<PAGE>
As filed with the Securities and Exchange Commission on June 1, 1999
Registration No. 333-72975
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FINANCIAL INTRANET, INC.
(Name of small business issuer in charter)
Nevada 7375 88-0357272
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) I.D. Number)
410 Saw Mill River Road
Ardsley NY 10502
(914) 693-5060
(Address and telephone number, of registrant's principal executive offices)
- --------------------------------------------------------------------------------
Michael Sheppard, President c/o
Financial Intranet, Inc.
410 Saw Mill River Road
Ardsley NY 10502
(914) 693-5060
(Address of principal place of business or intended principal place of business)
(Name, address and telephone number, of agent for service)
- --------------------------------------------------------------------------------
Please send a copy of all communications to:
Steven W. Schuster, Esq.
McLaughlin & Stern, LLP
260 Madison Avenue
New York, New York 10016
(212) 448-1100
Fax (212) 448-0066
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the registration statement becomes effective.
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 of the Securities Act, check
the following box /X/
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum
Title of Each Class of Security Amount Being Offering Price Per Aggregate Amount of
Being Registered Registered Unit/Share(1) Offering Price Registration Fee
------------------------------- ------------ ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Shares of common stock $.001 par value(2) ...... 4,444,444 $ 1.35 $6,000,000 $ 1,668.00
Shares of common stock underlying warrants(3)(4) 5,408,333 $ 1.35 $7,301,250 $ 2,028.13
Shares of common stock(4) ...................... 1,592,994 $ 1.35 $2,150,542 $ 597.85
Shares of common stock underlying convertible
promissory notes(3)(4) ..................... 5,175,000 $ 1.35 $6,986,250 $ 1,942.18
Total registration fee ......................... $ 6,236.16
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Securities being registered for sale by Financial Intranet.
(3) Pursuant to Rule 416 there are also being registered such additional shares
as may be issued as a result of the anti-dilution provisions of the warrants
and the convertible promissory notes.
(4) Securities being registered for resale only.
(5) $8,521.43 previously paid as the registration fee.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act or until the registration statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), may
determine.
<PAGE>
EXPLANATORY NOTE
This registration statement covers the primary offering of common stock by
Financial Intranet, Inc. and the offering of common stock by certain selling
securityholders. Financial Intranet is registering under the primary prospectus
4,444,444 shares of common stock for sale. The selling securityholders are
registering, under an alternate prospectus 5,408,333 shares of common stock
underlying certain warrants, 5,175,000 shares of common stock underlying certain
convertible promissory notes (including an additional 2,025,000 shares of common
stock being registered with respect to certain anti-dilution provisions of such
promissory notes), 1,555,000 shares of common stock previously issued and 37,994
shares of common stock which may be issued. The alternate prospectus pages,
which follow the primary prospectus, contain certain sections which are to be
combined with all of the sections contained in the primary prospectus, with the
exceptions of the front and back cover pages and the section entitled "The
Offering." Furthermore, all references contained in the alternate prospectus to
the "offering" shall refer to Financial Intranet's offering under the primary
prospectus.
ii
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FINANCIAL INTRANET INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
Item Caption Location
<S> <C> <C>
1. Forepart of Registration Statement and Outside Front
Cover Page of Page Prospectus..................................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Outside Pages of
Prospectus........................................................ Inside Front and Outside Back Cover
3. Summary Information and Risk Factors.............................. Prospectus Summary; Risk Factors
4. Use of Proceeds................................................... Use of Proceeds
5. Determination of Offering Price Factors........................... Plan of Distribution
6. Dilution.......................................................... Dilution
7. Selling securityholders........................................... Selling securityholders
8. Plan of Distribution.............................................. Plan of Distribution
9. Legal Proceedings................................................. Business
10. Directors, Executive Officers, Promoters and Control
Persons........................................................... Management
11. Security Ownership of Certain Beneficial Owners and
Management........................................................ Principal Stockholders
12. Description of Securities......................................... Description of Securities
13. Interest of Named Experts and Counsel............................. Legal Matters; Experts
14. Disclosure of Commission Position on Indemnification
for Securities Act................................................ Plan of Distribution--Indemnification
15. Organization Within Last Five Years............................... Business
16. Description of Business........................................... Business; Risk Factors; Financial Statements;
Selected Financial Data; Prospectus Summary; Use of
Proceeds
17. Management's Discussion and Analysis Discussion and or
Plan of Operation................................................. Management's Analysis of Financial Condition and
Results of Operation
18. Description of Property........................................... Business-Facilities
19. Certain Relationships and Related Transactions.................... Certain Transactions
20. Market for Common Equity and Related Matters...................... Market for Common Equity
21. Executive Compensation............................................ Management-Executive Compensation
22. Financial Statements.............................................. Financial Statements
23. Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure............................... Not Applicable
</TABLE>
iii
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not an offer to buy these securities in any
state where the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED June 1, 1999
PROSPECTUS
4,444,444 Shares of Common stock
Financial Intranet, Inc.
$1.35 per share
Financial Intranet, Inc. is directly offering 4,444,444 shares of
common stock. We are not required to sell any specific number or amount of
common stock. We will use our best efforts to sell the common stock offered
without discounts or selling commissions. We will receive a maximum of
$5,820,000 before expenses if we sell all 4,444,444 shares. Our common stock is
listed on the Nasdaq OTC Bulletin Board under the symbol "FNTN."
These are speculative securities and this investment involves a high
degree of risk. See "Risk Factors" beginning on page 6.
We will offer the common stock for a maximum of 6 months from the date
of this prospectus. The funds will not be placed in an escrow account. We will
keep the proceeds as shares of common stock are purchased.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
adequacy of the prospectus. Any representation to the contrary is a criminal
offense.
Selling securityholders are offering under an alternate prospectus
8,558,333 shares of common stock underlying warrants and convertible promissory
notes, 1,555,000 shares of common stock previously issued and 37,994 shares of
common stock which may be issued.
The Date of this Prospectus is , 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus summary ...............................................................2
Risk factors .....................................................................6
Use of proceeds .................................................................10
Capitalization ..................................................................11
Dilution ........................................................................12
Dividend policy .................................................................13
Management's discussion and analysis of
financial condition and results of
operations .....................................................................14
Business ........................................................................18
Management ......................................................................30
Certain transactions ............................................................35
Principal stockholders ..........................................................36
Selling securityholders .........................................................37
Description of securities .......................................................40
Shares eligible for future sale .................................................43
Plan of distribution ............................................................43
Legal matters ...................................................................44
Experts .........................................................................44
Financial statements ...........................................................F-1
</TABLE>
2
<PAGE>
PROSPECTUS SUMMARY
About Our Company
We are an emerging media and communications company providing
specialized services to the investment industry.
o We offer mutual funds and investment managers a private
intranet to distribute product information and training
materials to broker/dealers and financial advisors. The client
can transmit these materials through interactive video
teleconferences and the transmission of video-on-demand, text
and digitally stored documents.
o We provide broker/dealers and financial advisors with
communications services, including voice and data
transmission. We also provide value-added features, including:
o immediate access to information about mutual funds,
o video teleconferencing, and
o leads to potential customers who visit our web site.
o We maintain a web site at www.fntn.com for prospective
investors. The web site offers
o "chat rooms,"
o message boards,
o delayed quotes on securities prices,
o advanced charting of security performance,
o portfolio management tools,
o a searchable mutual fund data base, and
o a realtime searchable news database
We have a strategic relationship with Siemens Nixdorf
Informationssysteme Ges.m.b.H. Siemens has installed and manages our integrated
hardware and software system. We and Siemens have developed applications based
on Siemens' proprietary video-on-demand and data mining technology.
Our business strategy is to offer our services to the investment
industry throughout the United States.
Our principal executive office is located at 410 Saw Mill River Road,
Suite 2040, Ardsley, New York 10502. Our telephone number is (914) 973-5060.
3
<PAGE>
The Offering
<TABLE>
<S> <C>
Securities offered: 4,444,444 shares of common stock
Offering price: $1.35 per share of common stock.
The price is estimated at $1.35
for purposes of this preliminary
prospectus. The offering price
will equal the average of the
closing bid and asked prices per
share of common stock as listed
on the OTC Bulletin Board on the
trading date prior to the
commencement of the offering
under this prospectus.
Securities outstanding prior to the
offering: 23,624,292 shares
Securities outstanding after
offering: 36,665,063 shares. The number
assumes conversion of the
selling securityholders'
convertible promissory notes and
exercise of the selling
securityholders' warrants and
the issuance of certain
additional shares but assumes no
exercise of any other
outstanding options or warrants.
Risk factors: An investment in the common
stock is highly speculative and
involves substantial risks
including the risks of :
o limited operations
o projected losses
o limited number of products
o management's broad discretion
in the application of proceeds
o the possible need for additional financing
o competition.
Investors should carefully
consider the matters under the
caption "Risk Factors."
Use of proceeds: [6~Financial Intranet will receive
maximum net proceeds from its
sale of the common stock of
approximately $5,820,000. We
intend to use the net proceeds
approximately as follows:
o marketing and sales
o capital expenditures
o expansion of network architecture
o repayment of accounts payable
o research and development
o deposits with telecom carriers
o working capital.
OTC Bulletin Board symbol: FNTN
</TABLE>
4
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data as of December 31, 1997 and 1998 and March 31, 1998
and 1999 and for the fiscal years ended December 31, 1997 and 1998 and quarters
ended March 31, 1998 and 1999 have been derived from our audited and unaudited
consolidated financial statements, including the related notes, included
elsewhere in this prospectus. This financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Year Ended December 31 Quarter Ended March 31
1997 1998 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Statement of Operations Data:
Total revenue............................. $0 $ 89,169 $ 35,931 $ 6,741
Cost of revenue .......................... 0 163,033 14,156 23,341
Operating expenses........................ 817,280 2,065,976 265,731 597,318
Loss from operations...................... (817,280) (2,139,840) (243,956) (613,918)
Other expense............................. (150) (2,138) (723) (12,605)
Net loss.................................. (817,430) (2,141,978) (244,679) (626,523)
Net loss per common share................. (0.07) (0.12) (.02) (.03)
Weighted average shares outstanding....... 10,932,900 18,328,984 16,223,877 22,461,567
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- --------------
<S> <C> <C>
Balance Sheet Data:
Working capital (deficit)................. $ (667,438) $ (280,134)
Total assets............................ 1,413,148 1,464,070
Total long-term debt.................... 500,000 860,000
Total stockholders' equity................ 42,963 23,414
---------- -----------
</TABLE>
5
<PAGE>
RISK FACTORS
Investors can have difficulty evaluating our prospects because we recently
commenced business.
We began building our infrastructure and our research and development
for our intranet in February 1997 and offer a limited relevant operating
history. You should consider our prospects in light of the risks, expenses and
difficulties frequently encountered by new businesses in connection with the
marketing and sale of new products and services.
Our projected losses raise substantial doubt about our ability to continue as a
going concern unless we obtain financing or generate adequate revenues.
Unless we generate sufficient revenues or obtain financing through this
offering or another means, our operations in the development stage raise
substantial doubt about our ability to continue as a going concern. We had net
losses of $817,430 for the year ended December 31, 1997 and $2,141,978 for the
year ended December 31, 1998. We have had limited revenues since inception. We
had no revenues from inception through December 31, 1997. We had revenues of
$89,169 in 1998. We expect to incur up-front operating costs to expand our
marketing efforts, which may result in further losses. We will not be profitable
until we establish a broader customer base for our services and derive
substantial revenues from our sale of communications and intranet services.
Our profitability depends on the success of a limited number of products.
Our business may be adversely affected if we receive lower than
anticipated revenues from either of our two principal sources:
o communications services with value added features for
broker/dealers and financial advisors, and
o marketing services for mutual funds and other financial
product companies.
Telecommunications companies and others with greater resources and name
recognition could make it very difficult to compete.
Telecommunications companies and other distributors of financial
information are our most significant competitors. Many competitors have greater
financial, technical, marketing, sales and customer support and other resources.
Many competitors have reputations for successfully developing, licensing and
selling their products and technologies. Competitors may be able to undertake
more extensive marketing campaigns and adopt more aggressive pricing policies
than we. They may be able to add value-added services, similar to ours. In that
case, we may face significant price competition and reduced profit margins. We
may not be able to compete successfully with larger companies.
Reduced barriers to entry may increase competition.
Technological changes have lowered the cost of operating communications
and computer systems and purchasing software. These changes reduce our cost of
providing services but also facilitate increased competition by reducing
competitors' costs in providing similar services. Such competition could
increase price competition and reduce anticipated profit margins.
Our lack of patent or copyright protection may increase the difficulty of
protecting our rights to our technology.
We regard the technology we use as proprietary, but have no existing or
pending patent or copyright protection. Our success depends in part on our
ability to protect our technology and other intellectual property
6
<PAGE>
by relying on one or more of the following:
o confidentiality agreements with employees and third parties
o license agreements with consultants, vendors and customers
o trade secret laws
o trademark laws
o common law copyright
We have signed agreements with third parties who have access to our technology.
Despite such protections, a third party could copy or otherwise obtain and use
our products or technology, or develop similar technology independently. We may
be forced to litigate to protect our interests. Litigation of this type is
frequently expensive. We may not have the financial resources to pursue such
litigation. We cannot be assured of success without patent and copyright
protection.
Others may claim that we breached their patents or copyrights and prevent us
from using our technology.
While we consider our technology unique, others utilize similar
technologies. These companies may claim that we have breached their copyrights,
patents or proprietary rights. We may be forced to litigate these disputes. This
litigation, too, would be expensive with no assurance of success.
Our success may depend on our ability to obtain additional financing following
this offering.
We anticipate that the net proceeds from the sale of all of the shares
and income from operations will satisfy our financial requirements for at least
24 months following the date of this prospectus. We base this expectation on our
current operating plan. The plan is subject to change because of events within
and outside of our control. In the event of a change, we may require additional
financing sooner than anticipated. Opportunities such as an acquisition may
arise which may require additional financing. We may not be able to obtain
funding on a timely basis, on favorable terms, or at all. One selling
securityholder is obligated to purchase convertible promissory notes and
warrants for an additional $1,100,000 during the 10 months after the date of
this prospectus. Except for that selling securityholder, we do not have a credit
facility or any committed source of financing. Our business, financial condition
and results of operations will suffer if we are unable to obtain the financing
we need or generate sufficient funds from operations. Although we anticipate
that we will continue to offer our existing services to additional customers, we
may curtail our planned expansion and may be unable to fund ongoing operations.
The ability of our officers and principal shareholders to control our business
may limit minority shareholders' ability to influence corporate affairs.
As of May 27, 1999, Michael Sheppard, President, Maura Marx, Executive
Vice President and Ben B. Stein, a consultant, own approximately 22.5% of the
outstanding shares of our common stock. They would own 36.5% of the outstanding
shares of common stock if they exercised all their options with an exercise
price of $.19 per share prior to completion of this offering. They would own
24.5% of the outstanding shares of common stock if they exercised all their
options and we sold all 4,444,444 shares in this offering and the selling
securityholders exercised all their warrants and converted all their promissory
notes. The exercise of such options by Messrs. Sheppard and Stein and Ms. Marx
may enable them to elect our directors and determine our policies.
We depend upon certain key employees to develop and market our services.
Financial Intranet's success is highly dependent upon key members of
senior management who designed the services and are responsible for marketing
them. The efforts of Mr. Sheppard, our President, and Ms. Marx, our Executive
Vice President are particularly essential to our operations and growth.
Financial Intranet has employment agreements with Mr. Sheppard and Ms. Marx but
no key-man life insurance on any employees. Our
7
<PAGE>
future operations will also depend in part upon our ability to retain current
employees and to attract and retain additional qualified personnel. We may not
be able to attract and retain such personnel or, if we are able to do so, on
favorable terms.
Because our operations are dependent on the continued operation of our computer
equipment, any disruption to our computer system could adversely affect our
business.
Substantially all of our communications hardware and certain of our
computer hardware operations are located at our offices in Ardsley, New York.
Our system is vulnerable to damage from:
o fire,
o flood,
o power loss,
o telecommunications failures, and
o break-ins and similar events.
We do not have any secondary systems, although we intend to establish
such a system with the proceeds of a maximum offering. We believe that a total
system failure would not result in interruption of our business for more than
two weeks. We have a disaster recovery plan and carry business interruption
insurance. However, any significant failure in our services could cause
significant harm to our customer relations.
We may be vulnerable to attempts by unauthorized computer users to penetrate our
network security.
Someone may be able to misappropriate proprietary information or cause
interruptions in our services. We may need to expend significant capital and
resources to protect against the threat of such security breaches or to
alleviate problems caused by such breaches. In addition to security breaches,
inadvertent transmission of computer viruses could expose us to risk of loss or
litigation and possible liability.
We may become liable if information disseminated by our website violates any law
or the rights of a third party.
Content from our Web site is distributed to others. We may be subjected
to claims of negligence, copyright, patent or trademark infringement,
defamation, indecency and other claims. Such claims have been brought, sometimes
successfully, against Internet content distributors. Our disclaimers regarding
content provided by others and indemnification from content providers may prove
inadequate. In addition, we could be subjected to claims based upon the content
that is accessible from our Web site through links to other Web sites. We
maintain general liability insurance of $2,000,000 and are applying for errors
and omission insurance. Our insurance may not cover potential claims of this
type or may not be adequate to indemnify us for all liability that may be
imposed. Any liability not covered by insurance or in excess of insurance
coverage could adversely effect us.
Our potential issuance of shares upon the exercise of certain options or
conversion of promissory notes at prices below the offering price could reduce
the market price of our stock.
The purchase of our stock by these investors or their potential of
purchases at below market price may reduce the market price of our stock. We
have issued stock options, warrants and convertible notes to persons who
invested in us or provided goods, services or credit. These people have the
right to purchase up to 15,938,622 shares at various prices below that offered
in this prospectus.
The sale of shares by selling security holders at the same time that we sell
shares could reduce the market price of our stock.
This prospectus is part of a larger registration statement. The
registration statement contains a second prospectus which allows a number of
investors to sell up to 10,151,327 shares of stock. The selling security
8
<PAGE>
holders' sale of their shares may reduce the market price of our stock. Some of
the shares can only be offered after the investors have exercised warrants, but
the exercise prices of the warrants are below the market price of our stock.
The price of our stock may decrease as a result of sales under Rule 144.
6,079,570 shares of common stock held by present shareholders have not
been registered under the Securities Act of 1933. The stock can be sold under
Rule 144. Sales of substantial amounts of stock under Rule 144 could adversely
affect the market price of the shares and make it more difficult for us to sell
our stock in the future.
The failure of third party vendors to be year 2000 compliant could
adversely affect us.
We work with a number of sophisticated companies in the
telecommunications industry, including Siemens, MCI/Worldcom and Frontier, who
have certified that they are year 2000 compliant. However, entities with which
we transact business, including customers and vendors may suffer from the year
2000 problem. We cannot be certain their products or systems are year 2000
compliant. We cannot predict the effects of the year 2000 problem on such
entities or on the economy in general, or the resulting effects on us. We may
suffer interruptions or additional expense or lose revenue to the extent
customers or vendors are not compliant.
9
<PAGE>
USE OF PROCEEDS
The net proceeds which Financial Intranet will receive from the sale of its of
common stock, after deducting offering expenses of approximately $180,000, will
be $5,820,000. Financial Intranet intends to use the net proceeds as follows:
<TABLE>
<CAPTION>
Approximate
Application of Proceeds dollar amount Percentage
- ----------------------- ------------- ----------
<S> <C> <C>
Marketing and sales.......................................................................... $1,600,000 27.4%
Capital expenditures for equipment........................................................... 900,000 15.5%
Disaster recovery programs and expansion into other geographic markets....................... 750,000 12.9%
Expand network architecture for switching and
installation of cabling to customers..................................................... 700,000 12.0%
Payment of past due accounts payable......................................................... 670,000 11.5%
Research and development of additional product and
software development tools................................................................. 500,000 8.6%
Deposits with telecom carriers who provide communications
services that we resell ................................................................... 150,000 2.6%
Working capital, primarily general and administrative expenses............................... 550,000 9.5%
Total $5,820,000 100.0%
========== ======
</TABLE>
If gross proceeds from this offering are $1,000,000 or less, we will
spend approximately 90% of the proceeds on marketing and sales and approximately
10% on payment of past due accounts payable. We will spend approximately
$1,600,000 from the proceeds of a maximum offering on marketing and sales.
Expenditures for marketing and sales will include advertising, brand marketing,
trade shows, product catalogs, public relations and the hiring of additional
sales and marketing personnel. If we receive gross proceeds of more than
$1,000,000 but less than the maximum amount, we anticipate applying the proceeds
to all of the items except for implementation of a second data center to
facilitate our expansion outside the United States.
Our allocation of net proceeds represents our best estimate based upon
present plans. Financial Intranet may reallocate some of the proceeds if our
plans change. We have broad discretion as to the application of a significant
portion of the net proceeds without having to seek the approval of the investors
in this offering. Future events may cause us to reallocate our resources,
including cash, for uses not presently contemplated by us.
Selling commissions of up to $600,000 and non-accountable expense
allowances of up to $180,000 may be deducted from the proceeds and a
reallocation would occur if any broker/dealers participate in the offering.
Financial Intranet believes that the net proceeds from its offering
and revenues generated by planned operations will satisfy our working capital
needs for the next 24 months. However, Financial Intranet may require additional
financing to expand its business. We will require additional financing for any
acquisitions and do not know the means or terms of financing any acquisition or
whether such financing would be available on acceptable terms. We have no
commitments or understandings for any acquisitions.
Financial Intranet expects to receive $1,100,000 over the next 10
months as agreed upon by the purchaser of convertible promissory notes and
warrants in February 1999. If we receive minimal proceeds from this offering, we
anticipate using $300,000 of such investment for marketing and sales and the
balance for working capital. Financial Intranet can't predict the amount or
potential source of other funds and has no current other commitments
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<PAGE>
to obtain such funds. We can't be assured of obtaining additional financing on
acceptable terms when needed.
CAPITALIZATION
The following table shows our capitalization as of March 31, 1999. The
information below should be read in conjunction with the other financial
information contained elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
----------------
<S> <C>
Total short-term debt including current maturities of long-term debt....................... $ -0-
Total long-term debt, less current maturities.............................................. 860,000
Stockholders's equity:..................................................................... 23,414
-----------
Common stock, $.001 par value; 50,000,000 shares authorized; 22,713,181 shares
outstanding.......................................................................... 22,713
-----------
Paid in capital....................................................................... 4,221,454
Deferred compensation cost............................................................ (600,323)
Accumulated deficit during the development stage........................................ (3,620,430)
-----------
Total stockholder's equity................................................................. $23,414
-----------
</TABLE>
11
<PAGE>
DILUTION
Purchasers of the shares of Financial Intranet will experience an
immediate and substantial dilution in the net tangible book value per share of
their investment. As of March 31, 1999, Financial Intranet had an aggregate
of 22,713,181 shares of common stock outstanding and a net tangible book value
of $(281,589) or $(.01) per share of common stock. See the March 31, 1999
financial statements. "Net Tangible Book Value Per Share" represents the total
amount of Financial Intranet's tangible assets, less the total amount of its
liabilities, divided by the total number of shares of common stock outstanding.
Our proforma net tangible book value would be $.20 per share after
giving effect to our sale of 4,444,444 shares at the offering price of $1.35 per
share of common stock. This amount represents an immediate dilution of
approximately $1.15 per share of common stock to new investors. At the same
time, it represents an immediate increase of $.29 per share of common stock to
stockholders. Dilution is defined as the difference between the attributed price
per share of common stock to purchasers in Financial Intranet's offering and the
proforma net tangible book value per share of common stock as of March 31, 1999.
The increase is defined as the difference between the proforma net tangible book
value per share of common stock as of March 31, 1999 and the proforma net
tangible book value per share of common stock as of March 31, 1999 after giving
effect to the issuance of 10,151,327 shares of common stock. Such increase to
current stockholders is solely attributable to the cash price paid by purchasers
of the common stock offered for sale by Financial Intranet.
