----------
Total Current Assets ............................................................... 70,312
Property and equipment, net ............................................................ 31,497
Other assets ........................................................................... 227
----------
TOTAL ASSETS ....................................................................... $ 102,036
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ...................................................................... $ 62,897
Demand note payable, net .............................................................. 148,883
----------
Total Current Liabilities .......................................................... 211,780
----------
Commitments (Note 5)
Stockholders' deficit:
Common stock -- no par value; authorized 227 shares, issued and outstanding 227 shares 227
Accumulated deficit ................................................................... (109,971)
----------
Total Stockholders' Deficit ........................................................ (109,744)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT ........................................ $ 102,036
==========
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE>
Entelechy, Inc.
Statement of Operations and Accumulated Deficit
For the Year Ended December 31, 1997
Revenues ............................................. $ 366,158
Cost of Services ..................................... 299,400
----------
Gross Profit ......................................... 66,758
Selling, general and administrative expenses ......... 114,310
----------
Operating loss ....................................... (47,552)
Interest expense ..................................... (13,067)
Other expense, net ................................... (188)
----------
Net loss ............................................. (60,807)
Accumulated deficit, beginning of year ............... (49,164)
----------
Accumulated deficit, end of year ..................... $ (109,971)
==========
See accompanying notes to financial statements.
F-20
<PAGE>
Entelechy, Inc.
Statement of Cash Flows
For the Year Ended December 31, 1997
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Net loss .................................................................. $ (60,807)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Depreciation ............................................................ 26,154
Non-cash interest expense ............................................... 12,768
Changes in operating assets and liabilities:
Accounts receivable .................................................... (65,524)
Other assets ........................................................... 13,873
Other .................................................................. (773)
Accounts payable ....................................................... 54,400
---------
Net Cash Used in Operating Activities ................................ (19,909)
---------
Cash Flows from Investing Activities:
Capital expenditures -- property and equipment ............................ (1,350)
---------
Net decrease in cash ....................................................... (21,259)
Cash, at Beginning of Year ................................................. 21,287
---------
Cash, at End of Year ....................................................... $ 28
=========
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest ................................................................ $ 299
=========
Income taxes ............................................................ $ --
=========
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE>
ENTELECHY, INC.
Notes to Financial Statements
1. Organization and Nature of Business
Entelechy, Inc. (the "Company") provides computer networking, programming
and applications development consulting services primarily to commercial
businesses and governmental agencies. The Company, an Alabama corporation, was
incorporated on August 22, 1995.
On January 31, 1998, a Stock Purchase Agreement (the "Agreement") was
entered into between the Company and IBS Interactive, Inc. ("IBS"), whereby IBS
acquired 100% of the Company's outstanding capital stock and the Company's
operations will be merged into those of IBS. Accordingly, the accompanying
financial statements do not reflect a remeasurement of the carrying values
ascribed to the Company's assets and liabilities to fair values.
To effect the acquisition, IBS has issued 147,310 shares of its common
stock at closing and will issue a total of 130,124 shares of common stock
ratably on each of the first, second and third anniversary dates of the
acquisition closing date. The issuance of the 130,124 shares is contingent upon
the former Company stockholders remaining in the employ of IBS. The values
ascribed to these shares (assuming that the former Company stockholders remain
employees of IBS) will result in a charge to IBS' operations as such shares are
earned through IBS' year ending December 31, 2001. The final purchase price of
the Company is subject to the completion of various analyses and closing
adjustments.
2. Summary of Significant Accounting Policies
Revenue Recognition
Revenue is recognized as services are provided to clients.
Income Taxes
The Company has elected and the stockholders have consented, under the
applicable provisions of the Internal Revenue Code and applicable state code,
to report its income for Federal and state income tax purposes as an "S"
corporation. Under those provisions, the stockholders receive the benefit for
the income tax effect of their respective share of the Company's net loss.
Accordingly, no benefit has been recorded for Federal and state income taxes in
the accompanying financial statements.
Financial Instruments and Concentrations
Financial instruments which potentially subject the Company to credit risk
consist primarily of a concentration of unsecured trade accounts receivables.
At December 31, 1997, two customers accounted for 54% and 44%, respectively, of
total net accounts receivable.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral on accounts receivable. The allowance for
doubtful accounts at December 31, 1997 was $0.
