<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 4, 2000
REGISTRATION NO. 333-33416
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM SB-2/A4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
N-GEN SOLUTIONS.COM, INC.
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
DELAWARE 84-1469564 7379
(State or other jurisdiction (IRS Employer (Primary Standard
of Identification No.) Industrial
Incorporation or organization) Classification Code Number)
</TABLE>
ROBERT D. ARNOLD, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
N-GEN SOLUTIONS.COM, INC.
410 17TH STREET, SUITE 1940
DENVER, COLORADO 80202
(303) 628-0747
(Address including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------------------
ROBERT D. ARNOLD, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
N-GEN SOLUTIONS.COM, INC.
410 17TH STREET, SUITE 1940
DENVER, COLORADO 80202
(303) 628-0747
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<S> <C>
JOHN B. WILLS, ESQ. DAVID A CARTER, P.A.
DIANA L. POWELL, ESQ. 2300 Glades Road,
Berenbaum, Weinshienk & Eason, P.C. Suite 210 West Tower
370 Seventeenth Street, Suite 2600 Boca Raton, Florida 33431
Denver, Colorado 80202-5626 (561) 750-6999
(303) 825-0800 (561) 367-0960 FAX
(303) 629-7610 FAX Counsel to Underwriter
Counsel to Issuer
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
check the following box. /X/
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.0001 Par Value(1)........... 1,840,000 Shares $5.00 $9,200,000 $2,428.80
Warrants(2)................................. 1,840,000 $0.125 $230,000 $60.72
Common Stock, Underlying Warrants(3)........ 1,840,000 $5.50 $10,120,000 $2,671.68
Underwriter's Common Stock Option(4)........ 160,000 nil $0 $0.00
Common Stock Underlying Underwriter's Common
Stock Option(5)........................... 160,000 $8.25 $1,320,000 $348.48
Underwriter's Warrant Option(6)............. 160,000 nil $0 $0.00
Warrants Underlying Underwriter's Warrant
Option(7)................................. 160,000 $0.20625 $33,000 $8.71
Common Stock Underlying Underwriter's
Warrant Option(8)......................... 160,000 $9.075 $1,452,080 $383.35
Total Registration and Fee(9)............... $22,355,080 $5,901.74
</TABLE>
(FOOTNOTES CONTINUED ON NEXT PAGE)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
(FOOTNOTES CONTINUED FROM PREVIOUS PAGE)
(1) Includes 240,000 shares reserved for the option, exercisable within 45 days
after the date on which the Securities and Exchange Commission (the
"Commission") declares this Registration Statement effective, to cover
over-allotments, if any (the "Over-Allotment Option"), granted by n-Gen to
Barron Chase Securities, Inc. (Underwriter"). See "Underwriting."
(2) Includes 240,000 Redeemable Common Stock Purchase Warrants ("Purchase
Warrants" of the "Warrants") reserved for issuance upon exercise of the
Over-Allotment Option. The Warrants (a) may be purchased separately from the
Common Stock in the offering, (b) are exercisable during a five-year period
commencing on the effective date of this Registration Statement, and
(c) shall be redeemable, at the option of n-Gen, at $.05 per Warrant upon 30
days' prior written notice, (i) if the closing bid price, as reported on the
Nasdaq SmallCap Market(SM), or the closing sale price, as reported on a
national or regional securities exchange, as applicable, of the shares of
the Registrant's Common Stock for 30 consecutive trading days ending within
ten days of the notice of redemption of the Warrants averages in excess of
$10.00 per share, subject to adjustment, and (ii) after a then current
registration statement has been declared effective by the Commission with
regard to the shares of Common Stock to be received by the holder upon
exercise, but (iii) during the one-year period after the effective date of
this Registration statement, only with the written consent of the
Underwriter.
(3) Reserved for issuance upon exercise of the Warrants. Pursuant to Rule 416
under the Securities Act, such additional number of shares of Common Stock
subject to the Warrants are also being registered to cover any adjustment
resulting from the operation of the anti-dilution provisions relating to the
Warrants. The indeterminate number of additional shares shall be issuable
pursuant to rule 416 to prevent dilution resulting from stock splits, stock
dividends or similar transactions.