The following table illustrates the per share dilution as of March 31, 1999:
<TABLE>
<S> <C>
Public offering price per share $1.35
-----
Net proforma tangible book value per share before giving $(.01)
effect to Financial Intranet's offering
Increase per share attributable to the net proceeds of
the sale of 4,444,444 shares of common stock
offered by Financial Intranet $ .20
Proforma net tangible book value per share as of
March 31, 1999 reflecting Financial Intranet's offering $ .28
Dilution per share to purchasers in Financial Intranet's offering $1.07
</TABLE>
In order to make these calculations, we included the following:
o 5,408,333 shares of common stock issuable upon exercise of
the warrants issued to selling securityholders;
o 3,150,000 shares of common stock issuable upon conversion of
the selling securityholders' convertible promissory notes;
o 1,555,000 shares of common stock issued to the selling
securityholders; and
o 37,994 shares of common stock which may be issued to the
selling securityholders.
We excluded the following:
o 858,442 shares of common stock issuable upon exercise of
outstanding stock options and warrants at exercise prices
from $.18 to $1.20 per share;
o 5,202,162 shares of common stock issuable upon exercise of
options at an exercise price of $.19 per share; or
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o shares that may be issuable pursuant to anti-dilution
provisions and market price protection provisions of certain
securities.
The following table sets forth, as of March 31, 1999, a comparison
of the number of shares of common stock acquired by current stockholders, the
total consideration paid for such shares of common stock and the average price
per share paid by current stockholders of common stock and to be paid by the
prospective purchasers of the shares of common stock offered for sale by
Financial Intranet. The calculations are based upon the anticipated public
offering price of $1.35 per share of common stock, before deducting estimated
offering expenses.
<TABLE>
<CAPTION>
Common stock Acquired Total Consideration
--------------------- -------------------
Number Percent Amount Percent Average Price Per Share
------ ------- ------ ------- -----------------------
<S> <C> <C> <C> <C> <C>
Current Stockholders: 22,713,181 83.6% $4,244,167 41.4% $ .187
New Investors: 4,444,444 16.4% 6,000,000 58.6% 1.35
Total: 27,157,625 100% $10,244,167 100% $ .377
</TABLE>
DIVIDEND POLICY
Financial Intranet has not paid and does not anticipate paying any dividends on
its common stock in the foreseeable future. Financial Intranet currently intends
to retain all working capital and earnings, if any, to finance its business
operations and expansion. The payment of any cash dividends will be at the
discretion of the board of directors and will be dependent upon Financial
Intranet's results of operations, financial condition, capital requirements,
contractual restrictions and other factors deemed relevant by the board of
directors.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes included elsewhere in this prospectus.
Results of Operations:
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Revenue
Our principal source of revenue was income from the resale of telephone and data
communication. Revenue for the year ended December 31, 1998 were $89,169 as
compared with no revenue in the prior year. Financial Intranet is a development
stage company and in 1997 had not commenced operations. We expect to derive
growth in revenues primarily through increased volume of communications usage
sold.
Cost of Revenue
Financial Intranet's cost of revenue consists primarily of telephone
communications lines and the internet access and hosting expenses required to
support and deliver Financial Intranet's communications services. Cost of
revenues for the year ended December 31, 1998 was $163,033 compared with no
costs in the prior year. We expect cost of revenues to increase in direct
relationship to the future revenues anticipated from increases in usage volume.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of commissions to our sales force
and promotional, advertising and public relations costs. Sales and marketing
expenses decreased 10% from $55,794 in 1997 to $50,246 in 1998. Lower
advertising and promotion costs were partially offset by commission expenses
paid to Financial Intranet's sales force which did not exist in 1997. We expect
sales and marketing expenses to increase due to the growth of the sales force as
well as the increased advertising and promotional activities.
General and Administrative Expenses
General and administrative expenses consist primarily of
o employee compensation and related expenses (including
payroll taxes and benefits) for executive, administrative
and operations personnel
o licensing, legal and other professional fees
o travel and entertainment o facility and office-related costs
such as rent insurance and telephone.
These costs increased 32% from $748,214 in 1997 to $988,509 in 1998 principally
due to increased payroll and office costs, as well as higher legal fees and a
$41,200 reserve for the potential uncollectibility of a long-term note
receivable. Included in these 1998 costs are $90,626 in non-cash issuance of
common stock to outside consultants in lieu of services performed. Management
expects general and administrative expenses to increase in future periods to
support the growth of the business.
Other Financing-related Expenses
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<PAGE>
Other financing-related expenses charged to operations consists of certain
non-cash costs of the issuance of common stock, warrants and stock options.
These expenses increased from $13,272 in 1997 to $897,808 in 1998.
Depreciation and Amortization
Depreciation and amortization consists primarily of depreciation of computer
equipment and amortization of software development costs. These activities were
effectively placed in service in 1998. No depreciation and amortization costs
existed in 1997. The 1998 expenses were $129,413 which represents a half year of
depreciation and amortization.
Other Income and Expense
Other income consists principally of interest from loans and notes receivable
and dividends from short-term investments. Interest and other income increased
67% from $2,475 for the year ended December 31, 1997 to $4,140 for the year
ended December 31, 1998. Interest expense consists of interest accrued on loans
and notes payable to officers. Interest expense more than doubled from $2,675
for the year ended December 31, 1997 to $6,278 for the year ended December 31,
1998.
Income Taxes
No provision for federal and state income taxes has been recorded as Financial
Intranet incurred net operating losses in both 1997 and 1998. Financial Intranet
had approximately $634,000 of net operating loss carryforwards for federal
income tax purposes as of December 31, 1997. We have not determined the net
operating loss carryforward as of December 31, 1998 because we have not filed
our tax returns for such period. The net operating loss will be available to
offset future taxable income. Given Financial Intranet's limited operating
history, losses incurred to date and the difficulty in accurately forecasting
Financial Intranet's future results, management does not believe that the
realization of the potential future benefits of these carryforwards meets the
criteria for recognition of a deferred tax asset required by generally accepted
accounting principles and, accordingly, a full 100% valuation allowance has been
provided.
Quarter Ended March 31, 1999 Compared with Quarter Ended March 31, 1998
(unaudited)
Revenue
Our principal source of revenue was income from the resale of telephone and data
communication. Revenue for the quarter ended March 31, 1999 were $6,741 after a
deduction for credits of $3,200 issued to a customer, as compared with $35,931
in the prior year. The lower revenue is a timing difference attributable to
switching telecommunications carriers during the quarter ended March 31, 1999.
This revenue will be billed in the second quarter.
Cost of Revenue
Financial Intranet's cost of revenue consists primarily of telephone
communications lines and internet access costs required to support and deliver
Financial Intranet's communications services. Cost of revenues for the quarter
ended March 31, 1999 was $23,341 compared with $14,156 in the prior year. We
expect cost of revenues to increase in direct relationship to the future
revenues anticipated from increases in usage volume.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of commissions to our sales force
and promotional, advertising and public relations costs. Sales and marketing
expenses increased 76% from $23,139 in 1998 to $40,745 in 1999. Web advertising
costs, partially offset by lower commissions paid to Financial Intranet's sales
force, primarily accounted for the increase. We expect sales and marketing
expenses to increase due to the growth of the sales force as well as the
increased advertising and promotional activities.
General and Administrative Expenses
General and administrative expenses consist primarily of
o employee compensation and related expenses (including payroll taxes
and benefits) for executive, administrative and operations personnel
o licensing, legal and other professional fees
o travel and entertainment
o facility and office-related costs such as rent, insurance and
telephone.
These costs increased 18% from $226,043 in 1998 to $265,668 in 1999 principally
due to increased legal and professional fees for the public offering
registration. Management expects general and administrative expenses to increase
in future periods to support the growth of the business.
Other Financing-related Expenses
Other financing-related expenses charged to operations consist of certain
non-cash costs of the issuance of common stock, warrants and stock options.
These expenses increased from $13,704 in 1998 to $224,436 in 1999.
Depreciation and Amortization
Depreciation and amortization consists primarily of depreciation of computer
equipment and amortization of software development costs. Software development
costs of $2,845 were amortized in 1998. No depreciation was taken in the first
quarter of 1998 because the equipment had not yet been placed in service. The
1999 first quarter expenses were $66,469, which consisted of $42,259 in
depreciation and $24,210 in amortization.
Other Income and Expense
Other income consists principally of interest from loans, notes receivable and
short-term investments. Interest and other income increased from $ 390 for the
quarter ended March 31, 1998 to $1,633 for the quarter ended March 31,1999.
Interest expense consists of interest accrued on loans and convertible notes
payable. Interest expense increased from $1,113 for the quarter ended March 31,
1998 to $14,238 for the quarter ended March 31, 1999.
Income Taxes
No provision for federal and state income taxes has been recorded as Financial
Intranet incurred net operating losses in both the first quarters of 1998 and
1999. The net operating losses will be available to offset future taxable
income. Given Financial Intranet's limited operating history, losses incurred to
date and the difficulty in accurately forecasting Financial Intranet's future
results, management does not believe that the realization of the potential
future benefits of these carryforwards meets the criteria for recognition of a
deferred tax asset required by generally accepted accounting principles and,
accordingly, a full 100% valuation allowance has been provided.
Liquidity and Capital Resources
We had balances of $228,032 and $149,225 in cash and cash equivalents at
March 31, 1999 and December 31, 1998, respectively.
Financial Intranet had negative working capital of $(667,438) at December 31,
1998. Net cash used in operating activities was $453,786 for the year ended
December 31, 1998. Cash used in operating activities was primarily attributable
to a net loss of $2,141,978 partially offset by non-cash items such as
depreciation and amortization of $129,413, stock compensation costs of $897,808,
as well as positive changes in working capital. Net cash used in operating
activities for the year ended December 31, 1997 was $533,042 which was
principally due to the net loss of $817,430, partially offset by $159,290 in
consulting services paid by issuance of common stock and positive changes in
working capital.
Financial Intranet had negative working capital of $(280,134) at March 31, 1999.
Net cash used in operating activities was $437,707 for the quarter ended March
31, 1999. Cash used in operating activities was primarily attributable to a net
loss of $626,523 and negative changes in working capital. This was partially
offset by non-cash items such as depreciation and amortization of
$66,469 and stock compensation costs of $224,436. Net cash provided by
operating activities for the quarter ended March 31, 1998 was $379,651, which
was principally due to the net loss of $244,679 being more than offset by
positive changes in working capital.
Net cash used in investing activities of $859,343 for the year ended December
31, 1998 was primarily attributable to capital expenditures of $833,128 and
capitalized software development costs of $41,551, partially offset by a
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<PAGE>
$15,336 loan repayment from an officer. Net cash used in investing activities of
$365,597 for the year ended December 31, 1997 was due to $235,712 in capital
equipment acquired, $68,275 in software development costs, $20,410 in loans
advanced to an officer and notes receivable advances of $41,200.
Net cash used in investing activities of $15,618 for the quarter ended March
31, 1999 was primarily attributable to capital expenditures of $20,692. Net
cash used in investing activities of $486,081 for the quarter ended March 31,
1998 was entirely due to capital equipment acquired.
Net cash provided by financing activities for the year ended December 31, 1998
was $1,460,425 and consisted of proceeds from the issuance of common stock and
convertible promissory notes, less related financing costs and a $47,250
repayment of a vendor loan. Net cash provided by financing activities for the
year ended December 31, 1997 was $900,466, and consisted of proceeds from the
issuance of common stock, less related financing fees, and proceeds from a
vendor loan, which was repaid during 1998.
Net cash provided by financing activities for the quarter ended March 31, 1999
was $532,132 and consisted of proceeds from the issuance of convertible
promissory notes, less related financing costs and repayments to an officer. Net
cash provided by financing activities for the quarter ended March 31, 1998 was
$104,501, and consisted of proceeds from the issuance of common stock, less
related financing fees and repayments to an officer.
We believe that the cash proceeds from the offering, together with existing
private placement arrangements, will be sufficient to meet anticipated cash
requirements because Financial Intranet does not expect to generate positive
cash flow from operations until the second quarter of the year 2000. However,
unless Financial Intranet generates significant revenue or obtains financing
through this offering or another means in the near future, Financial Intranet's
operations in the development stage raise substantial doubt about its ability to
continue as a going concern. We have the right to demand payment of $1,100,000
from the investor in a private placement in four installments during the 10
months following the date this prospectus becomes effective. There can be no
assurance that additional capital beyond the amounts currently forecasted by
Financial Intranet will not be required, nor that any such required additional
capital will be available on reasonable terms, if at all, at such time as
required by Financial Intranet.
We anticipate that we can continue to provide the services that we currently
offer to more customers without any proceeds from this offering. We believe that
revenues from operations and the $1,100,000 which the investor in a private
placement has agreed to provide us during the 10 months following the date of
this prospectus will enable us to conduct our business. The proceeds of this
offering will enable us to accelerate our intended expansion, although there can
be no assurance. In addition, without all of the proceeds of this offering or
financing from another source, we will not implement the disaster recovery
program mentioned in our use of proceeds.
Financial Intranet has satisfied its cash requirements primarily through
revenue, private placements of common stock, warrants and debentures convertible
into shares of common stock, as well as the issuance of common stock in lieu of
payment for services. Also, officers have loaned Financial Intranet funds as
needed to provide working capital.
On May 20, 1998, Financial Intranet issued a 6% convertible debenture in the
principal amount of $500,000. The entire principal amount of the debenture and
all accrued interest was converted into an aggregate of 1,070,800 shares of
common stock.
On June 5, 1998, Financial Intranet issued a 12% convertible promissory note in
the principal amount of $500,000. The entire principal amount of this promissory
note and all accrued interest was converted into 1,237,666 shares of common
stock.
On December 31, 1998, Financial Intranet issued a 7% convertible promissory note
in the principal amount of $500,000 with a maturity date of December 31, 2001.
In conjunction with the issuance of the note, Financial Intranet issued warrants
to purchase 1,250,000 shares of common stock for $0.60 per share. The shares
issuable upon conversion of the promissory note and exercise of the warrant are
being registered pursuant the registration statement of which this prospectus is
a part.
There can be no assurance that the warrants will be exercised or the note
converted.
On February 8, 1999, Financial Intranet issued a 7% convertible promissory note
in the principal amount of $600,000. The principal amount of $240,000 was
converted to common stock on March 10, 1999 and the balance of $360,000 was
converted to common stock on May 14, 1999. Financial Intranet also issued
warrants to purchase 1,500,000 shares of Common stock for $0.40 per share. We
have the right to demand that the investor purchase, for $1,100,000, additional
convertible promissory notes and warrants to purchase 1,833,333 shares of Common
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<PAGE>
stock. We can demand this amount over 10 months from the date of this
prospectus. The promissory notes will bear interest at the rate of 7% per annum.
Financial Intranet anticipates using the proceeds of the additional promissory
notes for working capital. The shares issuable upon conversion of the promissory
note and exercise of the warrant are being registered pursuant the registration
statement of which this prospectus is a part. There can be no assurance that the
warrants will be exercised or the note converted.
From time to time, officers have loaned Financial Intranet funds as needed to
provide working capital. Financial Intranet issued three outstanding notes in
favor of Ben B. Stein, a principal shareholder, consultant and former officer
and director. The original principal amount of the notes was $60,889. Mr. Stein
agreed on March 3, 1999 to apply the outstanding principal amount of the notes
and all accrued interest to the exercise of options in lieu of a cash payment by
Financial Intranet. The Company no longer has any obligations to Mr. Stein.
We have an outstanding note in favor of Michael Sheppard for $36,115 due on
demand. The promissory note bears interest at 8% per annum.
Year 2000 Compliance
The year 2000 problem is the result of a widespread programming technique that
causes computer systems to identify a date based on the last two numbers of a
year, with the assumption that the first two numbers of the year are "19." As a
result, the year 2000 would be stored as "00," causing computers to incorrectly
interpret the year as 1900. Left uncorrected, the year 2000 problem may cause
information technology systems (e.g. computer databases) and non-information
systems (e.g. elevators) to produce incorrect data or cease operating
completely.
We have received confirmation from Siemens, which installed and manages our
hardware and software systems, that they are year 2000 compliant. Financial
Intranet uses recent releases of software applications and operational programs
that are certified by the manufacturers to be year 2000 compliant. We have not
incurred material costs to become year 2000 compliant. Financial Intranet has
contingency plans to deal with unanticipated year 2000 problems including
backing up its data base and financial and accounting records.
Financial Intranet has been advised by its telecommunications providers and
providers of information services on its Website and other significant vendors
that they are year 2000 compliant and that they have contingency plans in place.
At this time, Financial Intranet fully expects to be year 2000 compliant and
believes that its providers and its significant vendors have taken, or are
taking, the steps necessary to be in compliance by the year 2000. We believe we
can quickly switch to other vendors from any who are not year 2000 compliant and
that we will not incur prolonged disruption to our business. Nevertheless,
uncertainties remain about the affect on Financial Intranet of third parties who
are not year 2000 compliant. The business of Financial Intranet could be
adversely affected should Financial Intranet or other entities with whom
Financial Intranet does business be unsuccessful in completing critical
modifications in a timely manner.
Forward-looking statements in this prospectus may prove to be materially
inaccurate.
In addition to historical information, this prospectus contains
forward-looking information that involves risks and uncertainties. The words
"may," "will," "expect," "anticipate," "continue," "estimate," "project,"
"intend" and similar expressions are intended to identify forward-looking
statements. Actual results may differ materially from those included within the
forward-looking statements as a result of certain factors, including the risks
described above and elsewhere in this prospectus.
17
<PAGE>
BUSINESS
Introduction
Financial Intranet, Inc. is an emerging New York based media and communications
company which delivers services to the investment community. Financial
Intranet's initial objectives are to obtain a share of the telephony resale
market by offering value-added services to broker/dealers and financial advisors
and providing mutual funds and other investment managers with a cost-efficient
method for distributing information about their products.
To accomplish these goals, Financial Intranet and its technology partners have
developed a secure intranet capable of delivering high quality narrow-band
video-on-demand. We currently resell telecommunications services to
broker/dealers. Broker/dealers and financial advisors who are subscribers of
Financial Intranet can now use the same communications lines for the
transmission of voice, video and text data. Mutual funds and futures traders
have begun using our intranet to provide product information to broker/dealers
using video, text and graphics and to distribute their documentation. We believe
that the mutual funds and futures dealers can distribute their documentation via
our intranet at lower cost than printing and physically distributing the same
materials. Financial Intranet intends to offer its network to deliver continuing
education courses on series and ethics material to broker/dealers on an ongoing
basis.
Our web site also offers financial information to individuals .These individuals
provide historical information about their investment practices which we collect
and analyze. If the individuals consent, we provide this information to
broker/dealers who specialize in the sectors in which the individual expressed
an interest. These broker/dealers are subscribers to our communications
services. We will use the generation of leads as a marketing tool to sell
communication services to broker/dealers. Revenues will be generated both by the
resale of telecommunications services bundled with value-added services to
subscribing broker/dealers and from fees from mutual funds for the use of
Financial Intranet's network and access to its subscribers.
The technology underlying Financial Intranet's high-speed intranet,
video-on-demand service and data mining capability was developed by Financial
Intranet in association with Siemens. Financial Intranet has signed agreements
creating a strategic alliance with a number of Siemens companies.
History of Financial Intranet
Financial Intranet was incorporated in 1993 as Alexis and Co. in the State of
Nevada. We changed our name to Wee Wees Inc. and thereafter, on December 17,
1996 to Financial Intranet, Inc. upon the purchase of a controlling interest by
Ben B. Stein. Prior to that date, Financial Intranet had not conducted any
business.
We received our reseller certificate from the Federal Communication Commission
in 1997 to provide international telecommunications services originating in the
United States. Upon the effective date of a tariff in 1997, Financial Intranet
also became authorized to provide domestic interstate telecommunications
services in accordance with its tariffs. Financial Intranet is also authorized
to offer intrastate telephone services in New York, Texas, California, Florida,
New Jersey, Connecticut and Colorado. We offer interstate and intrastate long
distance service at this time. In June 1997, Financial Intranet entered into an
agreement with MCI/WorldCom to resell communications services to end users.
Financial Intranet entered into our first contracts with Siemens in July 1997 to
provide hardware and assist in developing technology for its intranet. In
October 1997, Financial Intranet began providing communications services to
broker/dealers. In April 1999, we signed an agreement with Frontier
Communications to resell communication services to end users. Financial Intranet
derived its 1998 revenues from the resale of communications services to
approximately 20 broker/dealers.
We launched our web site in July 1998. Financial Intranet began delivering
video-on-demand on our web site in 1998. We began using data mining software to
take the information gathered on the website and
18
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generate live customer leads for broker/dealers in 1998. We added chat rooms and
message boards in January 1999.
An investor has agreed to invest $1,100,000 over the next 10 months under the
terms of a private placement in February 1999. We will use the proceeds from
such investor to expand our operations . The proceeds of this offering will be
used to accelerate the expansion of services that we currently offer.
Markets
Financial Intranet targets three groups in the investment industry :
Mutual funds and other providers of investment products
Mutual funds need to deliver product information and increase their exposure to
potential investors. Approximately 7,000 mutual funds were being offered to
investors according to a Reuters article entitled "More Mutual Funds Turning to
Outside Management" dated April 23, 1999. If a broker/dealer is to market a
fund's products, that fund must provide it with sales information, including a
current prospectus. The broker/dealer and its registered representatives must
review the prospectus and the fund's rate of return history and sign a selling
agreement with the fund before they can solicit or offer the product to the
public. Moreover, funds may desire to provide this information in a compelling
manner to attract the interest of broker/dealers and their registered
representatives and distinguish the fund from its competitors.
Historically, mutual funds provide information to broker/dealers and their
registered representatives by mass mailings of printed material, such as
prospectuses, sales aids and charts. Funds also utilize wholesalers to introduce
the mutual funds to broker/dealers. According to the July 1996 issue of Research
Magazine Online, approximately 5,000 wholesalers sold mutual funds in 1996. Fund
managers have advised us in interviews that reaching a large group of
broker/dealers and their registered representatives and distributing
documentation is expensive and can be a particular burden for smaller funds
without large marketing budgets. Fund managers said they needed a more effective
and economic way to inform a wider range of broker/dealers to increase the
percentage of closed sales to prospective investors.
We offer an alternative to using mailings and wholesalers. Using our high speed
secure intranet, a fund can distribute to our subscribers
o plain text,
o graphics,
o digitally stored documents such as prospectuses, and
o video content.
Financial Intranet believes this method of distribution will appeal to
broker/dealers and their registered representatives who will have immediate
access to fund information without having to leave their trading screen. A
broker can listen to audio or view a video or digitally stored document in a
window while still following real-time trading information. The advantage to the
broker is more information available at his convenience in his office and more
product to sell in a user-friendly format.
We target various providers of investment products. Financial Intranet offers
services to
o mutual funds,
o insurance companies,
o commodity trading advisors,
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o commodity pool operators,
o banks, and
o other investment product creators.
Mutual funds can use a variety of our services.
The network allows mutual funds to
o deliver pre-recorded information on their products and
educational video content. We deliver the service using our
point to point video-on-demand capability . We are producing
content. Funds from this offering will enable us to broaden
this service by allowing us to develop more content.
o deliver interactive training and support. We deliver the
service through point to multi-point live video
teleconferencing. Mutual funds can answer questions about
the features of their products. We offer this feature on a
trial basis. The rate at which we increase its availability
depends on the availability of funds.
o distribute sales material. Simple text, graphics or
digitally stored documents can be viewed on screen or
printed by the recipient. Financial Intranet is currently
digitalizing documents, provided by our customers for
transmission over the network. The proceeds of this offering
will enable us to more rapidly expand our ability to
digitalize documents for distribution.
Three mutual funds use our network to advertise their products.
Financial Intranet is working with these funds to develop the materials which
can be disseminated. Financial Intranet expects that as more broker/dealers
purchase its communication services and participate on its intranet, mutual
funds and other investment managers will pay Financial Intranet to distribute
information about their products.