Property and Equipment
Property and equipment are stated at cost, reduced by a reserve for
accumulated depreciation. Depreciation is provided under the straight line
method based upon the following useful lives:
Computer equipment ............. 3 years
Furniture and fixtures ......... 7 years
Office equipment ............... 5 years
Estimated Fair Values of Financial Instruments
The carrying values reported in the accompanying balance sheet for
accounts receivable, accounts payable and demand note payable approximate fair
value because of the immediate or short-term maturity of these financial
instruments.
F-22
<PAGE>
ENTELECHY, INC.
Notes to Financial Statements -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
3. Property and Equipment
Major classes of property and equipment, net, consist of the following:
December 31, 1997
------------------
Computer equipment ...................... $ 75,965
Office equipment and fixtures ........... 5,979
---------
81,944
Less: Accumulated depreciation .......... (50,447)
---------
$ 31,497
=========
Depreciation expense for the year ended December 31, 1997 amounted to
$26,154.
4. Demand Note Payable
The Company has a non-interest bearing demand note with a relative of a
Company stockholder. The face amount of the demand note is $150,000 and the
Company has discounted the face value of the note, using an implicit rate of
9%, to reflect an imputed interest expense over the period that the note is
expected to be outstanding. The unamortized discount at December 31, 1997 is
$1,117. Interest expense for the year ended December 31, 1997 was $12,768.
The demand note will automatically convert into 25,000 of IBS common stock
upon the consummation of IBS' contemplated initial public offering of its
common stock.
5. Commitments
The Company leases its premises under an arrangement with a third party in
which the Company provides certain consulting services to the lessor in return
for use of the facility. The fair values ascribed to the services and rent
approximate $18,000 per year. There is no commitment to fund minimum annual
rental payments under this leasing arrangement.
6. Related Party Transactions
During the year ended December 31, 1997, approximately $42,000 of the
Company's revenues were derived from IBS. At December 31, 1997, accounts
receivable included approximately $38,000 owed by IBS.
Salary expense for three company officers, who are also stockholders,
totalled $144,000 for the year ended December 31, 1997.
7. Major Clients
Three clients generated 41%, 25% and 11% (IBS) of the Company's revenues
for the year ended December 31, 1997.
F-23
<PAGE>
IBS INTERACTIVE, INC.
Pro Forma Unaudited Condensed Statement of Operations
For the Year Ended December 31, 1997
The accompanying pro forma unaudited condensed statement of operations for
the year ended December 31, 1997 is based upon the historical financial
statements of IBS Interactive, Inc. ("IBS") and Entelechy, Inc. ("Entelechy")
adjusted to give effect to the acquisition of Entelechy by IBS (accounted for
as a purchase), as if such acquisition had occurred on January 1, 1997. The
accompanying pro forma unaudited condensed balance sheet as of December 31,
1997, is based upon the historical financial statements of IBS and Entelechy,
adjusted to give effect to the acquisition of Entelechy by IBS, as if such
acquisition had occurred on December 31, 1997. The pro forma unaudited
condensed statement of operations and balance sheet data are not necessarily
indicative of the results that would have been obtained if the acquisition of
Entelechy by IBS had occurred on the date indicated or for any future period or
date. The pro forma unaudited adjustments give effect to available information
and assumptions that the Company believes are reasonable. The pro forma
unaudited condensed financial information should be read in conjunction with
the historical financial statements of IBS and Entelechy and notes thereto. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
<TABLE>
<CAPTION>
IBS Entelechy Eliminations &
Historical Historical Adjustments Pro Forma
---------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Revenues .................................... $2,741,000 $ 366,000 $ (42,000)(d) $3,065,000
Cost of Services ............................ 1,099,000 299,000 (42,000)(d) 1,356,000
---------- --------- ---------- ----------
Gross Profit ................................ 1,642,000 67,000 1,709,000
Selling, general and administrative ......... 1,296,000 115,000 1,411,000
Amortization of intangible assets ........... 12,000 156,000(a) 168,000
Compensation expense -- Entelechy ........... 197,000(b) 197,000
---------- --------- ---------- ----------
Operating income (loss) ..................... 334,000 (48,000) (353,000) (67,000)
Other expense, net .......................... (52,000) (13,000) (65,000)
---------- --------- ---------- ----------
Income (loss) before income taxes ........... 282,000 (61,000) (353,000) (132,000)
Income tax (provision) benefit .............. (84,000) 103,000(c) 19,000
---------- --------- ---------- ----------
Net income (loss) ........................... $ 198,000 $ (61,000) $ (250,000) $ (113,000)
========== ========= ========== ==========
</TABLE>
F-24
<PAGE>
IBS INTERACTIVE, INC.