(4) To be issued to the Underwriter or persons related to the Underwriter.
Pursuant to Rule 416 under the Securities Act, such additional number of
Underwriter stock options ("Common Stock Underwriter Warrants") are also
being registered to cover any adjustment resulting from the operation of the
anti-dilution provisions relating to the Common Stock Underwriter Warrants.
The indeterminate number of additional Common Stock Underwriter Warrants
shall be issuable pursuant to Rule 416 to prevent dilution resulting from
stock splits, stock dividends or similar transactions.
(5) Reserved for issuance upon exercise of the Common Stock Underwriter
Warrants. Pursuant to Rule 416 under the Securities Act, such additional
number of shares of Common Stock subject to the Common Stock Underwriter
Warrants are also being registered to cover any adjustment resulting from
the operation of the anti-dilution provisions relating to the Common Stock
Underwriter Warrants. The indeterminate number of additional shares shall be
issuable pursuant to Rule 416 to prevent dilution resulting from stock
splits, stock dividends or similar transactions.
(6) To be issued to the Underwriter or persons related to the Underwriter.
Pursuant to Rule 416 under the Securities Act, such additional number of
Underwriter warrant options ("Underwriter Warrant Options") are also being
registered to cover any adjustment resulting from the operation of the
anti-dilution provisions relating to the Underwriter Warrant Options. The
indeterminate number of additional shares shall be issuable pursuant to
Rule 416 to prevent dilution resulting from stock splits, stock dividends or
similar transactions.
(7) Reserved for issuance upon exercise of the Underwriter Warrant Options.
Pursuant to Rule 416 under the Securities Act, such additional number of
warrants to purchase shares of Common Stock subject to the Underwriter
Warrant Options are also being registered to cover any adjustment resulting
from stock splits, stock dividends or similar transactions.
(8) Reserved for issuance upon exercise of the Underwriter Underlying Warrants.
Pursuant to Rule 416 under the Securities Act, such additional number of
shares of Common Stock subject to the Underwriter Underlying Warrants are
also being registered to cover any adjustment resulting stock splits, stock
dividends or similar transactions. The indeterminate number of additional
shares shall be issuable pursuant to Rule 416 to prevent dilution resulting
from stock splits, stock dividends or similar transactions.
(9) The requisite fee has been paid in connection with this Registration
Statement.
------------------------------
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.
The Exhibit Index appears on page II-4 of the sequentially numbered
pages of this Registration Statement. This Registration Statement, including
exhibits contains 365 pages.
<PAGE>
CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B)
SHOWING LOCATION IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF FORM SB-2
<TABLE>
<CAPTION>
FORM SB-2
ITEM NO. SECTIONS IN PROSPECTUS
--------- ----------------------
<C> <S> <C>
1 Front of Registration Statement and
Outside Front Cover of Prospectus......... Facing Page; Cross Reference Sheet;
Prospectus Cover Page
2 Inside Front and Outside Back Cover
Pages of Prospectus....................... Prospectus Cover Page; Prospectus Back
Cover Page
3 Summary Information and Risk Factors...... Prospectus Summary; Business; Risk Factors
4 Use of Proceeds........................... Use of Proceeds
5 Determination of Offering Price........... Risk Factors; Underwriting
6 Dilution.................................. Dilution and Other Comparative Data
7 Selling Security Holders.................. Description of Securities
8 Plan of Distribution...................... Prospectus Cover Page; Underwriting
9 Legal Proceedings......................... Legal Proceedings
10 Directors, Executive Officers, Promoters
and Control Persons....................... Management; Principal Shareholders
11 Security Ownership of Certain Beneficial
Owners and Management..................... Principal Shareholders
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
Liabilities............................... Certain Relationships and Related
Transactions
15 Organization within Last Five Years....... Prospectus Summary; Business
16 Description of Business................... Business
17 Management's Discussion and Analysis or
Plan of Operation......................... Management's Discussion and Analysis or
Plan of Operation
18 Description of Property................... Business
19 Certain Relationships and Related
Transactions.............................. Certain Relationships and Related
Transactions
20 Market for Common Equity and Related
Stockholder Matters....................... Description of Securities
21 Executive Compensation.................... Management
22 Financial Statements...................... Financial Statements
23 Changes In and Disagreements With
Accountants on Accounting and Financial
Disclosure................................ Not applicable
</TABLE>
<PAGE>
SUBJECT TO COMPLETION OCTOBER 4, 2000
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 IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
1,600,000 SHARES
1,600,000 WARRANTS
[LOGO]
Prior to this offering, there has been no public market for our common stock
and warrants. The initial public offering price of our common stock is $5.00 per
share and the initial public offering price of our warrants is $.125 per
warrant. We have recently applied for the inclusion of our common stock and
warrants on the Nasdaq SmallCap Market ("Nasdaq") under the symbols "LERN" and
"LERNW" and the Boston Stock Exchange under the symbols "NGN" and "NGN&W."