Broker/dealers and financial advisors
Selling communications services to broker/dealers will be a
significant portion of our business. Telecommunications represent one of the
largest recurring expenses to broker/dealers and financial advisors. There were
5,553 NASD member firms and 309 New York Stock Exchange member firms doing a
public business in 1996 according to the Nasdaq stock market company directory,
1997 edition. The NYSE member firms spent approximately $3,100,000,000 on
communications in 1996, a 50% increase from 1985.
Financial Intranet provides discount, long-distance telephony to
subscribers. We plan to enter the local resale market. Financial Intranet's
reseller agreements with MCI WorldCom Inc. and Frontier Corp. allow it to
utilize those companies' communication infrastructures while incurring little
up-front installation and maintenance costs. We believe that one appeal of our
service is its ability to utilize any channel in our network for the
transmission of voice, video, text and digitally stored documents as and when
needed.
Value-added services at no additional cost are intended to make our
communications services more attractive. Financial Intranet provides
broker/dealers and financial advisors value-added services in addition to the
technical enhancements to basic communication services. We generate live
consumer leads. Financial Intranet developed a web site accessible to
individuals. Individuals may "register" by completing a questionnaire and
consenting to specified limited use of the information. In exchange for
registration, the individual may receive a reward and access to the other
features on our web site. We currently provide a 20 minute pre-paid phone card
as a reward. Financial Intranet keeps track of the products in which each
visitor to its web site shows an interest. The information gathered from each
investor is analyzed using our data mining technology, and the name and profile
of a consenting individual is given to one broker/dealer or financial advisor
operating in that person's geographical area or area of interest. The
broker/dealer or financial advisor benefits from the possible sale of products
and the opportunity to develop a relationship with the individual.
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We reviewed the first 500 questionnaires completed at our web site. Of
the individuals responding:
o 95% claim to do a substantial amount of research regarding
investment opportunities;
o 92% have a brokerage account;
o approximately half execute trades through their broker;
o 87% trade at least once a month, the majority trading either
weekly or monthly;
o 67% earn over $50,000 per year; 20% earn over $100,000 per
year;
o 90% reside in the United States; 8% reside in Europe; 2%
reside elsewhere.
Financial Intranet believes that many of these individuals are potential
customers for our subscribing broker/dealers and financial advisors based on the
response to the questionnaires. Financial Intranet can also assist
broker/dealers by using the network to provide the various sales application
forms on-line to the registered representatives.
Broker/dealers and financial advisors are currently offered two levels of
access, informational access and interactive access. Interactive access allows
broker/dealers and financial advisors to schedule video conferences. Information
access provides video-on-demand and news. Delayed quotes on securities prices
are available for no additional charge on our web site. We recognize that
broker\dealers require real time quotes. Real time quotes and financial data are
available through Financial Intranet's co-marketing agreement with S&P Comstock
for an additional charge. We could provide real time quotes directly if we
construct a second data center with the proceeds of a maximum offering. The
second data center will afford us sufficient redundancy in our hardware to
improve our reliability if our primary data center sustains a disruption.
Financial Intranet also offers links to broker/dealer web sites.
We have begun to offer broker/dealers and financial advisors training on mutual
funds and other investment products using video-on-demand, plain text and
digitally-stored documents which can be viewed or read at the recipient's
location. The information can be updated as needed by the provider of the
product. Financial Intranet's network now has the capability to offer
video-on-demand but its growth is limited by a lack of content. We are
developing content for the video on demand. The development of content can be
accelerated with the receipt of additional funding from this offering. Training
will also be available through point to multi-point (e.g. mutual fund to
broker/dealers) through live interactive video teleconferencing. This live
interchange allows broker/dealers to ask questions about the fund or other
product.
Financial Intranet expects that brokerage firms will utilize its network to help
them fulfill their continuing education requirement for the NASD. Financial
Intranet intends to offer broker/dealers the ability to obtain education and
training materials for examinations administered by the NASD through the
presentation of courses via video-on-demand at the broker/dealer's trading
terminal or personal computer. We do not expect to offer this service unless we
complete the maximum offering or obtain financing from another source.
Individual investors
Individual investors have access to Financial Intranet's web site. The web site
offers
o delayed quotes on securities prices,
o advanced, customizable charting,
o portfolio management ,
o video-on-demand library,
o a searchable mutual fund database,
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o "chat rooms,"
o message boards, and
o a real time searchable news data base .
The number of "hits" per day on Financial Intranet's web site increased from
approximately 13,000 to 85,000 since we began the chat rooms in January 1999.
We make the names of certain registrants available to broker/dealers. During
registration, we ask each individual for permission to forward his/her name to a
broker/dealer or financial advisor. The registrant is also asked to acknowledge
that the material presented at the web site is derived from outside sources and
Financial Intranet is not responsible for its content.
We do not expect the web site to be a direct source of substantial income.
Individual investors do not pay to access or register at Financial Intranet's
web site. Financial Intranet is offering some fee based services and products
such as books and investment newsletters on stocks and investors and mutual
funds which may become an ancillary source of revenue.
Marketing and sales
We believe that increasing our marketing will best facilitate our growth because
we currently offer most of the services described in this prospectus. We employ
2 full time salespeople and 2 consultants to assist our President and Executive
Vice President in marketing our products. We also advertise our products and
services on the internet and attend trade shows. If we receive no proceeds from
this offering, we will add salespeople and expand our advertising. We will use
90% of the proceeds of this offering for marketing if gross proceeds from this
offering are $1,000,000 or less. We will spend approximately $1,600,000 from the
proceeds of a maximum offering on marketing and sales. If we raise only minimal
proceeds from this offering, we will use approximately $300,000 from the
$1,100,000 which an investor is obligated to provide us over the next 10 months.
Products and services
Resale of long distance and local communication services
Resellers are among the fastest growing segment of the telecommunications
industry. Resellers grew at an annual rate of 16% between 1994 and 1996 while
the total long distance market is growing at approximately 6% per year according
to the Telecommunications Resellers Association, a trade association. Resellers
represented approximately 19% (or $13,000,000,000) of the $68,000,000,000 total
retail long distance market in 1996. The trade association stated on its web
site in January 1999 that 800 telecommunications resellers operate in the United
States. The trade association reported that while resellers have historically
engaged only in the resale of long distance communications, they are now adding
other services such as local resale, pagers, travel cards and PCS
phones/cellular phones. Financial Intranet believes that its value-added
services provide an advantage over other resellers.
A key element of Financial Intranet's services to the investment community is
the resale of discount, long distance telephony and other communication services
to broker/dealers and financial advisors. Voice, video-on-demand services, text,
and digitally-stored documents share the same network connection to each
customer's office. Financial Intranet has reseller agreements with MCI WorldCom
Inc. and Frontier Corp. The agreement with MCI/WorldCom expires in March 2001
and may be extended on a month-to-month basis thereafter. Our agreement with
Frontier expires in April 2001. Financial Intranet can also enter into such
agreements with other carriers who may be more competitive in specific
geographical areas or with respect to specific services. Resale of communication
services has been the principal source of revenue to date and is expected to be
one of our major revenue producing products during the initial years of
operation.
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Financial Intranet is permitted to provide interstate and international long
distance service. Financial Intranet tariffed in New York, Florida, Connecticut,
Texas and California to provide intrastate toll telecommunications services and
in anticipation of entering the local resale business. We are registered in New
Jersey and Colorado where no tariffs are required. We have tariffs pending in
Georgia, Illinois, Massachusetts, Pennsylvania and Maryland. We are permitted to
offer intrastate toll telecommunications services in four other states without
filing a tariff by either filing a registration or commencing operations. None
of these authorizations include the authority to provide Financial Intranet's
telecommunications services on a local exchange, non-toll basis for which
separate applications and/or tariff filings are required.
We intend to engage in development of a voice-over internet protocol. This
feature will enable us to facilitate the transmission of voice and other
communications over the Internet. We do not anticipate devoting significant
proceeds from this offering to development as this technology is available
through Siemens.
Video-on-demand training and marketing
Financial Intranet now offers video conferencing and video-on-demand services to
provide flexible distance learning opportunities. These services permit
customers to conduct live training or informational sessions via
teleconferencing and to access pre-recorded materials through video-on-demand.
We can provide video-on-demand training and marketing applications. These
applications use stored video content, and are available on demand to Financial
Intranet's customers via its private intranet and to individual investors at its
web site. For broker/dealers, this content will include materials regarding
various investment products. Financial Intranet and mutual funds are jointly
developing materials related to their products. We are also developing our own
content. The content can range from videotapes of teleconferencing sessions to
customized materials with data, video and text.
Content is delivered at different speeds depending on its destination.
Broker/dealers receive video and detailed sales fulfillment material at high
speed and have direct contact with mutual funds. Financial Intranet's video
image occupies one quarter of the screen of the desktop computer and does not
interfere with access to real time financial data. Individuals have access to
more general information and can access stored video and certain
digitally-stored documents such as prospectuses. The digitally-stored documents
are delivered at the transmission speed available to them.
Video conferencing
Financial Intranet has begun testing point to point and point to multi-point
video conferencing to facilitate both marketing and training. A client, such as
a mutual fund, can now schedule a point to multi-point live video conference.
Scheduling information is accessible to the client on Financial Intranet's
private intranet. Financial Intranet's intranet can transmit full screen
downstream video (originator to viewer) at 30 frames per second. The upstream
video (viewers to originator) is delivered at 5 frames per second, a sufficient
quality for the originator to be able to identify who is asking a question.
We provide video conferencing hardware to clients. We currently lease or
purchase the required equipment. Our ability to expand this service is
constrained by our lack of equipment. We lease or purchase additional equipment
on an as needed basis as we secure additional demand for our service. We believe
that purchasing equipment with the proceeds of this offering will enable us to
have an inventory of equipment and obtain equipment on better terms than
continuing to purchase equipment on an as needed basis. We intend to use a
portion of the proceeds of this offering to purchase additional equipment, if we
receive proceeds of $1,000,000 or more.
Financial Intranet intends to use a portion of the proceeds of this offering to
develop a system for delivering
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continuing education training to broker/dealers to meet NASD requirements. This
system will track the progress of a broker/dealer's registered representatives
and provide courses appropriate to their requirements and skill levels. We do
not anticipate developing this system unless we complete a maximum offering or
obtain financing from another source.
Individual investor web site
Financial Intranet recruits prospective investors as leads for the
broker/dealers, financial advisors and mutual funds, who subscribe to our
communications services. The web site is a mechanism to deliver multimedia
information and education to individual investors while capturing information
about those investors. A continuous background feature is the provision of
o 20 minute-delayed stock quotes,
o exchange information,
o newsletters,
o chat rooms,
o market news,
o information about mutual funds and other markets, and o
message boards.
Data mining technology
We track the activities of our broker/dealer subscribers and the visitors to our
web site. We obtain information provided by investors who register. We maintain
information about specific materials downloaded by broker/dealers and registered
investors and subsequent actions relating to the information received.
Financial Intranet uses this data to provide customer leads, surveys and reports
based on criteria provided by its broker/dealer and financial advisor customers
through the use of its proprietary data mining system. Financial Intranet
believes its ability to convert the data it gathers into practical knowledge
gives Financial Intranet an advantage over its competitors in the communication
service resale industry. Financial Intranet does not, however, attempt to
determine the suitability of investors for particular investments.. That
qualification remains the responsibility of the broker/dealer.
Expansion
We have concentrated on the investment industry. Financial Intranet believes
this industry will benefit most from our information and communications services
and that the investment industry presents the most immediate opportunity for
revenue. Financial Intranet hopes that as it becomes established as a provider
of financial services information, we will capture a larger portion of the long
distance resale business.
We plan to expand our intranet services to other industries and associations. We
are examining expansion into pharmaceutical and health products, real estate,
insurance and entertainment industries. We believe these industries can benefit
from our telecommunications products and from participating in an
industry-centered intranet. We intend to focus on industries which rely on
distributors of their products and services or need to train geographically
dispersed sales people.
Financial Intranet intends to expand from the eastern United States throughout
the United States and possibly Europe and the Pacific Rim. Overseas expansion
may entail adding data centers or implement collocation agreements to service
those markets and provide Financial Intranet with a redundant data source. We
will not be able to add additional data centers unless we complete a maximum
offering or obtain financing from another source. We are unlikely to attempt to
expand to reach customers based overseas within the next 12 months unless we
complete a maximum offering.
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We may also expand through the acquisition of companies that provide
complementary services. We are considering an acquisition of a company that
sells communications services. Discussions regarding the potential acquisition
are in the preliminary stage and no terms have been agreed upon. The
contemplated acquisition is not probable at this time. Any acquisition that
requires payment of a cash purchase price will likely require financing in
addition to the proceeds of this offering. Other issues to be resolved in an
acquisition include the assimilation of the operations, management and products
of the acquired companies. We can't be sure that we will complete any
acquisitions.
Technology and Business Partners
Financial Intranet's overall delivery system has three parts:
o The data center in Ardsley, NY, houses Financial Intranet's
video library and video processing software and its data
warehouse and data mining capability.
o The link between Financial Intranet and its customers. This
includes private lines from UUNet, an MCI WorldCom company,
and the "last miles" on either end connecting the leased
lines to Financial Intranet and each of its customers. This
link creates a virtual private network.
o The services gateway which resides at each customer's
office.
We have a strategic alliance with Siemens Nixdorf Informationssysteme Ges.m.b.H.
and several of its subsidiaries, most significantly Siemens Information and
Communication Products LLC and Siemens Telecom Network. Steven Weller, a member
of the Board of directors of Financial Intranet, is the Vice President of Sales
for the Computer Systems division of Siemens Information and Communication
Products LLC.
The Siemens companies installed a fully integrated system including hardware and
software in Financial Intranet's data center. They provided full documentation
and trained our internal technical team. Siemens will provide full time remote
management of Financial Intranet's system for a twelve month period beginning
February 1, 1999 under a management agreement. Out cost is $105,000 for the
year. Financial Intranet anticipates renewing the management agreement after one
year. Financial Intranet believes at least three full-time employees would be
required to perform these services in-house without the management agreement.
Siemens also licensed its proprietary data mining technology to Financial
Intranet for a one-time single site fee.
Competition
Financial Intranet does not believe any other company offers the same array of
services as us although a number of companies compete with Financial Intranet in
specific areas.
Telecommunications carriers and resellers
Financial Intranet's communications resale services compete with:
o other resellers,
o local exchange carriers,
o local phone carriers,
o regional Bell operating companies, and
o long distance carriers.
Some competitors offer a wider range of communications services than Financial
Intranet. Some have
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significantly greater assets. Financial Intranet believes it has an advantage
over other resellers because of our value-added-services.
Mutual fund information services for financial sales professionals
Financial Intranet believes it has no direct competition providing mutual fund
information to financial services professionals such as broker/dealers and
financial planners. The large brokerage houses have long had internal systems
for the redistribution of mutual fund data to their employees. These systems use
data replication to replace paper distribution of mutual fund sales and
marketing materials to in-house brokers.
Financial Intranet's most direct competitor as an outside electronic
redistributor of fund sales and marketing materials is First Data Investor
Services Group, developer of BROKERCONNECT. Financial Intranet believes it has a
significant advantage over BROKERCONNECT. We deliver the same electronic text
redistribution services but add video-on-demand content provided by the fund and
as interactive video training and the prospect of receiving customer leads.
Real time data redistribution
Brokerage firms purchase trading desks equipped with terminals and real-time
data feeds for their registered representatives. Many companies provide
real-time data feeds, including PC Quote, Quotron and S&P Comstock. Through our
co-marketing agreement with S&P Comstock, Financial Intranet believes it can
deliver S&P terminals and data feeds to broker/dealers at a
competitive price. Financial Intranet does not see data feeds as a significant
independent revenue source. Data feeds primarily provide value enhancement to
attract brokers to purchase Financial Intranet's communication services.
Government Regulation
Communications regulation
Financial Intranet and its underlying carriers who provide the network
facilities and services we resell are subject to certain regulation at the
federal level by the FCC and, with limited exceptions, at the state level by
public service, public utility or state corporation commissions.
Financial Intranet and all other "non-dominant" carriers (telecommunications
service providers) are authorized to provide interstate telecommunication
services under a general policy decision adopted by the FCC as opposed to any
company specific authorization. We are not subject to periodic renewal
requirements. In mid-1997, Financial Intranet was granted its certificate of
public convenience and necessity pursuant to Section 214 of the Communications
Act of 1934. This certificate authorizes us to provide international services,
that is, communications originated by customers in the United States and its
possessions and terminating in foreign countries. Financial Intranet's
certificate has no expiration date and is not subject to periodic renewal
requirements.
Financial Intranet filed tariffs with the FCC after obtaining certificates under
Section 214. FCC regulations require that Financial Intranet, like all carriers,
file and maintain separate tariffs for its interstate and international service
offerings. Tariffs contain the terms, conditions and rate for each
telecommunications service offered or provided by Financial Intranet. Tariffs
are not approved by the FCC, but may be reviewed by the FCC on its own motion or
pursuant to complaint by a customer, a non-customer member of the public or a
competing communications company. Tariffs are strictly construed and any
ambiguity in the tariff is construed in favor of the public (customer) and
against the carrier. Financial Intranet has the right to file revisions to its
tariff and change any rate, term or condition at any time, except that any term,
condition or rate once filed must remain, by FCC rule, effective for a minimum
of 30 days. The FCC may not interfere with or reject any filed tariff rate, term
or condition without specific findings that such rate, term or condition is
unjust, unreasonable or unduly discriminatory.
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The FCC assumes that all non-dominant carriers' rates are reasonable and
non-discriminatory. Any new or revised rate may be filed on only one day's prior
notice. The FCC does not review specific tariff filings unless someone protests
or it learns of some issue of lawfulness. Should issues be raised against any
tariff filing, the FCC must find that the tariff or tariff provision is
"patently unlawful," that is, contrary on its face to some law, rule,
regulation, policy or pre-existing decision of the courts or FCC. Where patent
unlawfulness is not shown, the FCC may suspend a tariff filing's effectiveness
for no more than 120 days, request that a carrier voluntarily "defer" the
effective date or investigate the tariff after the suspension is over.
Financial Intranet is also tariffed in New York, California, Florida,
Connecticut and Texas which allows it to provide intrastate toll communications
services. It is registered in New Jersey and Colorado (no tariffs being
required) and has tariffs pending in Georgia, Illinois, Massachusetts,
Pennsylvania and Maryland, and is legally permitted to offer intrastate toll
telecommunications services in four other states without filing a tariff by
either filing a registration or commencing operations. None of these
authorizations include the authority to provide Financial Intranet's
telecommunications services on a local exchange, non-toll basis for which
separate applications and/or tariff filings are required.
Should operations be expanded to countries other than the United States,
Financial Intranet will be required to comply with the laws and regulations
applicable to that country's telecommunications industry. In Western Europe, the
telecommunications industry is also subject to the actions, policies and
regulations of the European Commission. Beginning January 1, 1998, regulation of
telecommunications in Western Europe was formally liberalized to increase
competition in telecommunications. The timing and degree of liberalization
however varies, sometimes widely, country by country, and some countries like
Portugal and Greece have delayed implementation of new regulations.
Since few laws or regulations are directly applicable to access or commerce on
the internet, our internet and intranet is not subject to direct government
regulation, other than regulations applicable to businesses generally. However,
a number of legislative and regulatory proposals are under consideration by
federal, state, local and foreign governmental organizations and, as a result, a
number of laws or regulations may be adopted with respect to internet user
privacy, taxation, infringement, pricing, quality of products and services and
intellectual property ownership.
Securities regulation
Financial Intranet's customers are subject to various federal and state laws and
regulations of self-regulatory agencies such as the NASD, regarding the sale of
securities and continuing education. Changes in these laws and regulations may
affect Financial Intranet's business. While Financial Intranet's web site states
that Financial Intranet is not responsible for the information presented,
Financial Intranet will make reasonable efforts to assure that its services are
not misused.
We do not intend to engage in activities which would require registration as a
broker\dealer. The leads are provided to our subscribers without charge, as a
value added service for their purchase of communications services. The
subscriber has the responsibility to approve the lead as a client, have the
client complete any new account forms or other documents regarding an investment
and determine the suitability of any investments for the client. We do not
receive commissions from any business that may be generated by the new client.
Intellectual Property
We regard the technology we use as proprietary, but have no existing or pending
patent or copyright protection. We rely on the following to protect our software
and other propriety technology:
o confidentiality and license agreements with third parties,
o trade secret and trademark laws, and
o common law copyright.
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Suppliers
Financial Intranet's principal suppliers for the resale of communication
services are MCI WorldCom Inc. and Frontier Corp. We use third party production
companies to produce video on terms negotiated with respect to each project.
Financial Intranet uses computer hardware and software and related services
provided by Siemens Nixdorf Informationssysteme Ges.m.b.H. and several of its
subsidiaries. Although we believe our supplier relationships are good, we
believe that alternate suppliers of telephony, computer hardware, software and
servicing are available at competitive prices. Regulatory and other changes in
the industry have lowered network costs. We believe we will obtain agreements
from suppliers of communications services which will permit the contained resale
of services at acceptable margins. Financial Intranet could experience a
disruption in its business if it needed to replace the Siemens companies without
sufficient notice.
Disaster Recovery System
Implementation of a second data center from the proceeds of a maximum offering
will facilitate both expansion overseas and implementation of a more thorough
disaster recovery program. Our current data center already provides some
redundancy and protection against a disruption in our computer systems. We
believe that all but the most severe problems can be corrected quickly and
without much disruption to our business. Our data center has four clustered
servers. Video transmissions can be transferred to another server within hours
if an existing server malfunctions. A defective motherboard can be replaced in
one or two days. Our software is backed up each day. We also purchase
telecommunications services from reliable major companies, WorldCom and
Frontier. A second data center would eliminate the delay that could result from
a total system failure. We anticipate that the second data center would be
implemented by leasing space and equipment at an existing Siemens data center.
Currently, a total system failure could disrupt operations for up to two weeks
until we secured connections to the Siemens data center in Toronto. We also
carry business disruption insurance.
Facilities
Financial Intranet's principal offices are located at 410 Saw Mill River Road,
Ardsley, New York. Such offices are located on two floors leased by Financial
Intranet under two leases. A lease for 909 square feet at an annual rent of
$18,675 terminates on December 31, 2000. A lease for 700 square feet for annual
rent of $15,575 terminates on December 31, 2000. Financial Intranet believes
that the offices are sufficient for its current operations and proposed
operations through the term of the lease.
Employees
Financial Intranet has five full-time employees and one part-time employee. Four
full-time employees are officers. We have five part-time outside consultants.
None of the employees are represented by a collective bargaining agreement and
management believes it has good relations with its employees.
Legal Proceedings
On or about July 23, 1998, H & H Acquisition Corporation, individually and
purportedly on behalf of Financial Intranet, commenced an action in United
States District Court, Southern District of New York entitled H & H Acquisition
Corp., individually and on behalf of Financial Intranet. Inc. v. Financial
Intranet Holdings. Financial Intranet. Inc., Ben Stein, - Interwest Transfer
Co., Steven A. Sanders.. Michael Sheppard, Maura Marx, Henry A. Schwartz,
Leonard Gotshalk. Gotshalk Enterprises. Law Office of Steven A. Sanders., P.C.
and Beckman, Millman & Sanders, LLP, 98 Civ. 5269. The action's principal basis
appears to be plaintiff's claim that Ben Stein wrongfully claims ownership of
certain shares of common stock which, according to plaintiff, belong to
plaintiff. The plaintiff asserts sixteen causes of action. Only some make
allegations against
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Financial Intranet, Michael Sheppard and Maura Marx. The
plaintiff alleges:
o Mr. Sheppard and Ms. Marx assisted defendants Stein and
Financial Internet Holdings (a company owned by Stein) in
converting stock which plaintiff allegedly owns..
o Mr. Sheppard and Ms. Marx assisted in defrauding plaintiff
with respect to the stock plaintiff claims.
o a derivative claim on behalf of Financial Intranet that
alleges that Mr. Sheppard and Ms. Marx permitted issuance of
shares to defendant Gotshalk without proper consideration
and refused to allow plaintiff to purchase additional
shares.
o Mr. Sheppard and Ms. Marx permitted Financial Intranet to
pay defendant Schwartz monies which should not have been
paid, and authorized issuance of stock to Schwartz without
proper authority.
o Mr. Sheppard and Ms. Marx caused the issuance of stock to
themselves without proper authority.
o a derivative claim on behalf of Financial Intranet seeking
an order directing the holding of a shareholders meeting and
rescission of actions determined to be improper by the Court
or its designee. The shareholders meeting was held in
December 1998.
o Financial Intranet and its former transfer agent wrongfully
transferred shares belonging to plaintiff to a third party.