Pro Forma Unaudited Condensed Balance Sheet
December 31, 1997
<TABLE>
<CAPTION>
IBS Entelechy Eliminations &
Historical Historical Adjustments Pro Forma
------------ ------------ ------------------- ------------
<S> <C> <C> <C> <C>
Cash ....................................... $ 95,000 $ 95,000
Accounts receivable, net ................... 1,636,000 $ 70,000 $ (38,000)(f) 1,668,000
Other current assets ....................... 50,000 50,000
---------- ----------
Total Current Assets ..................... 1,781,000 70,000 (38,000) 1,813,000
---------- ---------- ---------- ----------
Property and equipment ..................... 518,000 32,000 550,000
Intangible assets .......................... 56,000 -- 780,000(e) 836,000
Other non current assets ................... 96,000 96,000
---------- ----------
TOTAL ASSETS ............................. $2,451,000 $ 102,000 $ 742,000 $3,295,000
========== ========== ========== ==========
Notes payable, current ..................... $ 307,000 $ 149,000 $ 456,000
Capital lease obligations, current ......... 42,000 42,000
Other current liabilities .................. 865,000 63,000 $ (38,000)(f) 890,000
---------- ---------- ---------- ----------
1,214,000 212,000 (38,000) 1,388,000
---------- ---------- ---------- ----------
Non current liabilities .................... 98,000 98,000
---------- ----------
TOTAL LIABILITIES ........................ 1,312,000 212,000 1,486,000
---------- ---------- ----------
Stockholders' Equity (Deficit) ............. 1,139,000 (110,000) 780,000(e) 1,809,000
---------- ---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ................... $2,451,000 $ 102,000 $ 742,000 $3,295,000
========== ========== ========== ==========
</TABLE>
F-25
<PAGE>
Notes to Pro Forma Unaudited Condensed Financial Statements
Adjustments to reflect the acquisition of Entelechy by IBS, as if it had
occurred as of January 1, 1997, are as follows:
(a) Amortization of intangible assets arising from the acquisition
amounting to $156,000; such amount is amortized over an estimated useful
life of five years.
(b) Recognition of compensation expense related to the issuance of
contingent shares of IBS common stock on the first anniversary date of the
acquisition. The issuance of such shares is contingent upon the former
Entelechy stockholders remaining in the employ of IBS.
(c) Relates to a tax benefit (utilizing an effective tax rate of 40%)
recognized on adjustment (b) and a tax benefit recognized for the loss
generated by Entelechy during the year ended December 31, 1997. Entelechy
was recognized as an S Corporation for Federal and State income tax
purposes prior to the acquisition.
(d) Elimination of transactions between IBS and Entelechy.
Adjustments to reflect the Entelechy acquisition, as if it had occurred as
of December 31, 1997, are as follows:
(e) The value ascribed to Company shares issued ($670,000) plus the net
liability assumed ($110,000) resulted in an intangible asset of $780,000.
Entelechy's stockholders' deficit ($110,000) has been eliminated in
recording the acquisition.
(f) Elimination of December 31, 1997 balances between IBS and Entelechy.
F-26
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with this offering and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Company or the Underwriter. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any security
other than the securities offered by this Prospectus, or an offer to sell or a
solicitation of an offer to buy any securities by anyone in any jurisdiction in
which such offer or solicitation is not authorized or is unlawful. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information contained herein is
correct as of any time subsequent to the date hereof.
-------------------
TABLE OF CONTENTS
Page
---------
Prospectus Summary ....................... 3
Risk Factors ............................. 6
Use of Proceeds .......................... 14
Dilution ................................. 15
Dividend Policy .......................... 16
Capitalization ........................... 16
Selected Financial Data .................. 17
Management's Discussion and Analysis
of Financial Condition and Results of
Operations ............................ 18
Business ................................. 23
Management ............................... 32
Principal Stockholders ................... 36
Certain Transactions ..................... 37
Description of Securities ................ 38
Shares Eligible for Future Sale .......... 39
Underwriting ............................. 40
Legal Matters ............................ 41
Experts .................................. 41
Available Information .................... 42
Index to Financial Statements ............ F-1
--------------------
Until June 8, 1998 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This delivery requirement is in addition to the obligation of dealers to
deliver a Prospectus when acting as an underwriter and with respect to their
unsold allotments or subscriptions.
================================================================================
<PAGE>
================================================================================
[LOGO]
1,200,000 Shares
IBS INTERACTIVE, INC.
Common Stock
-----------------
Prospectus
-----------------
Whale Securities Co., L.P.
May 14, 1998
================================================================================