The underwriter has an option to purchase a maximum of 240,000 additional
shares of our common stock and 240,000 additional warrants, to cover
over-allotments of our shares and warrants.
INVESTING IN OUR COMMON STOCK AND WARRANTS INVOLVES RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS
PRICE TO AND INVESTOR
PUBLIC COMMISSIONS
---------- ------------
<S> <C> <C>
Per Share............................................ $ 5.00 $ .50
Per Warrant.......................................... $ .125 $ .0125
Per Share Total...................................... $8,000,000 $800,000
Per Warrant Total.................................... $ 200,000 $ 20,000
</TABLE>
Neither the Securities and Exchange Commission nor any other state
securities commission has approved these securities or determined that this
prospectus is accurate or complete. Any representation to the contrary is
illegal.
It is expected that delivery of the certificates representing the common
shares and the warrants will be made at the offices of Barron Chase Securities,
Inc. on or about , 2000.
[LOGO]
THE DATE OF THIS PROSPECTUS IS , 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY.......................................... 3
THE OFFERING................................................ 5
SELECTED CONSOLIDATED FINANCIAL DATA........................ 6
RISK FACTORS................................................ 7
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........... 23
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING......... 23
DIVIDEND POLICY............................................. 23
DILUTION.................................................... 24
CAPITALIZATION.............................................. 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS................................................ 26
BUSINESS.................................................... 34
MANAGEMENT.................................................. 45
PRINCIPAL SHAREHOLDERS...................................... 50
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS........ 51
DESCRIPTION OF SECURITIES................................... 52
SHARES ELIGIBLE FOR FUTURE SALE............................. 54
TRANSFER AGENT AND REGISTRAR................................ 55
REPORTS TO SECURITY-HOLDERS................................. 55
UNDERWRITING................................................ 56
LEGAL PROCEEDINGS........................................... 59
LEGAL MATTERS............................................... 59
EXPERTS..................................................... 59
WHERE YOU CAN FIND MORE INFORMATION......................... 59
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY BE USED ONLY WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY BE ACCURATE ONLY
ON THE DATE OF THIS DOCUMENT.
For investors outside the United States: Neither we nor any of the
underwriters have done anything that would permit this offering or possession or
distribution of this prospectus in any jurisdiction where action for that
purpose is required, other than in the United States. You are required to inform
yourselves about and to observe any restrictions relating to his offering and
the distribution of this prospectus.
ATTENTION CALIFORNIA RESIDENTS
Offers and sales of the Common Stock and Warrants of n-Gen Solutions.com,
Inc. to California residents pursuant to this prospectus are restricted to
individuals who meet suitability standards of not less than $250,000 liquid net
worth (a net worth exclusive of home, home furnishings and automobile), plus
$65,000 gross annual income or a $500,000 liquid net worth (a net worth
exclusive of home, home furnishings and automobile).
2
<PAGE>
PROSPECTUS SUMMARY
n-GEN SOLUTIONS.COM, INC.
THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO
YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK
FACTORS" SECTION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES
THERETO APPEARING IN THE CONSOLIDATED FINANCIAL STATEMENTS BEFORE MAKING AN
INVESTMENT DECISION.