The transfer agent has asserted a claim against us seeking
indemnification for any liabilities incurred by the transfer
agent in this action.
o Plaintiff is entitled to $2500.00, plus interest, from us
for alleged breach of contract. Financial Intranet settled
this cause of action.
Plaintiff also seeks an accounting from Mr. Sheppard and Ms. Marx, among other
defendants, for damages Financial Intranet allegedly suffered.
Financial Intranet, Mr. Sheppard and Ms. Marx believes that the claims against
it, Mr. Sheppard and Ms. Marx are without merit and is vigorously defending the
action. Financial Intranet, Mr. Sheppard and Ms. Marx have filed an answer. The
answer denies all material allegations of the complaint and the claim asserted
by the transfer agent, and asserts a variety of defenses. Discovery has not yet
commenced. We cannot make any assurances about the litigation's outcome. If the
plaintiff prevails against us, we could be adversely affected.
Available Information
We will begin to file various documents that are required by the SEC following
this offering. These include annual reports, quarterly reports, special reports
and proxy statements. Financial Intranet plans to give its stockholders annual
reports containing audited financial statements, all other reports which
Financial Intranet is required to provide and any other documents which
Financial Intranet believes its shareholders should have.
This prospectus is part of a registration statement filed with the SEC. It does
not contain all of the information in the registration statement, nor the
exhibits or the schedules which were included with the registration statement.
The registration statement, and the exhibits and schedules thereto, may be
inspected and copied at the principal office of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the SEC at Seven World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part
thereof may be obtained at prescribed rates from the SEC's Public Reference
Section at 450 Fifth Street, N.W., Washington, D.C. 20545 or by calling the SEC
at 1-800 SEC-0330. The SEC also maintains a World Wide Web site on the Internet
at http://www.sec.gov that contains reports, proxy and information statements
and other information regarding
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registrants that file electronically with the SEC.
When we qualify statements in this prospectus with the word "believe," unless
otherwise indicated, we are basing our belief on the knowledge and experience of
our personnel and advisors. Statistical information included in this prospectus
has been obtained by us from publications we deem reliable and with which we
have no relationship.
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MANAGEMENT
Executive Officers and Directors
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Michael Sheppard........................................... 49 Director, President, Chief Operating Officer
Joseph F. Engelberger...................................... 74 Director
Steven S. Weller........................................... 44 Director
Maura Marx................................................. 36 Executive Vice President, Secretary
Alan Spar.................................................. 26 Chief Technical Officer/Vice President,
Technology
Alan M. Ross............................................... 55 Vice President, Finance and Administration
</TABLE>
All directors serve one year terms or until the next annual meeting of the
shareholders.
Michael Sheppard--President, Chief Operating Officer and Director
Mr. Sheppard joined Financial Intranet as a consultant in February 1997 and
became President, Chief Operating Officer and Director in April 1997. Mr.
Sheppard has been involved in setting up the corporate infrastructure of several
early stage development companies and undertaking their day-to-day operations as
chief executive and chief operating officer. From January 1996 through January
1997, Mr. Sheppard was Chief Operating Officer of Freelinq Communications,
formerly Televideo Corporation, based in New York City. Freelinq offers real
time video-on-demand via ATM/XDSL technology with high-speed internet
transmission and advertiser supported free theatrical films delivered through
twisted pair telephone lines. From 1995 to 1996 he was chief operating officer
for Lee Communications Ltd., which is a laser development and transmission
company. From 1993 to 1995, he was Chief Executive Officer for MLS Lighting Ltd.
In 1980 he founded Belden Communications and served as its President and Chief
Executive Officer until it was acquired in 1985. It was engaged in the sale and
distribution of proprietary products used in the motion picture and television
markets, and was merged in 1985 into Lee America Ltd., which was bought by Lee
Lighting Ltd., a United Kingdom company, in 1986.
Joseph F. Engelberger
Mr. Engelberger became a Director of Financial Intranet in August 1998. Joseph
Engelberger founded Helpmate Robotics, Inc. Since 1984, he has been Chairman and
Chief Executive Officer of Helpmate Robotics, Inc. He received B.S. and M.S.
degrees from Columbia University in 1946 and 1949, respectively, and he has
authored numerous articles in the instrumentation and robotics fields.
His honors include the Progress Award of the Society of Manufacturing Engineers,
the Leonardo da Vinci Award of the American Society of Mechanical Engineers and
the 1982 American Machinist Award. The University of Liverpool bestowed the
first McKechnie Award on him in 1983. In 1984, he was elected to the National
Academy of Engineering. He was the recipient of the Egleston Medal for
distinguished engineering achievement from Columbia University. The University
of Bridgeport, Spring Garden College, Briarwood College, Trinity College and
Carnegie-Mellon University granted him honorary doctorates. In January 1997, he
received the Beckman Award for pioneering and original research in the general
field of automation. Mr. Engelberger serves on the Board of directors of EDO
Corporation (NYSE:EDO).
Steven Weller
Mr. Weller became a director of Financial Intranet in November 1998. Since 1989,
Mr. Weller has been the Vice President of Siemens Information and Communication
Products LLC. He is the Vice President of Sales for the
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Computer Systems division. He is responsible for all sales and technical support
personnel. He was previously the Vice President of Sales for the North American
Key Accounts.
Maura Marx--Executive Vice President, Secretary
Ms. Marx became Secretary in December 1998 and became Executive Vice President
in February 1999. She had been the Senior Vice President and Assistant Secretary
since September 1997. From 1994 until 1996, she was employed as a salesperson in
the Sales and Leasing Department of the Friedman Realty Group, a major New York
commercial real estate firm. Her responsibilities centered on selling, servicing
and expanding the firm's client base of foreign banking institutions. Ms. Marx
was head of the Sales & Marketing Department for Warner Bros. Film Gesmbh based
in Vienna Austria from 1992 until 1994. She was responsible for tactical and
budget planning, and for distribution and promotion of Warner films and Warner
retail goods throughout Austria. From 1990 until 1992, she served as Assistant
Director of European Development for the Guggenheim Museum Salzburg Advisory
Board (GMSAB).
Consultants
Ben B. Stein--Director of Brokerage Sales
Mr. Stein founded Financial Intranet in December 1996. Since November 1998, he
has been a consultant to Financial Intranet as Director of Brokerage Sales. He
is responsible for selling our products and services to the brokerage community.
From December 1996 through November 1998, he was a member of the board of
directors and Secretary of the Company. Mr. Stein has over 25 years experience
in the securities industry during which time he has held Series 3, Series 4,
Series 7, Series 8, Series 24, Series 27 and Series 63 Licenses issued by the
NASD. From July 1998 through October 1998, he was a registered representative
with the Empire Financial Group. From 1993 to 1996, Mr. Stein was Chief
Executive Officer of Stein Shore Securities, Inc., a full-service broker/dealer
with three branch offices. From 1991 through 1993, Mr. Stein operated as Senior
Vice President of Marsh Block & Company, a securities firm specializing in
investment banking. Mr. Stein received a Bachelor of Science degree in Business
Administration from Roosevelt University in Chicago, Illinois in 1961. He became
a Certified Public Accountant in 1968.
Kevin M. Haggerty--Consultant for Mutual Fund & Brokerage Industries
Mr. Haggerty became a consultant in October 1997. He provides consulting
services on marketing and sales of our products, training programs ans services
to customers. From 1990 to April 1997, Mr. Haggerty was the Senior Vice
President--Manager for equity trading at Fidelity Capital Markets in Boston, a
division of Fidelity Investments, the mutual fund complex. He was in charge of
all U.S. Institutional and broker/dealer equity trading. He was also responsible
for option, agency over-the-counter training, and all of the exchanges, floor
operations and execution, including the Chicago Board Options Exchange, New York
Stock Exchange, American Stock Exchange, the Pacific Stock Exchange and the
Boston Stock Exchange.
Executive Compensation
Employees
Michael Sheppard receives a salary of $150,000 per year under his employment
agreement dated September 12, 1997. The employment agreement expires on December
31, 2002. Mr. Sheppard received an incentive bonus of 750,000 shares of common
stock upon execution of a consulting agreement on February 27, 1997. Mr.
Sheppard received an option under the employment agreement to purchase 2,231,352
shares of common stock at a price of $0.19 per share. The option expires upon
the earlier to occur of December 31, 2002 or 90 days after the termination of
Mr. Sheppard's employment without cause or immediately after termination with
cause. The option is personal to Mr. Sheppard and is not assignable. Mr.
Sheppard has not purchased any shares of common stock pursuant to his option.
32
<PAGE>
Ms. Marx receives a salary of $100,000 per year under her employment agreement
dated September 12, 1997. The employment agreement expires on December 31, 2002.
Ms. Marx received an incentive bonus of 500,000 shares of common stock upon
execution of the employment agreement. She received an option under her
employment agreement to purchase 1,279,379 shares of common stock at a price of
$0.19 per share. The option expires upon the earlier to occur of December
31, 2002 or 90 days after the termination of Ms. Marx's employment without cause
or immediately after termination with cause. The option is personal to Ms. Marx
and is not assignable. Ms. Marx has not purchased any shares of common stock
pursuant to her option.
Mr. Ross receives a salary of $80,000 per year and has an unvested option to
purchase 250,000 shares of common stock at an exercise price of $0.62 1/2 per
share. One third of Mr. Ross's options vest on December 7 of each year
commencing in December 1999.
Mr. Spar receives a salary of $100,000 per year and has an unvested option to
purchase 250,000 shares of common stock at an exercise price of $0.62 1/2 per
share. One third of Mr. Spar's options vest on December 9 of each year
commencing in December 1999.
Consultants
Mr. Stein received compensation of $150,000 per year and 1,500,000 shares of
common stock as a signing bonus and 1,500,000 shares of common stock in lieu of
his compensation for 1997 under his consulting agreement dated February 27,
1997. He signed an employment agreement for the same annual compensation on
September 12, 1997. Mr. Stein ceased his employment and became a consultant in
November 1998. Mr. Stein's consulting fee is based solely on commissions earned
from telecommunications services sold to clients he introduces to us. The
consulting agreement expires on December 31, 2002. Financial Intranet accrued
Mr. Stein's consulting fee for 1998 in the aggregate amount of $150,000 but paid
$40,500 of such accrued amount in 1999.
The employment and consulting agreements provided Mr. Stein with options to
purchase shares of common stock at a price of $.19 per share. Under his
consulting agreement dated March 3, 1999, Mr. Stein agreed to reduce his options
from 3,640,262 to 2,500,000 and agreed to apply the $109,500 balance of his
accrued salary and the principal of $56,889 owed under two promissory notes to
purchase 879,685 shares of common stock. He now owns options to purchase
1,620,315 shares. The options expire upon the earlier to occur of December 31,
2002 or immediately if Mr. Stein's consulting agreement is terminated with
cause. The options are personal to Mr. Stein and are not assignable.
Mr. Haggerty became a consultant commencing October 6, 1997. He received a
warrant to purchase 1,000,000 shares of common stock at a price of $0.01 per
share. The warrant became exercisable one year after grant. He exercised this
warrant on October 9, 1998. The consulting agreement expires October 20, 1999 .
The agreement can be terminated on 30 days notice by either Mr. Haggerty or
Financial Intranet. We will pay him $10,000 per month commencing November 1999
if we decide to extend the term to October 20, 2000.
Total Compensation
The following table shows the total compensation paid for services in all
capacities during the years ended December 31, 1998, 1997 and 1996 to officers
who received compensation in excess of $100,000 per year.
33
<PAGE>
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ----------------------
Restricted
Name and Principal Position Year Salary Bonus Other Stock Awards Stock Options
- --------------------------- ---- ------ ----- ----- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Ben B. Stein(1)...................................... 1998 $150,000 $0 $0 $0 1,242,955
1997 150,000 0 10,500 54,000 2,397,307
1996 0 0 0 0 0
Michael Sheppard..................................... 1998 150,000 0 0 0 720,914
1997 116,352 0 0 27,000 1,510,438
1996 0 0 0 0 0
Maura Marx........................................... 1998 100,000 0 0 0 447,464
1997 48,750 0 0 18,000 903,031
1996 0 0 0 0 0
</TABLE>
(1) On February 27, 1997, Mr. Stein received 1,500,000 shares of common
stock in lieu of cash compensation for 1997 and an additional 1,500,000
shares of common stock as an inducement to execution of the consulting
agreement.
OPTION GRANTS IN LAST FISCAL YEAR--INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
Percent of Total
Number of Options Granted
Securities to Employees In
Underlying Fiscal Year Ended Exercise or Base
Name Options Granted December 31, 1998 Price Per ($/Share) Expiration Date
- ---- --------------- ----------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Ben B. Stein.............................. 1,242,955 51.5% $.19 12-31-2002
Michael Sheppard.......................... 720,914 29.9% $.19 12-31-2002
Maura Marx................................ 447,464 18.6% $.19 12-31-2002
</TABLE>
Fiscal Year End Option Values
The following table shows the value of unexercised in-the-money options held by
the executive officers and consultant as of December 31, 1998.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Fiscal Year End Options at Fiscal Year End
-------------------------- --------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ben B. Stein.................................................. 3,640,262 0 $1,674,521 0
Michael Sheppard.............................................. 2,231,352 0 1,026,422 0
Maura Marx.................................................... 1,350,495 0 621,228 0
</TABLE>
Director's Compensation
Financial Intranet's directors who are not full-time employees of Financial
Intranet receive compensation of $350 and reimbursement of expenses for
attendance at each meeting of the board of directors. Mr. Weller has received
options
34
<PAGE>
to purchase 10,000 shares of common stock at an exercise price of $.60 per
share, which options are exercisable through November 12, 2001. Mr. Engelberger
has received options to purchase 10,000 shares of common stock at an exercise
price of $.725 per share, which options are exercisable through August 31, 2001.
Committees of the Board
The board of directors has one committee, the stock option committee. The stock
option committee administers the stock option plan and authorizes the award of
stock options by Financial Intranet. Messrs. Sheppard, Weller and Engleberger
are the members of the stock option committee.
Indemnification of Directors and Officers and Related Matters
The by-laws of Financial Intranet provide that, to the fullest extent permitted
by applicable law, as amended from time to time, Financial Intranet will
indemnify any person who was or is a party or is threatened to be made a party
to an action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was director,
officer, employee or agent of Financial Intranet or serves or served any other
enterprise at the request of Financial Intranet.
Financial Intranet maintains directors' and officers' insurance insuring the
directors against any liability arising out of the director's status as a
director of Financial Intranet regardless of whether Financial Intranet has the
power to indemnify the director against such liability under applicable law.
Financial Intranet has been advised that it is the position of the SEC that
insofar as the foregoing provisions may be invoked to disclaim liability for
damages arising under the Securities Act, such provisions are against public
policy as expressed in the Securities Act and are unenforceable.
Stock Option Plans
Financial Intranet has established the 1998 Stock Option Plan which provides for
the granting of options which are intended to qualify either as incentive stock
options within the meaning of Section 422 of the Internal Revenue Code or as
options which are not intended to meet the requirements of such section. The
total number of shares of Common stock reserved for issuance under the plan is
1,500,000. Options to purchase shares may be granted under the plan to persons
who, in the case of incentive stock options, are key employees (including
officers) or, in the case of non-statutory stock options, are key employees
(including officers) or non-employee directors or non-employee consultants.
The plan will be administered by the board of directors or a committee chosen by
the board of directors, which will have discretionary authority, subject to
certain restrictions to determine the number of shares issued pursuant to
incentive stock options and nonstatutory stock options and the individuals to
whom, the times at which and the exercise price for which the options will be
granted. On November 13, 1998, Financial Intranet appointed Steven S. Weller,
Michael Sheppard and Joseph F. Engelberger to constitute the stock option
committee to administer the plan.
The exercise price of all incentive stock options granted under the plan must be
at least equal to the fair market value of such shares on the date of the grant
or, in the case of incentive stock options granted to the holder of more than
10% of Financial Intranet's common stock, at least 110% of the fair market value
of such shares on the date of the grant. The maximum exercise period for which
incentive stock options may be granted is ten years from the date of grant (five
years in the case of an individual owning more than 10% of Financial Intranet's
common stock). The aggregate fair market value (determined at the date of the
option grant) of shares with respect to which incentive stock options are
exercisable for the first time by the holder of the option during any calendar
year shall not exceed $100,000.
The exercise price of all non-statutory stock options granted under the plan
must be at least equal to the 85% of the fair market value of such shares on the
date of the grant
As of the date hereof, no options have been granted pursuant to the plan.
35
<PAGE>
CERTAIN TRANSACTIONS
On February 7, 1997, Financial Intranet issued Ben Stein, the principal
shareholder of Financial Intranet, 1,500,000 shares of common stock in lieu of
salary due for 1997 in the amount of $150,000.
On February 8, 1999, Financial Intranet issued a 7% convertible promissory note
in the principal amount of $600,000. The principal amount of $240,000 was
payable on demand on March 10, 1999 and the principal amount of $360,000 is
payable on demand on May 9, 1999. The promissory note is convertible into common
stock at a conversion price equal to the lesser of:
o 75% of the average of the five lowest closing bid prices of
common stock during the 30 trading days ending on the
trading day immediately preceding the conversion date, or
o $.40 per share.
Mr. Ben Stein guaranteed, with recourse, Financial Intranet's obligations under
the convertible promissory note and pledged 1,500,000 restricted shares of
common stock as collateral security for such obligations. The lender received
600,000 of the pledged shares in March 1999 in satisfaction of payment of the
principal amount of $240,000 and 900,000 of the pledged shares in May 1999 in
satisfaction of payment of the principal amount of $360,000 based on a
conversion price of $.40 per share. Financial Intranet issued 1,500,000 shares
of common stock to Mr. Stein in May 1999 to replace the pledged shares.
On March 3, 1999, Mr. Stein applied $167,140 owed to him by Financial Intranet
in lieu of cash payment to purchase 879,685 shares of common stock under options
with an exercise price of $.19 per share. The $167,140 owed to Mr. Stein
consisted of $109,500 in accrued compensation from 1998 and two promissory notes
in the principal amount of $56,889 and all accrued interest.
36
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the common stock as of May 27, 1999 by:
o each stockholder known by Financial Intranet to be the
beneficial owner of more than 5% of the outstanding common
stock;
o each director and executive officer; and
o all directors and executive officers as a group.
Except as otherwise indicated, Financial Intranet believes that the
beneficial owners of the common stock listed below have sole investment and
voting power with respect to such shares. The following table:
o Assumes the exercise of all stock options held by the
shareholder.
o Includes 1,020,000 shares owned by Financial Intranet
Holdings, Inc., a company wholly-owned by Mr. Stein. Mr.
Stein disclaims ownership of 183,000 shares owned by his
children, 80,000 shares owned by his wife and 30,000 shares
owned by his mother and sister.
o Includes options exercisable at a price of $.19 per share
for
o 1,620,315 shares issuable to Mr. Stein.
o 2,231,352 shares issuable to Mr. Sheppard and
o 1,350,491 shares issuable to Ms. Marx
o Includes 10,000 shares of common stock issuable at an
exercise price of $.725 per share for Mr. Engelberger's
options and $.60 per share for Mr. Weller's options.
<TABLE>
<CAPTION>
Number of Percentage Number of Percentage
Shares of Shares Shares of Shares
Prior to Prior to After After
Shareholder Offering Offering Offering Offering
- ----------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Ben B. Stein....................................................... 5,967.537 23.6% 5,367,537 15.9%
Michael Sheppard................................................. 2,732,177 10.6 2,732,177 7.9
Maura Marx....................................................... 1,817,346 7.3 1,817,346 5.4
Joseph Engelberger............................................... 10,000 -- 10,000 --
Steven Weller .................................................... 10,000 -- 10,000 --
All shareholding officers and directors as a group
(4 Persons)..................................................... 4,569,523 16.8 4,569,523 12.8
</TABLE>
The address of each principal shareholder is c/o Financial Intranet, Inc., 410
Saw Mill River Road, Ardsley, New York 10502.
37
<PAGE>
SELLING SECURITYHOLDERS
In addition to the 4,444,444 shares being offered by Financial Intranet, the
registration statement, of which this prospectus forms a part, also covers the
registration on behalf of the selling securityholders of an aggregate of:
o 5,408,333 shares of common stock issuable upon the exercise
of warrants,
o 3,150,000 shares of common stock issuable upon conversion of
certain convertible promissory notes,
o 1,555,000 shares of common stock previously issued and
o 37,994 shares otherwise issuable to the selling
securityholders.
The number of shares of common stock which may be issued to the selling
securityholders are subject to certain market price protection provisions and
additional shares of common stock may be sold by the selling securityholders
pursuant to the alternative prospectus. Financial Intranet may receive proceeds
if the warrants are subsequently exercised, as to which there can be no
assurance. The costs of qualifying these shares of common stock under federal
and state securities laws, together with legal and accounting fees, printing and
other costs in connection with this offering, will be paid by Financial
Intranet.
The following list identifies the selling securityholders and the number of
shares of common stock owned by such selling securityholder along with shares
available upon the exercise of the respective options, warrants, or conversion
rights which are being registered pursuant to the registration statement, of
which this prospectus forms a part.
<TABLE>
<CAPTION>
Number of Percentage Percentage
Shares of Shares Number of of Shares
Owned Owned Shares Owned
Before Before Owned After After
Shareholder Offering(1) Offering(1) Offering(9) Offering
- ----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Ahood Sharbatly(1)(2)....................................... 1,090,046 4.99 0 0
Zubair Kazi(1)(3)........................................... 1,090,046 4.99 0 0
Ben B. Stein (4)............................................ 5,967,537 23.6 5,367,537 15.9
Cardinal Capital Management Inc.(5)......................... 376,497 1.7 0 0
J.G. Capital, Inc. (6)..................................... 341,497 1.6 0 0
Joseph Theismann(7)......................................... 150,000 -- 0 0
Corporate Capital Management Corp.(8)....................... 50,000 -- 0 0
</TABLE>
(1) The table assumes exercise of warrants and conversion of
all promissory notes issued to Messrs. Sharbatly and Kazi. The
convertible promissory notes and warrants prohibit each of them and
their affiliates from beneficially owning more than 4.99% of the and
outstanding common stock at any time. They cannot convert the
promissory notes or exercise the warrants to the extent that such
conversion or exercise will result in the selling securityholder
exceeding such limitation.
(2) Mr. Sharbatly may receive an aggregate of up to
2,500,000 shares of Common stock upon exercise of all warrants and
conversion of his promissory note in the principal amount of $500,000.
The number of shares assumes a conversion price of $.40 per share for
the convertible promissory note.
(3) Mr. Kazi may receive 6,133,333 shares of common stock
upon exercise of all warrants and conversion of promissory notes in
the aggregate principal amount of $1,460,000.
o Assumes conversion prices of :
38
<PAGE>
o $.50 for a promissory note in the principal amount of
$200,000 and
o $.60 for three promissory notes in the aggregate principal
amount of $900,000.
(4) Mr. Stein is the founder of Financial Intranet, the largest
shareholder and serves as a consultant.
(5) Includes three warrants to purchase:
o 160,000 shares at an exercise price of $.64 per
share
o 75,000 shares at an exercise price of $.40 per
share, and
o 95,000 shares at an exercise price of $.60 per
share.
(6) Includes three warrants to purchase:
o 125,000 shares at an exercise price of $.40 per
share
o 75,000 shares at an exercise price of $.40 per
share, and
o 95,000 shares at an exercise price of $.60 per
share.
(7) Includes warrants to purchase 150,000 shares of common stock
at an exercise price of $.75 per share. Mr. Theismann is a
spokesperson for Financial Intranet.
(8) Includes warrants to purchase 50,000 shares of common stock
at an exercise price of $.64.