OUR BUSINESS
We design, install and outfit computer classrooms for schools, businesses
and government agencies that are customized for each customer to address the
various subject areas being taught. Currently our customers are comprised of
educational institutions (75%), commercial users (22%) and training individuals
(3%). Our revenues are comprised of product sales (95%), commissions from
manufacturers (1%) and training services (4%). Product sales consist of sales of
interactive, computerized classrooms to educational institutions and sales of
computer aided design software to commercial users. The classrooms we design and
install typically contain the following components:
- 10 to 30 computer workstations for students;
- 1 instructor computer workstation;
- specially designed furniture and seating;
- audio and video switching equipment;
- an electronic whiteboard for visual projections and demonstrations; and
- a digital video server and a software database for searching and accessing
customer identified Internet sites, video materials, audio files, software
and images.
Management believes that our computer classrooms help promote student
learning by:
- giving the teacher the ability to work closely with students by allowing
the teacher to display the teacher's computer screen to students as a
whole class or to individual students who may require additional
assistance;
- giving the teacher the ability to work closely with the students by
allowing the instructor to talk with the class as a whole or to individual
students via headsets;
- giving students the ability to use many forms of information available on
their computer workstation, such as the Internet, video, audio, pictures
and photographs. Each student can access this information when they need
it or when the teacher tells them to;
- allowing students to work at their own pace and at their own level while
following a curriculum that is interactive and that contains the many
forms of data described above; and
- giving the teacher the ability to monitor student progress through the
computer database. Students can be prompted by the instructor either
verbally or over the computer system to answer questions. The classroom's
audio/video system automatically collects the students' answers for the
instructor and displays the results for the instructor to review.
We are also developing an on-line e-commerce web site to provide our
customers the opportunity to purchase a broad assortment of educational
products, software and office and school supplies. Our hope is that we can
provide an easy-to-use, single, centralized source for purchasing products
designed to meet the immediate needs of school purchasing agents, school
administrators and individuals in the educational community. We anticipate the
launch of our web site in the fourth quarter of 2000.
3
<PAGE>
Key elements of our on-line strategy include:
- continued development of our web site,
- aggressive marketing and sales efforts to familiarize our existing
customer base with the convenience of on-line purchasing,
- building brand awareness and product diversity, and
- insuring competitive pricing of products.
We may be unable to achieve these goals, as we have not yet launched our web
site and to date have not sold any products on-line. We are also dependent on
the August Group to develop and maintain our web site and dependent on
contractual relationships with the suppliers of our products.
We were incorporated in Delaware in July 1998 under the name AAE Education
Corporation and changed our name to n-Gen Solutions.com, Inc. in January 2000.
Our web site address is www.ngensolutions.com. THE INFORMATION ON OUR WEB SITE
IS NOT INCORPORATED BY REFERENCE INTO THIS PROSPECTUS. We have applied for a
trademark for the name "N-GEN LEARNING ENVIRONMENT." We have also applied for
servicemarks for the names "n-Gen Solutions," "Learningwire.com," "n-Gen
Learning Suite," and "n-Gen Enable." This prospectus also contains trademarks of
other companies.
Our principal executive offices are located at 410 17th Street, Suite 1940,
Denver, Colorado 80202, and our telephone number is (303) 628-0747. n-Gen's
operations office is located at 8245 West I-25, Frontage Road, Erie, Colorado
80516.
RISK FACTORS
Investing in our common stock and warrants involves a very high degree of
risk. Before investing, you should consider the following risks and the risks
set forth and information included in this prospectus. Risk Factors of this
offering include:
- limited operating history
- control by insiders
- history of losses
- changing business model
- highly competitive market
- changing technology
- governmental regulation
- difficulty in evaluating e-commerce model
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered...................... 1,600,000 Shares(1)
Warrants Offered.......................... 1,600,000 Warrants(1)
Common Stock Outstanding:
Before the Offering....................... 6,045,250 Shares(2)
After the Offering........................ 7,645,250 Shares(2)
Warrants Outstanding:
Before the Offering....................... None
After the Offering........................ 1,600,000
Warrant Terms............................. Each of our warrants entitles the holder to purchase, at
any time, one (1) share of our common stock at $5.50 per
warrant for five (5) years from the date of this
prospectus. The $5.50 exercise price and number of
warrants may be adjusted up or down in the event we
declare a stock split, stock dividend or enter into a
reclassification, reorganization, consolidation or
merger with another company. We have the right after one
(1) year to redeem the outstanding warrants, at a price
of $.05 per warrant, if the price of our common stock
equals or exceeds $10.00 per share for a 30 day period
and the availability of a current registration
statement. In this event, you must either exercise your
warrant at $5.50 per warrant or accept the $.05
redemption price. Warrant holders have no voting rights
or other shareholder rights prior to the exercise of
their warrants.