(9) Assumes exercise of all warrants and conversion of all
promissory notes held by the selling securityholders.
Plan of Distribution
The shares offered by the selling securityholders may be sold from time to time
directly by the selling securityholders. Alternatively, the selling
securityholders may, from time to time, offer such securities through
underwriters, dealers and/or agents. The distribution of securities by the
selling securityholders may be effected in one or more transactions,
privately-negotiated transactions or through sales to one or more broker/dealers
for resale of such securities as principals, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or at
negotiated prices. Usual and customary or specifically negotiated brokerage fees
or commissions may be paid by the selling securityholders in connection with
such sales. The selling securityholders, and intermediaries through whom such
securities are sold, may be deemed "underwriters" within the meaning of the
Securities Act with respect to the securities offered. Any profits they realize
or commission they receive may be deemed underwriting compensation.
At the time a particular offer of securities is made by or on behalf of the
selling securityholders to the extent required, a prospectus will be distributed
which will set forth the number of securities being offered and the terms of the
offering, including the name or names of any underwriter, dealer or agent, the
purchase price paid by the underwriter for securities purchased from the selling
securityholders and any discounts, commissions or concessions allowed or
reallowed or paid to dealers and the proposed selling price to the public.
Sales of securities by the selling securityholders or even the potential of such
sales would likely have an adverse effect on the market prices of the securities
being offered. Following the closing of this offering (which assumes the
exercise of all warrants and conversion of all promissory notes held by the
selling securityholders), 30,885,483 shares of common stock will be freely
tradable
39
<PAGE>
MARKET PRICE OF COMMON STOCK
Market Information
The following table sets forth the high and low prices for the periods indicated
as reported by the National Daily Quotation Service, Inc. between dealers and do
not include retail mark-ups, mark-downs, or commissions and do not necessarily
represent actual transactions, as reported by the NASD Composite Feed or other
qualified inter-dealer quotation medium. During the first two quarters of the
fiscal year ending December 31, 1997, no established public trading market
existed for the common stock . The market prices included for these two quarters
were based on very limited transactions and sporadic price quotations that did
not reflect the true market value of the stock.
The prices listed for these periods reflect limited or sporadic quotations. As
of May 10, 1999, the closing bid price was $1.18 per share.
<TABLE>
<CAPTION>
Low High
--- ----
<S> <C> <C>
1997 Fiscal Year:
First Quarter.................................................................................. 3.75 6.375
Second Quarter................................................................................. .38 4.625
Third Quarter.................................................................................. .156 .484
Fourth Quarter................................................................................. .125 .594
1998 Fiscal Year:
First Quarter.................................................................................. .219 .547
Second Quarter................................................................................. .22 .95
Third Quarter.................................................................................. .58 1.99
Fourth Quarter................................................................................. .41 1.00
1999 Fiscal Year
First Quarter..................................................................................... .56 1.58
</TABLE>
The common stock is recorded on the OTC Bulletin Board with the symbol FNTN. As
of May 10, 1999, Financial Intranet had 48 record holders of its common stock
and an estimated 2,045 beneficial holders.
40
<PAGE>
DESCRIPTION OF SECURITIES
The following descriptions of securities are qualified in all respects by
reference to the certificate of incorporation and by-laws and the terms of
certain convertible promissory notes and warrants, copies of which are filed as
hibits to the registration statement of which this prospectus is a part. The
certificate of incorporation authorizes Financial Intranet to issue up to
50,000,000 shares of common stock, par value $.001 per share, and no preferred
stock. Neither the certificate of incorporation nor the by-laws contain any
provision that would delay, defer or prevent a change in control.
Common stock
23,624,292 shares of common stock are issued and outstanding. Each share of
common stock entitles the holder to one vote on each matter submitted to the
stockholders. The holders of common stock:
o have equal ratable rights to dividends from funds legally
available therefor when, as and if declared by the board of
directors;
o are entitled to share ratably in all of the assets available
for distribution to holders of common stock upon
liquidation, dissolution or winding up of the affairs of
Financial Intranet;
o do not have preemptive, subscription or conversion rights,
or redemption or sinking fund provisions applicable thereto;
and
o are entitled to one non-cumulative vote per share on all
matters submitted to stockholders for a vote at any meeting
of stockholders. Financial Intranet has not paid any
dividends on its common stock to date. Financial Intranet
anticipates that, for the foreseeable future, it will retain
earnings, if any, to finance the continuing operations of
its business. The payment of dividends will depend upon,
among other things, capital requirements and the operating
and financial conditions of Financial Intranet.
Shareholders do not have any pre-emptive rights to subscribe for or purchase any
stock, warrants or other securities of Financial Intranet. The common stock is
not convertible or redeemable. Neither the certificate of incorporation nor its
by-laws provide for pre-emptive rights.
Options
Financial Intranet has issued options to three affiliates (including two
executive officers) to purchase 5,202,162 shares of common stock at an exercise
price of $.19 per share, which options are exercisable through December 31,
2001. Financial Intranet has issued options to two other employees to purchase
500,000 shares of common stock at an exercise price of $.625 per share,
one-third of which vests each year commencing December 7, 1999 and are
exercisable for two years after vesting. Financial Intranet has issued options
to persons not affiliated with Financial Intranet to purchase an aggregate of
592,630 shares of common stock at exercise prices ranging from $.18 to $7.50.
Convertible notes and Warrants
$500,000 7% convertible promissory note and warrants
On December 31, 1998, Financial Intranet issued a 7% convertible promissory note
in the principal amount of $500,000 with a maturity date of December 31, 2001
and warrants to purchase 1,250,000 shares of common stock at an exercise price
of $.60 per share through December 31, 2003. The promissory note is convertible
into common stock at any time by the lender. On the maturity date, Financial
Intranet is required to automatically convert the remaining
41
<PAGE>
outstanding principal amount and accrued interest of the promissory note at the
conversion price into common stock.
Each of the 1,250,000 warrants issued in conjunction with the promissory note
entitle the holder to purchase one share of common stock at an exercise price
per share of common stock of $0.60. The warrants may be exercised through
December 31, 2003.
$1,700,000 7% convertible promissory notes and warrants
Initial Note and Warrants
In February 1999, Financial Intranet issued a 7% convertible promissory note in
the principal amount of $600,000, with $240,000 principal amount, and all
accrued interest thereon, payable on demand commencing March 10, 1999, and
$360,000 principal amount, and all accrued interest thereon, payable on demand
commencing May 9, 1999. The holder converted the $240,000 portion of the note
into common stock in March 1999 and the $360,000 balance into common stock in
May 1999. Financial Intranet issued 1,500,000 warrants in February 1999 to
purchase common stock at an exercise price per share of $.60. The warrants may
be exercised through February 6, 2002. The investor also agreed to lend
Financial Intranet an additional $1,100,000 in four subsequent tranches.
Financial Intranet's obligations under the promissory note for $600,000 are
subject to a guarantee by Ben B. Stein and secured by a pledge of 1,500,000
shares of common stock. Mr. Stein pledged 600,000 shares of common stock as
collateral for Financial Intranet's obligation payable March 10, 1999, and
900,000 shares as collateral for Financial Intranet's obligation payable May 9,
1999.
On February 6, 2002, Financial Intranet is required to automatically convert any
and all remaining outstanding principal amount and accrued interest of the
promissory note at the conversion price into common stock.
Installment Convertible Promissory Notes and Warrants
Commencing on the date of this prospectus and terminating 30 days later,
Financial Intranet may require the investor or the investor may demand to
purchase for $200,000 a promissory note in the principal amount of $200,000 and
a warrant for the purchase of 333,333 shares of common stock at an exercise
price of $.60 per share. During the 90 day period after the closing of the
installment for a promissory note in the principal amount of $200,000, Financial
Intranet may require the investor or the investor may demand to purchase for
$300,000 a promissory note in the principal amount of $300,000 and a warrant for
the purchase of 500,000 shares of common stock. During the 90 day period after
the issuance of the first $300,000 note, Financial Intranet may require the
investor or the investor may demand to purchase for $300,000 a promissory note
in the principal amount of $300,000 and a warrant for the purchase of 500,000
shares of common stock. During the 90 day period after the issuance of the
second $300,000 note, we may require the investor or the investor may demand to
purchase for $300,000 a promissory note in the principal amount of $300,000 and
a warrant for the purchase of 500,000 shares of common stock. The warrants are
exercisable for a period of five years after issuance at an exercise price of
$.60 per share.
The shares of common stock issuable upon conversion of the promissory notes and
warrants issued in conjunction with the notes are being registered in the
alternate prospectus.
The conversion prices for the convertible promissory notes are the lesser of :
o 75% of the average of the five lowest closing bid prices of
the common stock during the 30 trading days ending on the
trading day immediately preceding the conversion date, or
42
<PAGE>
o either: $.40 per share for the promissory note for $500,000
issued in December 1998 and the promissory note in the
principal amount of $600,000 issued in February 1999;
$.50 per share for the promissory note in the principal
amount of $200,000, and
$.60 per share for the three promissory notes in the
aggregate principal amount of $900,000.
The convertible promissory notes are convertible and the warrants are
exercisable, in whole or in part, at any time. However, the promissory note may
not be converted nor the warrants exercised to the extent that after such
conversion, the sum of
o the number of shares of common stock beneficially owned by
the holder and its affiliates (other than shares of common
stock which may be deemed beneficially owned through the
ownership of the unconverted portion of the promissory note)
and
o the aggregate number of shares of common stock issuable upon
the proposed conversion of the promissory note and the
warrants would result in beneficial ownership by the holder
and its affiliates of 4.99% or more of Financial Intranet's
issued and outstanding shares of common stock following such
exercise or conversion.
The 4.99% limitations in the promissory note and warrants do not apply to any
automatic conversion by Financial Intranet. The 4.99% limitations apply to any
transferee of the promissory note from the purchaser of such shares from
Financial Intranet.
Transfer Agent
The transfer agent for the common stock is Liberty Transfer Co., 191 New York
Avenue, Huntington, New York 11743.
43
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, Financial Intranet will have outstanding an
aggregate of 36,665,063 shares of common stock, assuming exercise of the
warrants and conversion of the promissory notes issued to the selling
securityholders. 31,485,483 shares of common stock will be freely tradable
without restriction or further registration under the Securities Act. Of the
remaining shares of common stock outstanding, 5,168,459 shares will be
"restricted" shares that are owned by "affiliates" of Financial Intranet as
such terms are defined under the Securities Act and 93,370 shares are
"restricted" shares that are owned by nonaffiliates of Financial Intranet.
In general, under Rule 144, a person (or persons whose shares are aggregated)
who has beneficially owned restricted securities within the meaning of Rule 144
securities for at least one year, including the holding period of any securities
which are converted into the restricted shares and including the holding period
of any prior owner, except an affiliate of Financial Intranet, would be entitled
to sell within any three-month period, only that a number of shares that do not
exceed the greater of 1% of the then outstanding shares of common stock or the
average weekly trading volume of the common stock reported during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain manner of sale provisions, notice requirements and the availability of
current public information about Financial Intranet. Any person (or persons
whose shares are aggregated with such person) who is not deemed to have been an
affiliate of Financial Intranet at any time during the 90 days preceding a sale,
and who has beneficially owned shares for at least three years (including any
period of ownership of preceding non-affiliated holders), would be entitled to
sell shares under Rule 144(k) without regard to the volume limitations, manner
of sale provisions, public information requirements or notice requirements.
The registration statement of which this prospectus is a part also registers
1,555,000 shares of common stock previously issued to selling securityholders,
8,558,333 shares of common stock to be issued upon exercise of warrants and
convertible promissory notes and 37,994 shares which may otherwise be issued to
the selling securityholders, thus permitting the resale of such shares by
non-affiliates in the public market without restriction under the Securities
Act.
PLAN OF DISTRIBUTION
Through our officers and directors, we are offering the shares of common stock
for sale on a "best efforts" basis. The shares will be offered by Michael
Sheppard, our President, and Maura Marx, our Executive Vice President. No
officer or director will receive any compensation for sales of shares of common
stock in this offering.
Licensed broker/dealers may also participate in the offering. We will pay a
commission of 10% and a non-accountable expense allowance of 3% to NASD
registered broker/dealers for sales of shares effected by NASD members. The
names of the NASD member broker/dealers that may participate in this offering,
if any, are identified on the annexed broker/dealer list. This list will be
updated by post-effective amendment to the extent that additional
broker/dealers, if any, agree to participate in this offering after the date of
this prospectus.
The offering shall commence on the date hereof and terminate 180 days later,
unless extended by us for up to an additional 90 days. All subscription proceeds
will be deposited no later than noon of the next business day after receipt into
our bank account. No escrow account will be established. Subscriptions will be
accepted as they are received.
The selling securityholders may sell their shares of common stock from time to
time in transactions, which may include block transactions by or for the account
of the selling securityholders, in the over-the-counter market or in negotiated
transactions, or through the writing of options on their shares, through a
combination of such methods of sale, or otherwise. Sales may be made at fixed
prices which may be changed, at market prices prevailing at the time of sale, or
at negotiated prices. If any selling securityholder sells shares of common
stock, or options thereon, pursuant to this prospectus at a fixed price or at a
negotiated price which is, in either case, other than the prevailing market
price or in a block transaction to a purchaser who resells, or if any selling
securityholder pays compensation to a broker/dealer that is other than the usual
and customary discounts, concessions or commissions, or if there are any
44
<PAGE>
arrangements either individually or in the aggregate that would constitute a
distribution of such shares, a post-effective amendment to the registration
statement of which this prospectus is a part, would need to be filed and
declared effective by the SEC before such selling securityholders could make
such sale, pay such compensation or make such a distribution. Financial Intranet
is under no obligation to file a post-effective amendment to the registration
statement of which this prospectus is a part under such circumstances.
LEGAL MATTERS
Certain legal matters in connection with the issuance of the securities being
offered by Financial Intranet will be passed upon for Financial Intranet by
McLaughlin & Stern, LLP, New York, New York. McLaughlin & Stern, LLP owns
options to purchase 75,000 shares of common stock at an exercise price of $.60
per share and 75,000 shares of common stock at an exercise price of $1.20 per
share. Mr. Schuster owns 11,111 shares of common stock.
EXPERTS
The financial statements as of December 31, 1998 and December 31, 1997 and for
the years ended December 31, 1998 and December 31, 1997 included in this
prospectus have been so included in reliance on the report of Reminick, Aarons &
Company, LLP, independent accountants, given on the authority of said firm as
experts in auditing and accounting.
45
<PAGE>
FINANCIAL INTRANET, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Financial Statements
Report of Independent Public Accountants......................................................................... F-2
Balance Sheets as of December 31, 1997 and 1998 ............................................................... F-3
Statements of Operations for the years ended December 31, 1997 and December 31, 1998 ............................ F-4
Statements of Changes in Stockholders' Equity for the years ended December 31, 1997 and 1998..................... F-5
Statements of Cash Flows for the years ended December 31, 1997 and December 31, 1998 ............................ F-8
Notes to Financial Statements ................................................................................... F-11
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Financial Intranet, Inc.
(A Development Stage Company)
We have audited the accompanying balance sheets of Financial Intranet, Inc. (a
Development Stage Company) as of December 31, 1998 and 1997, and the related
statements of operations, changes in stockholders' equity, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Financial Intranet, Inc. (a
Development Stage Company) as of December 31, 1998 and 1997, and the results of
its operations and its cash flows for the years then ended, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is in the development stage and has
experienced significant losses since its inception. In addition, the Company has
a negative working capital at December 31, 1998 and 1997 and the continuation of
the business is also dependent upon the Company's private placement and public
offering being successful. These matters raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans with regard
to these matters are also further described in Note 1. The accompanying
financial statements do not include any adjustments that may result should the
Company be unable to continue as a going concern.
/s/ REMINICK, AARONS & COMPANY, LLP
New York, New York
March 5, 1999, except for Note 6,
as to which the date is March 15, 1999
F-2
<PAGE>
FINANCIAL INTRANET, INC.
(a Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 March 31
ASSETS
1997 1998 1998 1999
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,929 $ 149,225 $ 0 $ 228,032
Accounts receivable 0 44,070 24,847 22,676
Due from officers 20,410 5,074 20,410 0
Prepaid expenses 4,693 4,378 0 49,814
----------- ----------- ----------- -----------
Total current assets 27,032 202,747 45,257 300,522
Property and equipment, net 235,712 961,195 721,793 858,545
Deferred offering costs 0 79,991 0 118,010
Deferred debt issuance costs 0 55,000 0 89,608
Notes receivable 41,200 0 41,200 0
Capitalized software development costs, net 68,275 88,058 65,430 68,640
Other assets 23,773 26,157 18,773 28,745
----------- ----------- ----------- -----------
Total assets $ 395,992 $ 1,413,148 $ 892,453 $ 1,464,070
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 140,292 $ 771,567 $ 763,227 $ 543,546
Due to officers 43,489 98,618 42,989 37,110
Loan payable 47,250 0 47,250 0
----------- ----------- ----------- -----------
Total current liabilities 231,031 870,185 853,466 580,656
----------- ----------- ----------- -----------
Note payable 0 500,000 0 860,000
----------- ----------- ----------- -----------
Total liabilities 231,031 1,370,185 853,466 1,440,656
----------- ----------- ----------- -----------
Commitments and contingencies
Stockholders' Equity:
Common stock, $.001 par value; 25,000,000 shares auth.,
15,589,228 and 16,223,877 shares issued and
outstanding December 31, 1997 and March 31, 1998,
respectively; 50,000,000 shares auth., 20,561,048
and 22,713,181 shares issued and outstanding
December 31, 1998 and March 31, 1999, respectively 15,589 20,561 16,224 22,713
Additional paid-in capital 1,306,622 4,079,186 1,335,987 4,221,454
Accumulated deficit during the development stage (851,928) (2,993,906) (1,096,606) (3,620,430)
Less: Stock subscriptions receivable (75,000) 0 0 0
Deferred compensation cost (230,322) (1,062,878) (216,618) (600,323)
----------- ----------- ----------- -----------
Total stockholders' equity 164,961 42,963 38,987 23,414
----------- ----------- ----------- -----------
Total liabilities and stockholders' equity $ 395,992 $ 1,413,148 $ 892,453 $ 1,464,070
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-3
<PAGE>
FINANCIAL INTRANET, INC.
(a Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31, Quarter Ended March 31,
1997 1998 1998 1999
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenue $ 0 $ 89,169 $ 35,931 $ 6,741
------------ ------------ ------------ ------------
Operating costs and expenses:
Cost of revenue 0 163,033 14,156 23,341
Sales and marketing expenses 55,794 50,246 23,139 40,745
General and administrative expenses 748,214 988,509 226,043 265,668
Depreciation and amortization 0 129,413 2,845 66,469
Stock compensation expense 13,272 897,808 13,704 224,436
------------ ------------ ------------ ------------
Total operating costs and expenses 817,280 2,229,009 279,887 620,659
------------ ------------ ------------ ------------
Loss from operations $ (817,280) $ (2,139,840) $ (243,956) $ (613,918)
Other income (expense):
Interest income $ 2,475 $ 4,140 $ 390 $ 1,633
Interest expense (2,625) (6,278) (1,113) (14,238)
------------ ------------ ------------ ------------
Total other (expense) (150) (2,138) (723) (12,605)
------------ ------------ ------------ ------------
Net loss $ (817,430) $ (2,141,978) $ (244,679) $ (626,523)
============ ============ ============ ============
Basic and diluted net loss per share $ (0.07) $ (0.12) $ (0.02) $ (0.03)
============ ============ ============ ============
Number of shares used in calculating basic
and diluted net loss per share 10,932,900 18,328,984 16,223,877 22,461,567
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-4
<PAGE>
FINANCIAL INTRANET, INC.
(a Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Years Ended December 31, 1997 And
1998 And (Unaudited) Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Additional
Paid-in
Description Shares Amount Capital
------ ------ -------
<S> <C> <C> <C>
Balance--January 1, 1997 3,980,000 $3,980 $ 30,620
February 29, 1997--issuance of stock in lieu of compensation
to key executives 4,250,000 4,250 148,500
May 1997 through December 31, 1997--Private Placement 6,904,228 6,904 877,823
August 4, 1997--issuance of stock in lieu of $6,500 in
promotional fees 100,000 100 6,400
September, 1997--issuance of stock to employees and increase in
additional paid-in capital resulting from stock options granted. 40,000 40 243,594
November 15, 1997--issuance of stock per non-dilution provisions
of consulting agreement 315,000 315 (315)
Net loss -- -- --
---------- ------- ----------
Balance--December 31, 1997 15,589,228 15,589 1,306,622
January, 1998--issuance of stock subscribed in 1997 400,000 400 29,600
Jan.-July 1998--issuance of stock per non-dilution provisions of
consulting agreement 346,742 347 (347)
May-Dec., 1998--issuance of stock in lieu of services 309,249 309 96,317
June and July, 1998--Promissory notes converted 1,070,800 1,071 463,930
June and October, 1998--Private placement 1,237,666 1,238 443,262
June 11, 1998--issuance of stock in lieu of fees on June, 1998
private placement 38,393 38 (38)
July 17, 1998--issuance of stock to release security interest in
certain equipment 500,000 500 314,500
October 15, 1998--issuance of stock in lieu of fees on 1997
private placement 68,970 69 (69)
October 15, 1998--issuance of stock resulting from exercise of
warrants 1,000,000 1,000 159,000
Increase in additional paid-in capital resulting from stock
options and warrants granted -- -- 1,266,409
Net loss -- -- --
---------- ------- ----------
Balance--December 31, 1998 20,561,048 20,561 4,079,186
January 7, 1999--issuance of stock in lieu of fees on December,
1998 private placement 25,000 25 (25)
January 21, 1999--Issuance of stock to three principals in
consideration for employment services 611,636 611 155,190
January 25, 1999--issuance of stock resulting from exercise of
warrants 5,812 6 (6)
March 3, 1999--issuance of stock to Founder for exercise of
options 879,685 880 166,260
March 3, 1999--issuance of stock in lieu of fees on February,
1999 private placement 30,000 30 (30)
March 10, 1999--issuance of stock as result of debt conversion 600,000 600 214,800
Increase in additional paid-in capital resulting from stock
options and warrants granted -- -- 130,600
Decrease in additional paid-in capital resulting from cancelled
stock options -- -- (524,521)
Net loss -- --
---------- ------- ----------
Balance--March 31, 1999 22,713,181 $22,713 $4,221,454
========== ======= ==========
</TABLE>
F-5
<PAGE>
FINANCIAL INTRANET, INC.
(a Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY--(Continued)
For The Years Ended December 31, 1997 And 1998
And (Unaudited) Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Accumulated
Deficit
Subscriptions Deferred Stock During the
Description Receivable Compensation Development Stage
---------- ------------ -----------------
<S> <C> <C> <C>
Balance--January 1, 1997 $ -- $ -- ($34,498)
February 29, 1997--issuance of stock in lieu of compensation to
key executives -- -- --
May 1997 through December 31, 1997--Private Placement (75,000) -- --
August 4, 1997--issuance of stock in lieu of $6,500 in
promotional fees -- -- --
September, 1997--issuance of stock to employees and increase in
additional paid-in capital resulting from stock options granted -- (230,322) --
November 15, 1997--issuance of stock per non-dilution provisions
of consulting agreement -- -- --
Net loss -- -- (817,430)
---------- --------- -----------
Balance--December 31, 1997 (75,000) (230,322) (851,928)
January, 1998--issuance of stock subscribed in 1997 75,000 -- --
Jan.-July 1998--issuance of stock per non-dilution provisions of
consulting agreement -- -- --
May-Dec., 1998--issuance of stock in lieu of services -- -- --
June and July, 1998--Promissory notes converted -- -- --
June and October, 1998--Private placement -- -- --
June 11, 1998--issuance of stock in lieu of fees on June, 1998
private placement -- -- --
July 17, 1998--issuance of stock to release security interest in
certain equipment -- -- --
October 15, 1998--issuance of stock in lieu of fees on 1997
private placement -- -- --
October 15, 1998--issuance of stock resulting from exercise of
warrants -- -- --
Increase in additional paid-in capital resulting from stock
options and warrants granted -- (832,556) --
Net loss -- -- (2,141,978)
---------- --------- -----------
Balance--December 31, 1998 -- (1,062,878) (2,993,906)
January 7, 1999--issuance of stock in lieu of fees on December,
1998 private placement -- -- --
January 21, 1999--Issuance of stock to three principals in
consideration for employment services -- -- --
January 25, 1999--issuance of stock resulting from exercise of
warrants -- -- --
March 3, 1999--issuance of stock to Founder for exercise of
options -- -- --
March 3, 1999--issuance of stock in lieu of fees on February,
1999 private placement. -- -- --
March 10, 1999--issuance of stock as result of debt conversion -- -- --
Increase in additional paid-in capital resulting from stock
options and warrants granted -- 42,939 --
Decrease in additional paid-in capital resulting from cancelled
stock options -- 419,616 --
Net loss -- (626,524)
---------- --------- -----------
Balance--March 31, 1999 $ 0 ($600,323) ($3,620,430)
========== ========= ===========
</TABLE>
F-6
<PAGE>
FINANCIAL INTRANET, INC.
(a Development Stage Company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY--(Continued)
For The Years Ended December 31, 1997 And 1998
And (Unaudited) Quarter Ended March 31, 1999
<TABLE>
<CAPTION>
Total
Stockholders' Equity
--------------------
<S> <C>
Balance--January 1, 1997 $102
February 29, 1997--issuance of stock in lieu of compensation to key
executives 152,750
May 1997 through December 31, 1997--Private Placement 809,727
August 4, 1997--issuance of stock in lieu of $6,500 in promotional
fees 6,500
September, 1997--issuance of stock to employees and increase in
additional paid-in capital resulting from stock options granted 13,312
November 15, 1997--issuance of stock per non-dilution provisions of
consulting agreement --
Net loss (817,430)
-----------
Balance--December 31, 1997 164,961
January, 1998--issuance of stock subscribed in 1997 105,000
Jan.-July 1998--issuance of stock per non-dilution provisions of
consulting agreement --
May-Dec., 1998--issuance of stock in lieu of services 96,626
June and July, 1998--Promissory notes converted 465,001
June and October, 1998--Private placement 444,500
June 11, 1998--issuance of stock in lieu of fees on June, 1998
private placement --
July 17, 1998--issuance of stock to release security interest in
certain equipment 315,000
October 15, 1998--issuance of stock in lieu of fees on 1997 private
placement --
October 15, 1998--issuance of stock resulting from exercise of
warrants 160,000
Increase in additional paid-in capital resulting from stock options
and warrants granted 433,853
Net loss (2,141,978)
-----------
Balance--December 31, 1998 42,963
January 7, 1999--issuance of stock in lieu of fees on December, 1998
private placement --
January 21, 1999--Issuance of stock to three principals in 155,801
consideration for employment services
January 25, 1999--issuance of stock resulting from exercise of warrants --
March 3, 1999--issuance of stock to Founder for exercise of options 167,140
March 3, 1999--issuance of stock in lieu of fees on February, 1999
private placement --
March 10, 1999--issuance of stock as result of debt conversion 215,400
Increase in additional paid-in capital resulting from stock options and
warrants granted 173,539
Decrease in additional paid-in capital resulting from cancelled stock
options (104,905)
Net loss (626,524)
-----------
Balance--March 31, 1999 $23,414
===========
</TABLE>
* See Statement of Cash Flows - (Noncash Investing and Financing Activities)
for related disclosure regarding issuance of common stock for noncash
consideration.
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
FINANCIAL INTRANET, INC.
(a Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, Quarter Ended March 31,
------------------------ ----------------------
1997 1998 1998 1999
---------- ----------- ---------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(817,430) $(2,141,978) $(244,679) $(626,523)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 0 129,413 2,845 66,469
Reserve for bad debts 0 41,200 0 0
Consulting services paid by issuance of
common stock 159,290 90,626 0 0
Compensation expense resulting from stock
options granted 13,272 897,808 13,704 224,436
Changes in operating assets and liabilities:
Accounts receivable 0 (44,070) (24,847) 21,394
Prepaid expenses (4,693) 315 4,693 (45,436)
Deferred offering costs 0 (55,991) 0 (38,019)
Other assets (23,773) (2,384) 5,000 (2,588)
Accounts payable and accrued expenses 140,292 631,275 622,935 (37,440)
--------- ----------- --------- ---------
Net cash provided by (used in) operating activities (533,042) (453,786) 379,651 (437,707)
--------- ----------- --------- ---------
Cash flows from investing activities:
Notes receivable advances (41,200) 0 0 0
Loans advanced from (to) officer (20,410) 15,336 0 5,074
Purchase of property and equipment (235,712) (833,128) (486,081) (20,692)
Capitalized software development costs (68,275) (41,551) 0 0
--------- ----------- --------- ---------
Net cash used in investing activities (365,597) (859,343) (486,081) (15,618)
--------- ----------- --------- ---------
Cash flows from financing activities:
(Repayments of) proceeds from loan payable 47,250 (47,250) 0 0
Proceeds from issuance of promissory notes 0 1,500,000 0 600,000
Payment of financing fees (70,523) (156,000) (2,499) (64,000)
Proceeds from issuance of common stock 880,250 37,500 37,500 0
Collection of stock subscriptions receivable 0 70,000 70,000 0
Proceeds from issuance of warrants 0 1,046 0 0
Advances from (payment to) officers 43,489 55,129 (500) (3,868)
--------- ----------- --------- ---------
Net cash provided by financing activities 900,466 1,460,425 104,501 532,132
--------- ----------- --------- ---------
Net increase in cash and cash equivalents 1,827 147,296 (1,929) 78,807
Cash and cash equivalents--beginning 102 1,929 1,929 149,225
--------- ----------- --------- ---------
Cash and cash equivalents--ending $ 1,929 $ 149,225 $ 0 $ 228,032
========= =========== ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 2,625 $ 4,167 $ 0 $ 739
========= =========== ========= =========
</TABLE>
F-8
<PAGE>
FINANCIAL INTRANET, INC.
(a Development Stage Company)
STATEMENTS OF CASH FLOWS --(Continued)
Noncash investing and financing activities:
The following noncash transactions occurred during the year ended
December 31, 1997:
-- 4,250,000 shares of the Company's common stock were issued to
three (3) key executives in lieu of $152,750 for executive
compensation and consulting fees.
-- 100,000 shares of the Company's common stock were issued to
outside consultants in lieu of $6,500 in promotional fees.
-- 315,000 shares of the Company's common stock valued at $315 were
issued at par value to outside consultants in accordance with the
anti- dilution provisions of the consulting agreement entered into
by the Company in December 1996.
-- Additional paid-in capital was increased by $243,594 and deferred
compensation of $230,322 was recorded resulting from stock options
granted.
The following noncash transactions occurred during the year ended
December 31, 1998:
-- 309,249 shares of the Company's common stock were issued to
outside consultants in lieu of 90,626 in services and $16,000 in
deferred offering costs, which represented the fair market value
of services rendered.
-- 1,000,000 shares of the Company's common stock in exchange for
$10,000 were issued to an independent consultant (as discussed in
Note 6) for providing various marketing, sales, general, and
public relations consulting services over a 24-month period. This
amount represented the excess of the market price of the Company's
common stock at date of grant over the exercise price.
-- 346,742 shares of the Company's common stock at par value were
issued to outside consultants in accordance with the anti-dilution
provisions of the consulting agreement entered into by the Company
which terminated in July 1998.
-- 500,000 shares valued at $315,000 were issued to an outside
facilitator as a settlement to release its security interest in
certain of the Company's equipment. This amount represented the
fair market value of the common stock issued at the date of
settlement.
F-9
<PAGE>
The following noncash transactions occurred during the quarter
ended March 31, 1999:
-- 12,500 shares of the Company's common stock were issued at par
value each to two financial advisors as part of their fees for
structuring a December, 1998 private placements.
-- 611,636 shares of the Company's common stock were issued to three
principals of the Company in consideration for employment services
valued at $155,801.
-- 5,812 shares of the Company's common stock were issued at par value
to Ganesh Asset Management for exercise of warrants.
-- 15,000 shares of the Company's common stock were issued at par
value each to two financial advisors as part of their fees for
structuring a February, 1999 private placement.
-- 879,685 shares of the Company's common stock were issued to Barry
Stein for aggregate consideration of $167,140 in payroll and
officers loans owed by the Company, upon exercise of options.
-- 600,000 shares of the Company's common stock were issued to an
investor as a result of a debt conversion.
-- Additional paid-in capital was decreased by $524,521 and stock
compensation costs were credited for $104,904 as a result of an
amended contract for Barry Stein wherein the Company cancelled
stock options to purchase 1,140,262 shares of commmon stock
previously granted in 1998 at an exercise price of $.19 per
share.
-- A credit in the amount of $81,081 was received from a vendor as an
adjustment to the purchase price of certain equipment and the
balance due to the vendor.
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
FINANCIAL INTRANET, INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1998
(Unaudited with respect to data as of March 31, 1998 and 1999
and for the three months ended March 31, 1998 and 1999)
Note 1--Summary of Significant Accounting Policies
Description of Business
Financial Intranet, Inc. (the "Company"), formerly Wee Wees, Inc. (which was
formerly Alexis & Co.) is a Nevada corporation incorporated on December 16,
1993. The founder of the Company acquired all of the outstanding shares of Wee
Wees, Inc. to obtain the benefits of a corporate entity for the business. The
Company provides a secure on-demand proprietary network (intranet) for
broker-dealers and their registered representatives. The network is designed to
provide updated training and data information concerning, among other things,
those mutual funds planning to participate in the Company's network. In
addition, the Company has developed an Internet presence accessible to the
general public, which will highlight the Company's clients. It is the Company's
plan to connect over 500 U.S. broker-dealer locations and subsequently provide
local access ports in various cities around the world. The Company has not yet
generated significant revenue from its operations and is therefore considered to
be a development stage company in accordance with Statement of Financial
Accounting Standards No. 7.
Going Concern Uncertainty
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. At December 31, 1997, the Company had a
negative working capital of $203,999 and a stockholders' equity of $164,961. At
December 31, 1998, the Company has a negative working capital of $667,438 and a
stockholders' equity of $42,963. As the Company is still in the development
stage and has experienced significant losses since its inception, there is
substantial doubt that it will be able to continue as a going concern without
the additional funding as contemplated by the Company's private placement and
public offering (see Note 12). If the public offering is not effected and
successful, management plans to seek alternate funding from an affiliated third
party, which will enable the Company to grow beyond the development stage. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Accounts Receivable
Accounts receivable are principally from users of the Company's communications
network. Accounts receivable at December 31, 1998 and March 31, 1999 were
$44,070 and $22,676, respectively. There were no accounts receivable at December
31, 1997 as no revenues were generated during 1997. Accounts receivable at March
31, 1998 was $24,847. Management believes that all accounts receivable are
fully collectible; accordingly, no allowance for uncollectible accounts has
been provided.
F-11
<PAGE>
FINANCIAL INTRANET, INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997 and 1998
(Unaudited with respect to data as of March 31, 1998 and 1999
and for the three months ended March 31, 1998 and 1999)
Note 1--Summary of Significant Accounting Policies--(Continued)
Property and Equipment
Property and equipment are stated at cost. At December 31, 1997, the computer
hardware and software acquired to implement the Company's intranet and internet
systems were not fully operational. As such, no depreciation or amortization had
been calculated for these assets for 1997 or at March 31, 1998. Depreciation
for the year ended December 31, 1998 was $107,645 as the equipment and related
software were not placed in service until 1998. Depreciation for the quarter
ended March 31, 1999 was $42,259. These assets are being depreciated on a
straight-line basis over their estimated lives, which range from three to five
years.
Deferred offering and debt issuance costs
Costs incurred in connection with the proposed offering of securities (see Note
12) and with the issuance of the December 31, 1998 convertible promissory note
have been deferred and will be offset against the proceeds of the offering and
conversion of debt. If the offering is not effected, these costs will be
expensed. The debt issuance costs will be amortized over the life of the debt,
if not converted. Amortization of debt issuance costs for the quarter ended
March 31, 1999 was $4,792.
Capitalized software development costs
Capitalized software development costs represent the costs of developing and
updating an Internet presence at the Company's web site. These costs are being
amortized on a straight-line basis over its estimated life of two years in
accordance with Statement of Position 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use." There was no amortization in
1997 because the web site was not placed in service until 1998. Amortization for
the quarter ended March 31, 1998 was $2,845. Amortization of capitalized
software development costs was $21,768 for the year ended December 31, 1998 and
$19,418 for the quarter ended March 31, 1999.
Basis for assigning amounts to equity securities issued for other than cash
Shares of common stock issued for other than cash have been assigned amounts
equivalent to the fair market value of the service or assets received in
exchange.
Revenue recognition
Revenue is recognized at the time telephone communications usage is incurred.
Advertising
Advertising and marketing costs are expensed as incurred.
Income taxes
The Company accounts for income taxes in accordance with the asset and liability
method of accounting for income taxes proscribed by Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". Under the asset and
liability method of Statement 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and
F-12
<PAGE>
liabilities are measured using enacted tax rates expected to apply to the
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Under
FINANCIAL INTRANET, INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997 and 1998
(Unaudited with respect to data as of March 31, 1998 and 1999
and for the three months ended March 31, 1998 and 1999)
Note 1--Summary of Significant Accounting Policies--(Continued)
Statement 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
Earnings per share
During the year ended December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). SFAS 128 requires the presentation of basic and diluted earnings per
share ("EPS"). Basic EPS is computed by dividing net loss available to common
stockholders by the weighted-average number of common shares outstanding during
the period. Diluted EPS is computed by dividing that net loss by the
weighted-average number of common shares and common stock equivalents
outstanding during the period. Common stock equivalents have been excluded from
the weighted-average shares for 1997 and 1998, because their inclusion is
anti-dilutive. All prior period EPS information has been computed in accordance
with the new pronouncement.
Stock-based compensation
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 is effective for fiscal years beginning
after December 31, 1995 and prescribes accounting and reporting standards for
all stock-based compensation plans, including employee stock options, restricted
stock, employee stock purchase plans and stock appreciation rights. SFAS 123
requires compensation expense to be recorded (i) using the new fair value method
or (ii) using existing accounting rules prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations with pro forma disclosure of what net income and
earnings per share would have been had the Company adopted the new fair value
method. The Company accounts for its stock-based compensation in accordance with
the provisions of APB 25.
Effect of recently issued accounting standards
In June 1997, the Financial Accounting Standards Board issued two new disclosure
standards.
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130") establishes standards for reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income is defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
130 requires that all items that are required to be recognized under current
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. The Company's net loss is the only item of comprehensive
income through December 31, 1997 and December 31, 1998.
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and related Information" ("SFAS 131"), which supersedes
Statement of Financial Accounting Standards No. 14, "Financial Reporting for
Segments of a Business Enterprise", establishes standards for the way that
public enterprises report information about operating segments in annual
financial statements and requires reporting of selected information about
operating segments in interim financial statements regarding products and
services, geographic areas and major customers. SFAS 131 defines operating
F-13
<PAGE>
segments as components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Company has only one operating segment.
FINANCIAL INTRANET, INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997 and 1998
(Unaudited with respect to data as of March 31, 1998 and 1999
and for the three months ended March 31, 1998 and 1999)
Note 1--Summary of Significant Accounting Policies--(Continued)
SFAS 130 and 131 are effective for financial statements for periods beginning
after December 15, 1997 and require that comparative information for earlier
years be restated.
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures About Pensions
and Other Postretirement Benefits" ("SFAS 132"), which standardizes the
disclosure requirements for pensions and other postretirement benefits. SFAS 132
is applicable for fiscal years beginning after December 15, 1997. The Company
does not expect adoption of SFAS 132 to have a material effect, if any, on the
financial statements and results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133), which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, collectively referred to as derivatives and hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial condition and measure those
instruments at fair value. SFAS 133 is effective for fiscal years beginning
after June 15, 1999. The Company has not determined the effect on its financial
statements or results of operations, if any, from the adoption of this
statement.
In October 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 134, "Accounting for Mortgage-backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise" (SFAS 134). This is an amendment to Statement of
Financial Accounting Standards No. 65, "Accounting for Certain Mortgage Banking
Activities", which establishes standards requiring that, after a securitization
of a mortgage loan is held for sale, an entity engaged in mortgage banking
activities classify the resulting mortgage-backed security as a trading
security. SFAS 134 is effective for fiscal years beginning after December 15,
1998. The Company's financial statements and results of operations are
unaffected by SFAS 134.
In March 1998, the AICPA issued Statement of Position 98-1, "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use" (SOP 98-1),
which provides guidance on accounting for the cost of computer software
developed or obtained for internal use regarding either the capitalization or
expensing of software costs that meet certain specified criteria. SOP 98-1 is
effective for fiscal years beginning after December 15, 1998 with earlier
application encouraged. SOP 98-1 has been adopted by the Company for the year
ended December 31, 1998.
In April 1998, the AICPA issued Statement of Accounting Position, 98-5
"Reporting on the costs of Start up Activities" (SOP 98-5), which provides
guidance on defining start up activities and requires that entities expense
start-up costs and organizational costs as they are incurred. SOP 98-5 is
effective for fiscal years beginning after December 15, 1998 with earlier
application encouraged, and was adopted by the Company in 1997.
F-14
<PAGE>
FINANCIAL INTRANET, INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997 and 1998
(Unaudited with respect to data as of March 31, 1998 and 1999
and for the three months ended March 31, 1998 and 1999)
Reclassifications
Certain accounts from the 1997 financial statements have been reclassified in
order to conform with the 1998 financial statement presentation. These
reclassifications have no effect on the previously reported net loss.
Unaudited Interim Financial Statements
The accompanying balance sheet as of March 31, 1998 and 1999 and the
accompanying statements of operations, stockholders' equity and cash flows for
the three months ended March 31, 1998 and 1999 included herein have been
prepared by the Company and are unaudited. The information furnished in the
unaudited financial statements referred to above includes all adjustments that
are, in the opinion of management, necessary for a fair presentation of such
financial statements. The results of operations for the three months ended March
31, 1998 and 1999 are not necessarily indicative of the results to be expected
for the entire fiscal year.
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 revenue and expenses during the reporting period.
Actual results could differ from those estimates.
Note 2--Notes Receivable
** 13 In connection with entering into a Letter of Intent to acquire 80% of the
equity of Micro-Intelligent Systems, Inc. (MIS), a private corporation that
manufactures a portable electronic document device, the Company provided loans
to MIS. On February 25, 1997, in conjunction with the signing of the Letter of
Intent, the Company provided a loan of $20,000, due on demand on or after
February 25, 2007, together with interest at the rate of 4% per annum. On March
21, 1997, the Company issued an additional loan of $20,000, due on demand on or
after March 21, 2007, together with interest at the rate of 4% per annum.
Subsequently, management has rescinded plans for the acquisition. Accrued
interest of $1,200 was due on these notes receivable at December 31, 1998. As
of December 31, 1998, the Company has fully reserved the balance of $41,200 for
the potential uncollectibility of this note and related accrued interest.
Note 3--Property and Equipment
Property and equipment consists of the following at December 31, 1997 and 1998:
<TABLE>
<CAPTION>
12/31/97 12/31/98 3/31/98 3/31/99
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Computer equipment.................... $235,712 $1,068,840 $721,793 $1,008,449
Accumulated depreciation.............. -- (107,645) -- (149,904)
-------- ---------- -------- ----------
$235,712 $ 961,195 $721,793 $ 858,545
======== ========== ======== ==========
</TABLE>
Note 4--Loan Payable
In September 1997, Civilization Communications Inc. (CivCom), a consultant, (see
Note 6) advanced funds to various vendors on behalf of the Company. These
payments were documented in a promissory note dated January 2, 1998 in the
principal amount of $47,250, bearing interest at the prime rate and due on June
30, 1998. On August 28, 1998 the balance, including principal and interest, was
fully repaid.
Note 5--Note Payable
F-15
<PAGE>
On December 31, 1998, the Company entered into a subscription agreement for a
private placement of $500,000 consisting of a 7% convertible promissory note in
the principal amount of $500,000, and warrants to purchase 1,250,000 shares of
the Company's common stock, at an exercise price of $.60 per share as defined in
the agreement.
The Company paid, on the closing date, fees of $55,000 as a reduction of the
proceeds. In addition, the two placement agents, as part of their fees, received
25,000 shares of common stock and warrants to purchase 160,000 shares of common
stock at an exercise price of $.64 per share and 125,000 shares of common stock
at an exercise price of $.40 per share, respectively, of common stock. The
25,000 shares were issued in January 1999.
On February 8, 1999 the Company issued $600,000 in 7% convertible promissory
notes, of which $240,000 were converted to 600,000 shares of common stock on
March 10, 1999 and $360,000 were converted to 900,000 shares of common stock
on May 14, 1999. (See Note 12).
Note 6--Commitments
Operating leases
The Company subleased its office space in New York City until April 1998. Rent
expense under this lease charged to operations was $22,431 and $16,299 for the
years ended December 31, 1997 and 1998, respectively and $17,691 and $7,695 for
the quarters ended March 31, 1998 and 1999, respectively.
F-16
<PAGE>
FINANCIAL INTRANET, INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997 and 1998
(Unaudited with respect to data as of March 31, 1998 and 1999
and for the three months ended March 31, 1998 and 1999)
Note 6--Commitments--(Continued)
In October 1997, the Company entered into a lease agreement for office space in
Ardsley, New York for a term of three (3) years commencing on January 1, 1998.
The lease agreement provides for a fixed annual base rent of $15,575 payable in
equal monthly installments plus a proportionate share of certain incremental
building operating expenses as defined in the lease agreement.
In June 1998, the Company entered into another lease agreement for additional
office space in Ardsley, New York for a term commencing on July 15, 1998 and
expiring on December 31, 2000. This lease provides for an annual base rent of
$8,303 payable in equal monthly installments, plus a proportionate share of
certain incremental building operating expenses as defined in the lease
agreement. Rent expense under these leases charged to operations was $0 and
$22,062 for the years ended December 31, 1997 and 1998, respectively. Minimum
required future rental payments under these operating leases at December 31,
1998 are as follows:
1999...............................................$23,878
2000............................................... 23,878
-------
$47,756
=======
Consulting agreement--Civilization Communications Inc.
In October 1996, the Company entered into an agreement executed by its founder
(amended December 20, 1996), with Civilization Communications Inc. (CivCom), to
provide various consulting services. Specifically, CivCom assisted in the
preparation of the Company's Business Plan and the preparation of the initial
Private Placement Memorandum (PPM) as well as associated and relevant documents.
In addition, the agreement provides for CivCom, at the Company's request, to
assist in the preparation of all filings and to prepare the documentation
required to be filed with various state and federal agencies concerning the
raising of the funds encompassed by the PPM. In consideration of the services
provided, the agreement provides for $25,000 in compensation, payable as
follows: a $15,000 cash payment from the funds acquired through the placement of
any of the Company's securities and 200,000 shares (subsequently adjusted to
240,000 shares) of common stock (in lieu of $10,000).
In accordance with the non-dilutive provisions of the agreement, CivCom was
entitled to maintain a 6.1% share of the total outstanding shares of the
Company's common stock through July 7, 1998. As such, CivCom was issued 315,000
shares during 1997 and 346,742 shares during 1998 at which time the agreement
was cancelled by the Company. Subsequent to July 1998, CivCom continued to
consult the Company on a fixed price per hour basis.