Estimated Net Proceeds.................... $6,884,000
Use of Proceeds........................... We expect that the net proceeds will be approximately
$6,884,000. We expect to use these net proceeds
principally for operational needs, the purchase of
capital equipment, expansion of our marketing and sales
capabilities, mergers and acquisitions and working
capital and general corporate needs.
Dividend Policy........................... We currently intended to retain any future earnings to
fund development and growth of our business. Therefore,
we do not currently anticipate paying dividends on our
common stock.
</TABLE>
<TABLE>
<CAPTION>
Common Stock Warrants
Proposed Nasdaq Small ------------ ------------
<S> <C> <C>
Cap Market(SM) Symbols.................. "LERN" "LERNW"
Proposed Boston Stock
Exchange Symbols........................ "NGN" "NGN&W"
Internet Web Site Address................. www.ngensolutions.com
</TABLE>
------------------------
(1) Our underwriter has an over-allotment option to purchase an additional
240,000 shares and 240,000 warrants solely to cover over-allotments. Our
underwriter will have 45 days from the effective date of this prospectus to
exercise this option.
(2) Includes 105,250 shares which will be issued to noteholders at the
completion of the public offering. Also, we have no outstanding options or
warrants, however, the 1,600,000 warrants being offered hereby when and if
exercised will increase our outstanding shares by 1,600,000, in addition to
the amount stated. The underwriter is also entitled to warrants to purchase
additional shares as more fully described herein.
5
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
STATEMENT OF EARNINGS DATA:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------- NINE MONTHS JULY 13, 1998
JUNE 30, JUNE 30, ENDED (INCEPTION) TO
2000 1999 SEPTEMBER 30, DECEMBER 31,
(UNAUDITED) (UNAUDITED) 1999 1998
----------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Net sales................................... $3,984,208 $1,798,172 $3,830,353 $ 0
Operating (loss)............................ $ (626,045) $ (899,565) $ (864,408) $ (244,254)
(Loss) before Income taxes.................. $ (740,540) $ (909,658) $ (850,954) $ (238,124)
Net (loss).................................. $ (740,540) $ (909,658) $ (850,954) $ (238,124)
(Loss) per share............................ $ (0.14) $ (0.21) $ (0.18) $ (0.06)
Basic and dilutive weighted average shares
Outstanding............................... 5,429,011 4,406,397 4,690,515 3,994,561
</TABLE>
The following table indicates a summary of our balance sheet at our year end
September 30, 1999 and at the nine months ended June 30, 2000 as described
below:
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AT
AT JUNE 30, PRO FORMA
SEPTEMBER 30, 2000 AS ADJUSTED(1)
1999 (UNAUDITED) JUNE 30, 2000
------------- ----------- --------------
<S> <C> <C> <C>
Cash.................................................. $ 210,196 $ 284,410 $ 7,168,410
Working capital (deficit)............................. $ (562,876) $(1,071,671) $ 5,812,329
Total assets.......................................... $2,570,539 $ 3,383,350 $10,077,723
Total liabilities..................................... $3,044,786 $ 4,104,433 $ 4,104,433
Stockholders' equity (deficit)........................ $ (474,247) $ (721,083) $ 5,973,290
</TABLE>
------------------------
(1) Adjusted to reflect sale of 1,600,000 shares of common stock and 1,600,000
warrants offered hereby and the receipt of the net proceeds therefrom
(assuming an initial public offering price of $5.00 per share of common
stock and $.125 per warrant, respectively, and after deducting underwriting
discounts and commissions and estimated offering expenses). Does not include
receipt of net proceeds from the exercise of the warrants, the underwriter's
purchase warrants, and the underwriter's over-allotment option.
6
<PAGE>
RISK FACTORS
Investing in our common stock and warrants involves risk. You should
carefully consider the risks and uncertainties described below before making an
investment decision. These risks and uncertainties are all material risks and
uncertainties which may adversely affect our business. We have included every
material risk and uncertainty of which we are aware. If any of the following
risks or uncertainties actually occur, our business, financial condition or
results of operations may be materially adversely affected. In this event, the
trading price of our common stock may decline, and you may lose all or part of
your investment. This prospectus also contains forward-looking statements that
involve risks and uncertainties. Our actual results may differ from those
described in the forward-looking statements. This may occur because of the risks
described below.
RISKS RELATING TO OUR COMPUTER CLASSROOM BUSINESS
OUR LIMITED OPERATING HISTORY HINDERS OUR ABILITY TO EVALUATE OUR BUSINESS
AND ENTAILS RISK THAT WE MAY FAIL TO ADEQUATELY ADDRESS BUSINESS ISSUES WITH
WHICH WE HAVE LIMITED EXPERIENCE. Our limited operating history in the computer
classroom industry and an accumulated deficit since inception of $(1,829,618) as
of June 30, 2000 hinders our ability to evaluate our business and prospects. Our
revenues for the nine months ending June 30, 2000 of $3,984,208 for this line of
business may not be indicative of n-Gen's future operating results. As a
relatively young company in the new and rapidly changing market for education
services, n-Gen faces numerous risks and uncertainties. Some of these risks
relate to difficulties we may experience in our efforts to:
- maintain and increase our school customer base;
- implement an evolving and unproven business model;
- compete favorably in a highly competitive market;
- expand our service offerings;
- attract, motivate and retain qualified employees;
- access sufficient capital to support our growth;
- build an infrastructure to effectively handle our growth; and
- upgrade and enhance our technologies.
We may not be successful in addressing these risks. As a business with a limited
operating history, if we fail to establish a profitable or viable business,
compete effectively in our market, attract capital, attract qualified employees,
build an adequate infrastructure or enhance our technologies, we may not obtain
or maintain profitability.
BECAUSE OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY, OUR
COSTS AND EXPENSES WILL SIGNIFICANTLY PRECEDE OR EXCEED RELATED REVENUE. Because
of our limited operating history and the emerging nature of the digital
classroom environment, we may be unable to accurately forecast our revenues. The
sales cycle for our market varies widely. Accordingly, it is difficult to
predict the timing of particular sales, the rate at which technological
classrooms will be implemented and/or the number of students who will utilize
our technology. The cancellation or delay of even a small number of
implementations could cause our revenues to fall short of projections. Since
most of our costs are fixed and are based on anticipated revenue levels, small
variations in the timing of revenue recognition could cause significant
variations in operating results from quarter to quarter. Sales and operating
results may fluctuate from quarter to quarter depending on:
- our ability to successfully install classrooms;
7
<PAGE>
- the amount and timing of operating costs and capital expenditures relating
to expansion of our business;
- our introduction of new or enhanced services and products and similar
introductions by n-Gen's competitors;
- the budgetary cycles of educational institutions;
- the seasonality inherent in the academic calendar;
- our ability to upgrade and develop our systems and infrastructure;
- our ability to attract, motivate, and retain personnel in a timely and
effective manner;
- technical difficulties in delivering our services;
- governmental regulation; and
- general economic conditions.
Failure by us to manage significant fluctuations in our operating results on a
quarter-to-quarter basis may result in failure to meet our revenue projections,
inadequate investment to support future revenues, or even failure to meet our
fixed cost obligations.
OUR LENGTHY SALES CYCLE IMPAIRS OUR ABILITY TO FORECAST THE TIMING AND
AMOUNT OF SALES AND RESULTING REVENUE AND MAY CAUSE FINANCIAL RESULTS TO VARY
SIGNIFICANTLY FROM PERIOD TO PERIOD. The sales cycle between initial customer
contact and signing of a contract varies widely, reflecting differences in our
customers' decision-making processes and budget cycles. Typically our customers
are large institutions, where a decision to implement our technological concept
may involve a cumbersome process, with multiple individuals and groups
participating in the decision. Our customers typically conduct extensive and
lengthy evaluations before committing to our system. Delays in the sales cycle
can result from, among other things, changes in an institution's budget, the
need for approval from both the customer's administration and faculty and the
need to educate the customer as to the potential applications of and cost
savings associated with our services. Generally, we have little or no control
over these factors, which may cause a potential customer to favor a competitor's
solution or to delay or forgo purchases altogether. As a result, we may not be
able to forecast the timing and amount of specific sales and resulting revenue.