Consulting agreements--key executives
In February 1997, the Company entered into consulting agreements with three key
executives to whom the Company intended to eventually offer long-term employment
agreements (see below). The consulting agreements provide for monthly stipends
from the date of signing to the date the Company and the executives enter into
the employment agreements. The consulting agreements also provide for the
issuance of the Company's common stock at par value since at the time there was
no determined market value for the shares issued as the Company was recently
formed and had no operations at this time. In addition, in February 1997, in
lieu of $150,000 in compensation for consulting services through December 31,
1997, the founder was issued an additional 1,500,000 shares of the Company's
common stock. The key executives and the related provisions within their
respective agreements are as follows:
F-17
<PAGE>
FINANCIAL INTRANET, INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997 and 1998
(Unaudited with respect to data as of March 31, 1998 and 1999
and for the three months ended March 31, 1998 and 1999)
Note 6--Commitments--(Continued)
<TABLE>
<CAPTION>
Par Value of
Monthly Common Stock Stock
Executive Stipend Issued Issued
- ------------ ------------ ------ ------
<S> <C> <C> <C>
Founder................................................................. $0 1,500,000 shares $1,500
Founder................................................................. $12,500 1,500,000 shares 1,500
President and Chief Operating Officer................................... $12,500 750,000 shares 750
Executive Vice-President ............................................... $5,417 500,000 shares 500
---------- --------
4,250,000 $4,250
</TABLE>
Employment agreements
On September 12, 1997, the Company entered into employment agreements with three
key executives which were later amended on March 15, 1999. The agreements are
for a five-year period commencing on September 12, 1997 and may be extended by
the Company for an additional three-year period upon written notice six months
prior to the third anniversary of the original term. The agreements stipulate
the duties, compensation and benefits, indemnification, termination and various
other terms of employment. Included in compensation for all three executives is
an option to purchase, at any time while the executive is employed by the
Company, additional shares (in addition to any shares previously issued) of the
Company's common stock through December 31, 1998. The purchase price for such
shares is at a price per share equal to eighty percent of the per share bid
price averaged over five working days prior to the date of the signed employment
agreement. The options shall permit each executive to purchase up to a certain
percentage (see below) of the Company's issued and outstanding shares of common
stock less; i) shares previously issued according to the consulting agreement;
ii) less any shares previously issued as a result of the exercise of this option
and (iii) less any shares issued in lieu of cash expenses advanced by the
executive or accepted as previously earned consulting fees paid to the executive
in lieu of cash. All options granted under the employment agreements expire on
December 31, 2002, except for earlier dates relative to termination.
The number of the Company's issued and outstanding common stock for the purpose
of calculating the total number of shares which may be purchased by the
executive in exercising the option shall be: i) the number of shares issued on
the later of the exercise date or any date prior to December 31, 1998, providing
that ii) the total number of shares issued as utilized in the calculation of the
shares available for purchase under the option shall not exceed the number of
shares issued and outstanding at December 31, 1998 as recorded on the Company's
stock ledger and as reported by the Company's transfer agent. These options are
non-transferable and expire on the last date of the original employment term or
any extension thereof (See note 8). The executives and the related provisions of
their employment agreement are detailed below:
<TABLE>
<CAPTION>
Stock Option
Percentage Through
Executive Base Salary December 31, 1998
- --------- ----------- ------------------
<S> <C> <C>
Founder............................................................................... $150,000 25.0%
President and Chief Operating Officer................................................. $150,000 14.5%
Executive Vice-President ............................................................. $100,000 9.0%
</TABLE>
F-18
<PAGE>
Consulting agreement--independent consultant
On October 6, 1997, the Company entered into a consulting agreement with an
individual to provide various marketing, sales, general and public relations
consulting in connection with undertaking the promotion of the Company's
products, training
FINANCIAL INTRANET, INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997 and 1998
(Unaudited with respect to data as of March 31, 1998 and 1999
and for the three months ended March 31, 1998 and 1999)
Note 6--Commitments--(Continued)
programs and services to broker/dealers, underwriters and administrators of
mutual funds. In consideration for services provided, the agreement granted the
consultant a warrant to purchase up to one million (1,000,000) shares of the
common stock of the Company at $.01 per share. In addition, all travel, mailing,
entertainment, printing, postage and all other expenses directly related to
services will be reimbursed by the Company. The warrant was exercised on October
9, 1998 for 1,000,000 shares.
The terms of the agreement are for a 24-month period commencing with the date of
the signing of the agreement and shall terminate on October 20, 1999, with an
extension convertible to October 20, 2000, unless sooner by death of the
consultant or a 30-day notice of termination by either party. Stock compensation
costs charged to operations for warrants issued was $150,000 for the year ended
December 31, 1998.
Major customers
A substantial portion of the Company's revenue is derived from three major
customers which, individually, constitute approximately 38.3%, 22.0% and 15.6%
of total revenue for the year ended December 31, 1998.
F-19
<PAGE>
FINANCIAL INTRANET, INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997 and 1998
(Unaudited with respect to data as of March 31, 1998 and 1999
and for the three months ended March 31, 1998 and 1999)
Note 7--Private Placements
The Company had a private placement offering in June 1997, whereby 6,904,228
shares of common stock were issued. The Company had two outstanding subscription
agreements from investors totaling $75,000 at December 31, 1997.
The Company subsequently issued 400,000 shares of common stock in January 1998.
On May 20, 1998, the Company entered into subscription agreements to issue a
total of $500,000 in convertible debentures, due November 20, 1998. The
debentures pay 6% cumulative interest annually, payable in cash or in freely
trading common stock of the Company, at the Company's option at the time of each
conversion until the principal amount is paid in full or has been converted. The
debentures are subject to automatic conversion at the end of six months from the
date of issuance based on a formula as defined under the agreements. The holder
of the debenture has the right, at their option, to convert it into shares of
the Company's common stock at any time before the close of business on the
maturity date. The debentures were converted into 1,070,800 shares in June and
July 1998.
On June 4, 1998, the Company entered into a Placement Agent Agreement with
Corporate Capital Management LLC (CCM). The agreement appointed CCM exclusive
placement agent of the Company during the offering period as defined in the
agreement for the purpose of assisting the Company in the sale of $500,000 (the
Funds) in principal amount of its convertible 12% promissory note due December
1, 1998 (the Note). The agreement provides for a cash fee in an amount equal to
10% of the gross proceeds from the sale of the Note plus warrants to purchase
50,000 shares of the Company's common stock. The warrants shall be exercisable
at a price equal to 110% of the bid price for the common stock on the date of
closing of the sale of the Note. In conjunction with the agreement to retain CCM
as placement agent, on June 4, 1998, the Company entered into a subscription
agreement for the Note. The Note is convertible, at the holder's option, at any
time, into shares of common stock of the Company. The number of shares of common
stock into which the Note may be converted shall be determined at the lesser of
(i) 72.5% of the lowest closing bid price quoted on the over-the-counter
Bulletin Board market of the common stock for the five-day trading period ending
on the day prior to the conversion date or (ii) the lowest closing bid price
quoted on the Bulletin Board of the common stock for the five-day trading period
ending on the day prior to the closing of the sale of the Note. The note was
converted to 1,352,718 shares of the Company's common stock in June 1998 and
115,052 shares were subsequently cancelled in October 1998.
Note 8--Stock Options and Warrants
The following stock options and warrants were granted during 1997 and 1998:
Warrants to purchase 1,000,000 shares of common stock exercisable at $.01 per
share pursuant to a consulting agreement (See note 6).
Warrants to purchase 166,667 shares of common stock to a consultant on July 15,
1998 which expire June 22, 2003, at an exercise price of $.40 per share.
Stock options to purchase 250,000 shares of common stock to each of two
employees at an exercise price of $.625 per share, which vest one-third each
year over the next three years beginning in December 1999.
Warrants to purchase 150,000 shares of common stock for legal services: 75,000
shares on July 10, 1998 which expire July 10, 2003, at an exercise price of
$1.20 per share; and 75,000 shares on November 25, 1998 which expire November
24, 2003, at an exercise price of $.60 per share.
F-20
<PAGE>
FINANCIAL INTRANET, INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Note 8--Stock Options and Warrants--(Continued)
Stock options to purchase 4,810,776 and 2,411,333 shares of common stock during
1997 and 1998, respectively, exercisable at $.19 per share pursuant to
employment agreements with three key executives (See note 6).
Warrants to purchase 10,000 shares of common stock to each of two directors, one
issued on September 1, 1998 which expires August 31, 2001, exercisable at a
price of $.725 per share; and the other issued on November 13, 1998 which
expires November 13, 2001, exercisable at a price of $.60 per share.
Warrants to purchase 285,000 shares of common stock to two investment bankers as
commissions for a December 31, 1998 private placement of convertible promissory
notes, one of which is for 125,000 shares of common stock exercisable at a price
of $.40 per share, and the other which is for 160,000 shares of common stock
exercisable at a price of $.64 per share.
Warrants to purchase 200,000 shares of the Company's common stock were issued to
a consultant on April 1, 1997 at an exercise price of $7.25. These warrants
expire on March 31, 2002.
Warrants to purchase 50,000 shares of the Company's common stock were issued to
the placement agent for a June, 1998 private placement. The warrants are
exercisable at $.64 per share.
The charge to operations for the above grants of options and warrants for the
year ended December 31, 1998 was $156,150.
The following warrants were granted during the quarter ended March 31, 1999:
Warrants to purchase 75,000 shares of common stock were issued to each of two
placement agents for a February 1999 private placement, exercisable at a price
of $.60 per share.
Warrants to purchase 40,000 shares of common stock were issued to the
subscriber's attorneys for a February 1999 private placement, exercisable at a
price of $.60 per share.
The charge to operations for the above grants for the quarter ended March 31,
1999 was $130,600.
Summary information with respect to stock options granted is as follows:
<TABLE>
<CAPTION>
Outstanding Outstanding
Exercise Options Options
Price Granted Exercisable
----- ------- -----------
<S> <C> <C> <C>
Balance, January 1, 1997..................................................... -- --
Activity:
Options granted........................................................... $.19 4,810,776 4,810,776
Options exercised......................................................... -- --
Options cancelled......................................................... -- --
--------- ---------
Balance, December 31, 1997................................................... $.19 4,810,776 4,810,776
Activity:
Options granted........................................................... $.19 2,411,333 2,411,333
Options exercised......................................................... -- --
Options cancelled......................................................... -- --
--------- ---------
Balance, December 31, 1998................................................... $.19 7,222,109 7,222,109
Activity:
Options granted........................................................... $.19 -- --
Options exercised......................................................... (879,685) (879,685)
Options cancelled......................................................... (1,140,262) (1,140,262)
---------- ----------
Balance, March 31, 1999...................................................... $.19 5,202,162 5,202,162
========= =========
</TABLE>
F-21
<PAGE>
Compensation cost charged to operations for stock options granted was $13,272
and $276,658 for the years ended December 31, 1997 and 1998, respectively and
$13,704 and $42,939 for the quarters ended March 31, 1998 and 1999,
respectively, and a $104,904 for options cancelled was credited during the
quarter ended March 31, 1999.
1998 Stock Option Plan
In December, 1998, the Company established the 1998 Stock Option Plan ("1998
Plan") which provides for the granting of options which are intended to qualify
either as incentive stock options ("Incentive Stock Options") within the meaning
of Section 422 of the
FINANCIAL INTRANET, INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997 and 1998
(Unaudited with respect to data as of March 31, 1998 and 1999
and for the three months ended March 31, 1998 and 1999)
Note 8--Stock Options and Warrants--(Continued)
Internal Revenue Code of 1986, as amended, or as options which are not intended
to meet the requirements of such section ("Non-statutory Stock Options"). The
total number of shares of Common stock reserved for issuance under the 1998 Plan
is 1,500,000. Options to purchase shares may be granted under the 1998 Plan to
persons who, in the case of Incentive Stock Options, are key employees
(including officers) of the Company or, in the case of Non-statutory Stock
Options, are key employees (including officers) or non-employee directors of, or
non-employee consultants to, the Company.
The exercise price of all Incentive Stock Options granted under the 1998 Plan
must be at least equal to the fair market value of such shares on the date of
the grant or, in the case of Incentive Stock Options granted to the holder of
more than 10% of the Company's Common stock, at least 110% of the fair market
value of such shares on the date of the grant. The maximum exercise period for
which Incentive Stock Options may be granted is ten years from the date of grant
(five years in the case of an individual owning more than 10% of the Company's
Common stock). The aggregate fair market value (determined at the date of the
option grant) of shares with respect to which Incentive Stock Options are
exercisable for the first time by the holder of the option during any calendar
year shall not exceed $100,000.
The exercise price of all Non-statutory Stock Options granted under the 1998
Plan must be at least equal to 85% of the fair market value of such shares on
the date of the grant.
No options have been granted during 1998 pursuant to the 1998 Plan.
Note 9--Income Taxes
The Company has net operating loss carryforwards available for income tax
reporting purposes of approximately $3,000,000, in the aggregate, expiring in
2011 to 2013 which, upon recognition, gives rise to a deferred income tax asset
of approximately $340,000 and $1,200,000 at December 31, 1997 and 1998,
respectively.
The Company has recorded a 100% valuation allowance on the net deferred tax
asset since management cannot determine if it is more likely than not that the
deferred tax asset will be utilized.
Note 10--Related Party Transactions
Due from officers
At December 31, 1997, the Company had a $19,500 note receivable from an
officer/stockholder of the Company. The note receivable, which is due on demand,
bears interest at 8% per annum. At December 31, 1997, there was $910 of accrued
interest on the note receivable. The balance of this note receivable was fully
repaid on November 19, 1998. At December 31, 1998 and March 31, 1999, there was
$5,074 and zero, respectively, in accounts receivable due from officers.
F-22
<PAGE>
Due to officers
At December 31, 1997, the Company had an unsecured note payable in the amount of
$43,489 to an officer/stockholder. The borrowings, advanced to meet current
operating obligations, were due on demand and are non-interest bearing. The
remaining balance at December 31, 1998 was $5,889 and zero at March 31, 1999.
On August 27, 1998 and December 16, 1998, the Company borrowed an additional
$50,000 and $5,000, respectively from the same officer. The promissory notes,
with an interest rate of 8% per annum, are due in 180 days. At December 31,
1998, interest of $1,350 was accrued on this note. This amount was repaid on
March 3, 1999 as part of an agreement with the Founder (see Note 12).
At December 31, 1998, the Company had an unsecured note payable in the amount of
$36,115 to another officer/stockholder, due on demand. The promissory note bears
an interest rate of 8% per annum. At December 31, 1998, interest of $254 was
accrued on this note. At March 31, 1999, interest of $995 was accrued on this
note.
Note 11--Contingency
Litigation
On July 23, 1998, H & H Acquisition Corp., individually and on behalf of the
Company, commenced an action in federal court in the Southern District of New
York against the Company, the founder and certain officers, among others. The
complaint is an action to recover shares of common stock of the Company
previously sold to an officer/stockholder and unspecified damages. Management
believes that the claims against the Company and certain officers are without
merit and is vigorously defending the action. In addition, management believes
that the plaintiffs' principal causes of action relate to the founder, who has
filed a motion to dismiss the complaint on the grounds, in part, that a mutual
release previously executed with the plaintiff covers the alleged action. No
provision has been made in these financial statements for any possible losses
arising from this litigation.
Settlement agreement
In February 1998, a collateral pledge agreement was executed between the Company
and two outside parties to arrange for the Company to receive $350,000 to
purchase certain network computer and telecommunications equipment. Pursuant to
that collateral pledge agreement, the Company granted a first priority security
interest to one of the parties (the "facilitator") in order to secure the
obligations of the other party ("the borrower") under said agreement. The
Company did not receive the contemplated funds and had to make other
arrangements to fund its purchase of the equipment.
In July 1998, in order to obtain a release of the security interest in the
equipment, the Company issued 500,000 shares of its common stock to the
facilitator. If the facilitator desires to sell the shares, the Company has a
right of first refusal to purchase those shares. In the event there is a sale of
the total shares, the facilitator receives the first $175,000 of the net
proceeds, and the balance shall be divided equally between the facilitator and
the Company. If the sale of shares has not taken place by July 31, 1999, this
agreement shall terminate and the facilitator shall retain ownership of the
shares. The Company has charged $315,000 to operations for the year ended
December 31, 1998 to reflect the issuance of the 500,000 shares of common stock.
Note 12--Subsequent Events
Private placement
F-23
<PAGE>
On February 8, 1999, the Company entered into a subscription agreement for a
private placement of up to $1,700,000 principal amount of 7% convertible
promissory notes and warrants to purchase up to 3,333,333 shares of common stock
in up to five separate installments at an exercise price of $.40 per share for
the initial warrants and $.60 per share for the installments. The agreements
consist of an initial purchase of a Promissory Note in the principal amount of
$600,000 (the "Initial Note") and Initial Warrants to purchase 1,500,000 shares
of Common stock for a purchase price of $600,000.
At the Initial Closing, the Company issued an Initial Note which may later be
convertible into common stock of the Company in the principal amount of
$600,000, with $240,000 of the principal amount, and all accrued interest
thereon, payable upon conversion by the holder thereof commencing March 10,
1999, and $360,000 of the principal amount, and all accrued interest thereon,
payable upon conversion by the holder thereof commencing 90 days after the
Initial Closing Date. The Initial Note with respect to the $240,000 principal
amount was converted on March 10, 1999 into 600,000 shares of common stock and
the balance of the $360,000 principal amount was converted on May 14, 1999 into
900,000 shares of common stock. The Installment Notes in the aggregate principal
amount of $1,100,000 may be converted, in whole or in part, at any time after
issuance at the option of the holder.
Commencing on the date the offering becomes effective, and terminating 30
days later, the Company may serve a demand notice or the investor may serve a
purchase notice, with respect to the purchase for $200,000 of a promissory note
in the principal amount of $200,000 and a warrant for the purchase of 333,333
shares of Common Stock at an exercise price of $.60 per share.
FINANCIAL INTRANET, INC.
(a Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years ended December 31, 1997 and 1998
(Unaudited with respect to data as of March 31, 1998 and 1999
and for the three months ended March 31, 1998 and 1999)
Note 12--Subsequent Events--(Continued)
The "Conversion price" shall be the lesser of: (i) 75% of the average of the
five lowest closing bid prices of the Common stock during the 30 trading days
ending on the trading day immediately preceding the Conversion date, or (ii)
$.40, $.50 and $.60 per share with respect to the promissory note for the
$200,000 promissory note and two promissory notes in the principal amount of
$300,000, respectively.
During the 90 day period after the closing of the installment for a promissory
note in the principal amount of $200,000, the Company may serve a demand notice
or the investor may serve a purchase notice, with respect to the purchase for
$300,000 of a promissory note in the principal amount of $300,000 and a warrant
for the purchase of 500,000 shares of Common stock (the "Third Installment").
During the 90 day period after the Third Installment, the Company may serve a
demand notice or the investor may serve a purchase notice, with respect to the
purchase for $300,000 of a promissory note in the principal amount of $300,000
and a warrant for the purchase of 500,000 shares of Common stock (the "Fourth
Installment"). During the 90 day period after the Fourth Installment, the
Company may serve a demand notice or the investor may serve a purchase notice,
with respect to the purchase for $300,000 of a Promissory Note in the principal
amount of $300,000 and a warrant for the purchase of 500,000 shares of Common
stock The warrants are exercisable for a period of five years after issuance at
an exercise price of $.60 per share.
The two agents for this placement, as part of their fee, each received 15,000
shares of Common stock and Initial Warrants to purchase 75,000 shares of Common
stock at an exercise price equal to $0.40 per share of Common stock (and
otherwise on terms set forth in the Common stock Purchase Warrant) on the
Initial Closing Date.
On each Closing Date for an installment: (i) the two Placement Agents, as part
of their fee, shall also each receive 1,727 shares of Common stock for each
$100,000 funded to the Company by the Investor, Installment Warrants to purchase
10,000
F-24
<PAGE>
shares of Common stock on the Closing Date for each $100,000 funded on
the second installment, and Installment Warrants to purchase 8,333 shares of
Common stock on each Closing Date for each $100,000 funded on the third, fourth
and fifth installments. The Installment Warrants will have an exercise price of
$0.60 per share.
Public offering
In February 1999, the Company filed a Registration Statement (Form SB-2)
covering the primary offering of Common stock by the Company and the offering of
common stock by certain selling securityholders. Under the primary prospectus,
the Company is registering 4,444,444 Shares of common stock, par value $.001 per
share, to be held for sale. Under an alternate prospectus, the selling
securityholders are registering 5,408,333 shares of common stock underlying the
warrants, 6,075,000 shares of common stock underlying the convertible promissory
notes (including an additional 2,025,000 shares of common stock being registered
with respect to certain anti-dilution provisions of such promissory notes),
655,000 shares of common stock previously issued and 37,994 shares of common
stock which will be issued upon conversion of certain promissory notes. These
shares will be offered to the public at an offering price of $1.35 per share.
Founder consulting agreement
On March 3, 1999 the Company entered into a consulting agreement with the
Company's Founder (the "Founder") whereby the Founder will be retained as a
consultant to act as Director of Brokerage Sales on a commission only basis
through December 31, 2002. The terms of compensation include commissions paid as
a percentage of sales and reimbursement of certain expenses as defined in the
agreement. In addition, under the terms of this agreement, the Founder
acknowledges that he agrees to reduce the number of unexercised options held by
him to purchase shares of the Company common stock from 3,640,262 to 2,500,000
shares at an exercise price of $.19 per share. The Founder has also agreed to
exercise these options with respect to 879,685 shares as of March 3, 1999 in
exchange for settlement of $167,140 in accrued salary and loans owed by the
Company to the Founder.
<PAGE>
We have not authorized anyone to give any information different
from that contained in this prospectus. You must not rely on any
unauthorized information. We are offering to sell, and seeking offers
to buy, shares of common stock only in states where offers and sales
are permitted. The information in this prospectus is accurate only as
of the date of this prospectus.
TABLE OF CONTENTS
Page
----
Prospectus Summary .....................................2
Risk Factors ...........................................6
Use of Proceeds .......................................10
Capitalization.........................................11
Dilution .............................................12
Dividend Policy .......................................13
Management's Discussions and Analysis of
Financial Condition and Results of
Operations ............................................14
Business...............................................18
Management ............................................30
Certain Transactions ..................................35
Principal Stockholders ................................36
Selling Securityholders ...............................37
Description of Securities .............................40
Shares Eligible for Future Sale .......................43
Plan of Distribution ..................................43
Legal Matters..........................................44
Experts................................................44
Financial Statements ................................F-1
Until ____, 1999 (25 days after the date of this prospectus),
all dealers effecting transactions in the securities offered hereby,
whether or not participating in the distribution, may be required to
deliver a prospectus. This is in addition to the obligation of dealers
to deliver a prospectus when acting as underwriters and with regard to
their unsold allotments or subscription.
4,444,444 Shares
of Common Stock
Financial Intranet, Inc.
PROSPECTUS
June , 1999
A-2
<PAGE>
[Alternate Cover Page--- The
Offering] SUBJECT TO COMPLETION,
DATED JUNE 1, 1999
PROSPECTUS
10,151,327 Shares of Common stock
Financial Intranet Inc.
Selling securityholders are offering 10,151,327 shares of common stock of
Financial Intranet, Inc.
The selling securityholders may sell the shares of common stock from time to
time. They have no underwriting arrangements. The selling securityholders and
intermediaries through whom such securities may be sold may be "underwriters"
under the Securities Act, and any profits or commissions may be underwriting
compensation. Financial Intranet agreed to indemnify the selling securityholders
against certain liabilities, including liabilities under the Securities Act.
On the date hereof, Financial Intranet commenced a public offering of 4,444,444
shares of common stock through a registration statement of which this prospectus
is a part.
These are speculative securities and this investment involves a high degree of
risk. See "Risk Factors" on page 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
adequacy of the prospectus. Any representation to the contrary is a criminal
offense.
The date of this Prospectus , 1999
A-1
<PAGE>
The Offering
<TABLE>
<S> <C>
Securities offered by selling securityholders:..................... 10,151,327 shares
Securities outstanding prior to Financial Intranet's offering:..... 23,624,292 shares
Securities outstanding after offering:............................. 36,665,063 shares which include:
o 5,408,333 shares of common
stock issuable upon exercise
of the warrants,
o 3,150,000 shares of common
stock issuable upon conversion
of the promissory notes issued
to the selling
securityholders,
o 1,555,000 shares of common stock
previously issued to the
selling securityholders,
o 37,994 shares otherwise
issuable to the selling
securityholders, and
o 4,444,444 shares of common
stock being offered by
Financial Intranet.
Risk Factors....................................................... An investment in any of the securities being offered
hereby is highly speculative and involves substantial
risks including the risks of:
o limited operations
o projected losses
o limited number of products
o management's broad discretion
in the application of proceeds
o the possible need for
additional financing
o competition
Investors should carefully consider the matters set forth under
the caption "Risk Factors."
OTC Bulletin Board Symbol:......................................... FNTN
</TABLE>
A-2
<PAGE>
We have not authorized anyone to give any information
different from that contained in this prospectus. You must not rely
on any unauthorized information. We are offering to sell, and
seeking offers to buy, shares of common stock only in states where
offers and sales are permitted. The information in this prospectus
is accurate only as of the date of this prospectus.
TABLE OF CONTENTS
Page
Prospectus Summary ........................................2
Risk Factors ..............................................6
Use of Proceeds ..........................................10
Capitalization............................................11
Dilution..................................................12
Dividend Policy ........................................13
Management's Discussions and Analysis of
Financial Condition and Results of
Operations ............................................14
Business..................................................18
Management ...............................................30
Certain Transactions .....................................35
Principal Stockholders ...................................36
Selling Securityholders ..................................37
Description of Securities ................................40
Shares Eligible for Future Sale ..........................43
Plan of Distribution .....................................43
Legal Matters.............................................44
Experts...................................................44
Financial Statements ....................................F-1
Until , 1999 (25 days after the date of this prospectus), all
dealers effecting transactions in the securities offered hereby, whether
or not participating in the distribution, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver
a prospectus when acting as underwriters and with regard to their unsold
allotments or subscription.
10,151,327 Shares
of Common Stock
Financial Intranet, Inc.
PROSPECTUS
----------------
June , 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Officers and Directors
Subsection 1 of Section 78.7302 of Chapter 78 of the Nevada General
Corporation Law ("NGCL") empowers a corporation to indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (except in an action by or in the right of
the corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of
another corporation or enterprise, against expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or
proceeding, if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation,
and, with respect to any criminal action or proceedings, had no reasonable
cause to believe his conduct was unlawful. The termination of any action,
suit or proceeding by judgment, order, settlement, conviction or upon a
plea of nolo contendere or its equivalent, does not, of itself, create a
presumption that the person did not act in good faith and in a manner which
he reasonably believed to be in or not opposed to the best interests of the
corporation, and that, with respect to any criminal action or proceeding,
he had reasonable cause to believe his action was unlawful.
Subsection 2 of Section 78.7502 of the NGCL empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the
right of the corporation to procure a judgment in its favor by reason of
the fact that he acted in any of the capacities set forth above, against
expenses, including amounts paid in settlement and attorneys' fees,
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in accordance with the
standard set forth above, except that no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have
been adjudged by a court of competent jurisdiction after exhaustion of all
appeals therefrom to be liable to the corporation or for amounts paid in
settlement to the corporation unless and only to the extent that the court
in which such action or suit was brought or other court of competent
jurisdiction determines that, in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such
expenses as the court deems proper.
Section 78.751 of the NGCL provides that unless indemnification is ordered
by a court, the determination to provide indemnification must be made by
the stockholders, by a majority vote of a quorum of the board of directors
who were not parties to the action, suit or proceeding, or in certain
circumstances by independent legal counsel in a written opinion. In
addition, the articles of incorporation, bylaws or an agreement made by the
corporation may provide for the payment of the expenses of a director or
officer of the expenses of defending an action as incurred upon receipt of
an undertaking to repay the amount if it is ultimately determined by a
court of competent jurisdiction that the person is not entitled to
indemnification. Section 78.751 of the NGCL further provides that, to the
extent a director or officer of a corporation has been successful on the
merits or otherwise in the defense of any action, suit or proceeding
referred to in subsection (1) and (2) , or in the defense of any claim,
issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith; that indemnification provided for by Section 78.751
of the NGCL shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled and that the scope of indemnification
shall continue as to directors, officers, employees or agents who have
ceased to hold such positions, and to their heirs, executors and
administrators.
Finally, Section 78.752 of the NGCL empowers the corporation to purchase
and maintain insurance on behalf of a director, officer, employee or agent
of the corporation against any liability asserted against him or incurred
by him in any such capacity or arising out of his status as such whether or
not the corporation would have the authority to indemnify him against such
liabilities and expenses.
The Registrant's bylaws provide for indemnification of officer, directors
and others to the fullest extent permitted by the laws of the State of
Nevada.
II-1
<PAGE>
Item 25. Other Expenses of Issuance and Distribution
The expenses payable by registrant in connection with the issuance
and distribution of the securities being registered are estimated
as follows:
Securities and Exchange Commission Fees................... $8,521.43
Accounting Fees and Expenses.............................. $30,000.00
Blue Sky Fees and Expenses................................ $25,000.00
Printing Expenses (including Securities).................. $30,000.00
Legal Fees................................................ $70,000.00
Miscellaneous............................................. $16,478.57
----------
Total.................................................. $180,000.00
===========
The selling securityholders will not assume any of the expenses of their
offering except to the extent that they engage their own legal counsel.
The estimate of expenses includes expenses in connection with the
issuance and distribution of shares by the selling security holders.
Item 26. Recent Sales of Unregistered Securities
All issuances were under Section 4(2) unless otherwise indicated.
Certain issuances under 4(2) were to officers, employees or legal
counsel who are familiar with the operations of the registrant. Other
issuances under Section 4(2) were to advisors, including Civilization
Communication Inc., Kevin Haggerty, Great North Capital Corp., Cardinal
Capital Management, Inc., Josephberg Grosz & Co., JG Capital Inc.,
Ganesh Asset Management Ltd. and Chez Inc. Financial Intranet believed
that these advisors were sufficiently sophisticated to qualify for the
exemption because they are in the business of advising corporations on
marketing, finance or public relations, as the case may be, and are
familiar with the business of the registrant.
Common Stock
On May 26, 1999, Financial Intranet issued 900,000 shares of common stock
to Barry Stein to replace shares that Mr. Stein had pledged to secure
Financial Intranet's obligations under a convertible promissory note.
On April 28, 1999, Financial Intranet issued 600,000 shares of common stock
to Barry Stein to replace shares that Mr. Stein had pledged to secure
Financial Intranet's obligations under a convertible promissory note.
On April 28, 1999, Financial Intranet issued 11,111 shares of common stock
to Steven Schuster, counsel to Financial Intranet, in consideration for
advisory services valued at $10,000.
On March 3, 1999, Financial Intranet issued 15,000 shares of common stock
each to Cardinal Capital Management Inc. and JG Capital, Inc. as part of
their fees as advisors for structuring a February 8, 1999 private
placement.
On March 3, 1999, Financial Intranet issued 879,685 shares of common stock
to Barry Stein for aggregate consideration of $167,140 upon exercise of
options.
On January 25, 1999, Financial Intranet issued 5,812 shares of common stock
to Ganesh Asset Management for exercise of warrants.
On January 21, 1999, Financial Intranet issued 197,402 shares of common
stock to Barry Stein in consideration for
II-2
<PAGE>
employment services valued at $43,837.55.
On January 21, 1999, Financial Intranet issued 205,825 shares of common
stock to Michael Sheppard in consideration for employment services valued
at $55,854.14.
On January 21, 1999, Financial Intranet issued 208,409 shares of common
stock to Maura Marx in consideration for employment services valued at
$56,109.39.
On January 7, 1999, Financial Intranet issued 12,500 shares of common stock
each to Cardinal Capital Management Inc. and Josephberg Grosz & Co. as part
of their fees as advisors for structuring a December 1998 private
placement.
On December 17, 1998, Financial Intranet issued 26,667 shares of common
stock to Civilization Communication, Inc. in consideration for advisory
services valued at $16,000 in connection with preparation of a Form 10.
On October 9, 1998, Financial Intranet issued 1,000,000 shares of common
stock to Kevin Haggerty in consideration for marketing consulting services
valued at $10,000.
On October 15, 1998, Financial Intranet issued 60,637 shares of common
stock to Great North Capital Corp. in consideration for advisory fees for
structuring a 1997 private placement.
On October 15, 1998, Financial Intranet issued 8,333 shares of common stock
to Ganesh Asset Management, Ltd. in consideration for advisory fees for
structuring a 1997 private placement.
On July 17, 1998, Financial Intranet issued 500,000 shares of common stock
to Internet Credit Corp. in consideration for release of security interest
in equipment.
On July 15, 1998, Financial Intranet issued 112,093 shares of common stock
to Civilization Communication, Inc. pursuant to anti-dilution provisions of
a consulting agreement dated December 1996.
On June 12, 1998, Financial Intranet issued 60,000 shares of common stock
to JG Partners, LP in consideration for investment banking services valued
at $25,000.
On June 11, July 11, and July 23, Financial Intranet issued a total of
1,070,800 shares of common stock to Thomas Kernaghan & Co. in consideration
for investment banking $500,000 pursuant to Rule 504.
On June 11, 1998, Financial Intranet issued 28,794 and 9,599 shares to
Great North Capital and Corporate Capital Management, respectively, in
consideration for advisory services regarding the funding by Cadence
Capital Corporation.
On June 5, 1998, Financial Intranet issued 1,352,718 shares of common stock
to Cadence Capital Corporation in consideration for $500,000 pursuant to
Rule 504 of Regulation D. 115,052 shares of common stock were subsequently
cancelled by the Company in October, 1998.
On May 19, 1998, Financial Intranet issued 38,066 shares of common stock to
Steven Sanders in consideration for legal services valued at $9,453.50.
On May 19, 1998, Financial Intranet issued 9,516 shares of common stock to
Debra Millman in consideration for legal services valued at $2,422.
On May 19, 1998, Financial Intranet issued 175,000 shares of common stock
to Civilization Communication, Inc. in consideration for advisory services
valued at $43,750 in connection with preparation of a Form 10.
II-3
<PAGE>
On February 9, 1998, Financial Intranet issued 234,649 shares of common
stock to Civilization Communication Corp. pursuant to anti-dilution
provisions of a consulting agreement dated December 1996.
On January 14, 1998, Financial Intranet issued 400,000 shares of common
stock to Landmark Capital in consideration for $107,500.
On November 15, 1997, Financial Intranet issued 315,000 shares to
Civilization Communication Corp. pursuant to anti-dilution provisions of a
consulting agreement.
On September 5, 1997, Financial Intranet issued 20,000 shares of common
stock to Ron Pauls, an employee, in consideration for employment services
rendered.
On September 5, 1997, Financial Intranet issued 20,000 shares of common
stock to James Reiff, an employee, in consideration for employment services
rendered.
On August 4, 1997, Financial Intranet issued 100,000 shares of common stock
to CHEZ, INC. in consideration for $6,500 in public relations.
In June 1997, Financial Intranet issued 6,904,228 shares of common stock to
investors of which 4,304,228 were purchased by non-U.S. residents overseas
for an aggregate consideration of $955,250 pursuant to Rule 504 of
Regulation D.
On February 27, 1997, Financial Intranet issued 750,000 shares of common
stock to Michael Sheppard as an incentive payment for execution of
employment contract pursuant to Section 701.
On February 27, 1997, Financial Intranet issued 500,000 shares of common
stock to Maura Marx as an incentive payment for execution of employment
contract pursuant to Section 701.
On February 27, 1997, Financial Intranet issued 1,500,000 shares of common
stock to Barry Stein as an incentive payment for execution of employment
contract pursuant to Section 701.
On February 7, 1997, Financial Intranet issued 1,500,000 shares of common
stock to Barry Stein in lieu of $150,000 in compensation for consulting
services through December 31, 1997.
On December 20, 1996, Financial Intranet issued 240,000 shares of common
stock to Civilization Communication Corp. in consideration for services
related to preparation of the business plans valued at $10,000.
On December 17, 1996, Financial Intranet issued 40,000 shares of common
stock to Michael Daniels in consideration for services rendered in
connection with his sale of a controlling interest in Wee Wees, Inc.
OPTIONS AND WARRANTS
On February 28, 1999, Financial Intranet issued 20,000 warrants to each of
Scott Goldstein and Sheldon Goldstein in consideration for legal services.
The warrants have an exercise price of $.60 per share and expire five years
after issuance.
On February 8, 1999, Financial Intranet issued warrants to purchase 75,000
shares of common stock to each of Cardinal Capital Management Inc. and J.G.
Capital Inc. in consideration f or investment banking services rendered in
connection with a private placement. The warrants expire five years after
issuance.
On December 31, 1998, Financial Intranet issued warrants to purchase
160,000 shares of common stock to Cardinal Capital Management Inc. with an
exercise price of $.64 per share and 125,000 shares of common stock to J.G.
Capital Inc. with an exercise price of $.40 per share. The warrants expire
five years after issuance. The warrants were issued in consideration for
investment banking services rendered for a private placement.
II-4
<PAGE>
On December 21, 1998, Financial Intranet issued 75,000 warrants to purchase
common stock to McLaughlin & Stern, LLP with an exercise price of $.60 per
share in consideration of legal services rendered and disbursements
incurred. The warrants expire on November 24, 2003.
On December 21, 1998, Financial Intranet agreed to issue options to
purchase 250,000 shares of common stock to Alan Spar at a price of $.625
per share. The options were issued as part of an employment compensation
package, vest over three years and expire on December 31, 2001.
On December 21, 1998, Financial Intranet issued 250,000 options to purchase
common stock to Alan Ross at a price equal to $.625 per share. The options
were issued as part of an employment compensation package, vest over three
years and expire on December 31, 2001.
On November 13, 1998, Financial Intranet issued 10,000 warrants to purchase
common stock at $.60 per share to Steven Weller. The warrants were issued
in consideration for Mr. Weller's agreement to serve as a Director and
expire on November 12, 2001.
On September 1, 1998, Financial Intranet issued 10,000 warrants to purchase
common stock at $.725 per share to Joseph F. Engelberger. The warrants were
issued in consideration for Mr. Engelberger's agreement to serve as a
Director and expire on August 31, 2001.
On July 15, 1998, Financial Intranet issued 166,667 warrants to McCap, Inc.
for public relations services at an exercise price of $.40 per share
expiring June 22, 2003.
On July 11, 1998, Financial Intranet issued 75,000 warrants to purchase
common stock for $1.20 per share to McLaughlin & Stern, LLP in
consideration of legal services rendered and disbursements incurred. The
warrants expire on July 10, 2003.
On July 1, 1998, Financial Intranet issued 980 warrants to purchase common
stock for $.32 per share to Corporate Capital Management for advisory
services. The warrants expire on September 15, 2000.
On June 5, 1998, the Company issued warrants to purchase 50,000 shares of
common stock to Corporate Capital Management with an exercise price of $.64
per share for advisory services.
Pursuant to his employment agreement dated September 12, 1997, Michael
Sheppard received options to purchase 2,231,352 shares of common stock at
an exercise price of $.19 per share. The warrants expire on December 31,
2002.
Pursuant to her employment agreement dated September 12, 1997, Ms. Marx
received options to purchase 1,350,495 shares of common stock at an
exercise price of $.19 per share. The warrants expire on December 31, 2002.
Pursuant to Mr. Stein's employment agreement, dated September 12, 1997, he
received options to purchase 3,640,262 shares of common stock as of common
stock at an exercise price of $.19 per share. The warrants expire on
December 31, 2002.
On September 15, 1997, Financial Intranet issued 2,422 warrants to purchase
common stock for $.18 per share to Corporate Capital Management for
advisory services. The warrants expire on September 15, 2000.
On September 15, 1997, Financial Intranet issued 5,812 warrants to purchase
common stock for $.18 per share to Ganesh Asset Management for advisory
services. The warrants expire on September 15, 2000.
On September 15, 1997, Financial Intranet issued 2,353 warrants to purchase
common stock for $.32 per share to Ganesh Asset Management for advisory
services. The warrants expire on September 15, 2000.
II-5
<PAGE>
On September 15, 1997, Financial Intranet issued 7,266 warrants to purchase
common stock for $.18 per share to Great North Capital for advisory
services. The warrants expire on September 15, 2000.
On September 15, 1997, Financial Intranet issued 2,942 warrants to purchase
common stock for $.32 per share to Great North Capital for advisory
services. The warrants expire on September 15, 2000.
On April 1, 1997, Financial Intranet issued warrants to purchase 200,000
shares of common stock with an exercise price of $7.25 per share to H&H
Acquisitions Inc. in connection with the acquisition of Wee Wees Inc. These
warrants expire on March 3, 2002.
Item 27. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1 -- Registrant's Restated Articles of Incorporation dated December 22, 1998
3.2 -- Registrant's By-laws
4.1 -- Form of Common Stock Certificate
4.2 -- 1998 Stock Option Plan
5 -- Opinion of McLaughlin & Stern, LLP (To be filed by amendment)
10.1 -- Letter regarding purchase of Wee Wees, Inc. dated October 9, 1996.
10.2 -- Employment Agreement dated as of September 12, 1997 between Registrant and Michael Sheppard.
10.3 -- Employment Agreement dated as of September 12, 1997 between Registrant and Ben B. Stein.
10.4 -- Employment Agreement dated as of September 12, 1997 between Registrant and Maura Marx.
10.5 -- Amendment to Employment Agreement dated as of December 15, 1998 between Registrant and Michael Sheppard.
10.6 -- Amendment to Employment Agreement dated as of December 15, 1998 between Registrant and Maura Marx.
10.7 -- Consulting Agreement dated as of February 27, 1997 between Registrant and Michael Sheppard.
10.8 -- Promissory Note issued by Registrant to investor on December 31, 1998 in connection with private placement.
10.9 -- Warrant issued by Registrant to investor on December 31, 1998 in connection with private placement.
10.10 -- Subscription agreement between Registrant and investor in private placement on December 31, 1998.
10.11 -- Subscription agreement between Registrant and investor in private placement on February 8, 1999.
10.12 -- Warrant issued by Registrant to investor on February 8, 1999 in connection with private placement.
10.13 -- Form of Warrant certificate issuable by Registrant to investor upon subsequent installments due under private
placement.
10.14 -- Guaranty executed by Ben B. Stein on February 8, 1999 in connection with private placement.
10.15 -- Stock Pledge Agreement executed by Ben B. Stein on February 8, 1999 in connection with private placement.
10.16 -- Service Agreement between the Registrant and Siemens dated December 30, 1998.(1)
10.17 -- Warrant issued by Registrant to Cardinal Capital Management on December 31, 1998 in connection with private
placement.
10.18 -- Warrant issued by Registrant to Josephberg Grosz & Co. on December 31, 1998 in connection with private placement.
10.19 -- Warrant issued by Registrant to Josephberg Grosz & Co. on February 8, 1999 in connection with private placement.
10.20 -- Warrant issued by Registrant to Cardinal Capital Management on February 8, 1999 in connection with private placement.
10.21 -- Convertible Promissory Note issued by Registrant to investor on February 8, 1999.
10.22 -- Registration Rights Agreement executed by Registrant on February 8, 1999.
10.23 -- Consulting Agreement with Barry Stein dated February 27, 1997.
</TABLE>
II-6
<PAGE>
<TABLE>
<S> <C>
10.24 -- Registration Rights Agreement executed by Registrant on December 31, 1998.
10.25 -- Consulting agreement with Kevin Haggerty dated October 6, 1997.(1)
10.26 -- Consulting agreement with Maura Marx dated February 27, 1997.(1)
10.27 -- Rebiller Service Agreement with WorldCom Inc. dated June 30, 1997.(1)
10.28 -- Consulting Agreement with Barry Stein dated as of March 3, 1999.(1)
10.29 -- Agreement with Frontier Corp. dated April 1999.(1)
10.30 -- Consulting Agreement with Joseph Theismann dated April 30, 1999.(1)
23.1 -- Consent of Reminick Aaron & Company, LLC.(2)
23.2 -- Consent of McLaughlin & Stern, LLP (included in Exhibit 5.1).
24 -- Power of Attorney (contained on signature page).
27 -- Financial Data Schedule.(2)
</TABLE>
Schedules other than those listed above have been omitted since they are either
not required, are not applicable or the required information is shown in the
financial statements or related notes.
(1) Included with Amendment No. 1. Other exhibits were previously filed.
Item 28. Undertaking
The undersigned Registrant hereby undertakes to:
(a) (1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a) (3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of a prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) Include any additional or changed material information on the plan of
distribution;
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement for the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering;
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering; and
(b) Provide to the underwriter at the closing specified in the underwriting
agreement certificates in such denominations and registered in such names
as required by the Underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business
II-7
<PAGE>
issuer of expenses incurred or paid by a director, officer or controlling
person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this registration as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-8
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of
1933, the Registrant certifies that it has reasonable grounds to
believe that it meets all of the requirements of filing on Form
SB-2 and authorized this registration statement to be signed on
its behalf by the undersigned, in the Town of Ardsley, State of
New York, on May 27, 1999.
FINANCIAL INTRANET INC.
By:/s/ MICHAEL SHEPPARD
----------------------
Michael Sheppard
President
By:/s/ ALAN M. ROSS
----------------------
Alan M. Ross
Vice President -- Finance
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below
constitutes and appoints Michael Sheppard and Maura Marx and each of them his
true and lawful attorney-in-fact and agent with power of substitution and
resubstitution, for him or her, and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments (including post effective
amendments) to this Registration Statement on Form SB-2, and to file the same,
with all exhibits thereto, and all documents in connection therewith, with the
Commission, granting unto said attorneys-in-fact and agents and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done to comply with the provisions of the
Securities Act and all requirements of the Commission, hereby ratifying and
confirming all that said attorneys-in-fact or either of them, or their
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
By: /s/ MICHAEL SHEPPARD Director, President, Chief Operating May 27, 1999
-------------------- Officer
Michael Sheppard
By: * Director May 27, 1999
--------------------
Steven S. Weller
By: * Director May 27, 1999
- --- -------------------------
Joseph F. Engelberger
Pursuant to Power-of-Attorney
* /s/ MICHAEL SHEPPARD
</TABLE>
II-9
<PAGE>
As filed with the Securities and Exchange Commission on June 1, 1999
Registration No. 333-72975
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBIT
TO
AMENDMENT NO. 2
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FINANCIAL INTRANET, INC.
(Name of small business issuer in charter)
EXHIBIT 23.1
EXHIBIT 27
II-10
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Financial Intranet, Inc.
We consent to the reference to our firm under the caption "Experts" in the
Amendment No. 2 to the Registration Statement (Form SB-2), and related
prospectus of Financial Intranet, Inc. and to the incorporation by reference
therein of our report dated March 5, 1999, except for Note 6, as to which the
date is March 15, 1999 with respect to the financial statements as of December
31, 1998 and 1997 and for the years then ended.
/s/ REMINICK, AARONS & COMPANY, LLP
New York, New York REMINICK, AARONS & COMPANY, LLP
June 1, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 24,847
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 45,257
<PP&E> 721,793
<DEPRECIATION> 0
<TOTAL-ASSETS> 892,453
<CURRENT-LIABILITIES> 853,466
<BONDS> 0
0
0
<COMMON> 16,224
<OTHER-SE> 22,763
<TOTAL-LIABILITY-AND-EQUITY> 892,453
<SALES> 35,931
<TOTAL-REVENUES> 35,931
<CGS> 14,156
<TOTAL-COSTS> 14,156
<OTHER-EXPENSES> 265,731
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 723
<INCOME-PRETAX> (244,679)
<INCOME-TAX> 0
<INCOME-CONTINUING> (244,679)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (244,679)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 228,032
<SECURITIES> 0
<RECEIVABLES> 22,676
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 300,522
<PP&E> 1,008,449
<DEPRECIATION> 149,904
<TOTAL-ASSETS> 1,464,070
<CURRENT-LIABILITIES> 580,656
<BONDS> 860,000
0
0
<COMMON> 22,713
<OTHER-SE> 701
<TOTAL-LIABILITY-AND-EQUITY> 1,464,070
<SALES> 6,741
<TOTAL-REVENUES> 6,741
<CGS> 23,341
<TOTAL-COSTS> 23,341
<OTHER-EXPENSES> 597,318
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,605
<INCOME-PRETAX> (626,523)
<INCOME-TAX> 0
<INCOME-CONTINUING> (626,523)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (626,523)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
</TABLE>