The delay in, or failure to complete planned transactions which results from our
lengthy sales cycle could cause our revenue to vary significantly from period to
period.
WE MAY FAIL TO MEET OUR CUSTOMERS' NEEDS WITH THE RESULT THAT WE MAY FAIL TO
ACHIEVE SUFFICIENT SALES TO BECOME PROFITABLE. We must accurately determine the
features and functionality required by educational institutions and students and
design and implement technological learning solutions that meet those
requirements in a timely and efficient manner. We may not be able to accurately
determine customer requirements or deliver features and functions that will
completely satisfy our customers' demands. Our failure to determine and address
customer needs in a timely and efficient manner may result in failure to achieve
sufficient sales revenues to obtain or maintain profitability.
OUR MODEL OF TECHNOLOGICAL LEARNING MAY NOT BE BROADLY ACCEPTED WITH THE
RESULT THAT OUR MODEL MAY NOT ATTRACT AND RETAIN SUFFICIENT BUSINESS FOR US TO
BE PROFITABLE. Some academics and educators are opposed to our digital
classrooms and software and their use in education in principle. They have
expressed concerns regarding the perceived loss of control over the education
process that can result from a digital environment. Some of these critics have
the capacity to influence the market for our services. Their opposition could
have a materially adverse impact on our business and financial results. Further,
the growth and development of the market for digital classrooms and their use in
long distance learning may prompt calls from some within the academic community
for more stringent protection of intellectual property associated with course
content. This may impose additional burdens on companies
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offering on-line learning. The adoption of any additional laws or regulations
may impair our growth, which could result in our failure to attract and retain
sufficient business for us to be profitable.
WE MAY FAIL TO COMPETE EFFECTIVELY IN OUR HIGHLY COMPETITIVE MARKET TO
PROVIDE TECHNOLOGICAL LEARNING SOLUTIONS AND ITS TECHNOLOGY. Our most intense
competition is with the information technology departments in certain schools
themselves. Such in-house information technology departments may seek to develop
digital learning capabilities internally rather than using an outsourced
provider. In addition, we face significant competition from a variety of
companies including:
- other companies which seek to offer a complete solution including software
and services;
- software companies with specific products for the education market;
- systems integrators; and
- hardware vendors.
Many such competitors are better capitalized and more well recognized firms. We
may achieve insufficient market share to be profitable, if we fail to
satisfactorily address the competitive pressures of our market.
WE MAY LOSE SALES REVENUE AND MARKET SHARE, IF OUR KEY SERVICE PROVIDERS AND
SUPPLIERS FAIL TO PROVIDE SUFFICIENT QUANTITIES OF QUALITY MERCHANDISE ON
ACCEPTABLE COMMERCIAL TERMS. We depend upon a limited number of suppliers for
some of our products. We also depend upon a limited number of service providers
for delivery of our products. Vendors may stop selling merchandise to us and we
may not be able to secure identical or comparable merchandise from alternative
vendors in a timely manner or on acceptable terms. As a matter of prudent
planning, we are required to anticipate that we may experience difficulty, from
time to time, in obtaining sufficient quantities of one or more products, though
no specific supply problems are currently foreseen. If our suppliers or service
providers are unable to provide the products or services that we require or
significantly increase their costs, this could impair our ability to deliver our
products on a timely and profitable basis. If we cannot supply our products to
consumers at acceptable prices, we may lose sales and market share as consumers
make purchases elsewhere. Further, an increase in supply costs could increase
operating losses beyond current expectations.
IF WE FAIL TO MANAGE THE RAPID TECHNOLOGICAL CHANGE WHICH CHARACTERIZES OUR
MARKET FOR LEARNING SOFTWARE AND SERVICES, WE MAY LOSE SALES AND MARKET SHARE.
The market for our software and services is characterized by rapid technological
change, changes in customer demands and evolving industry standards. The
introduction of services embodying new technologies and the emergence of new
industry standards can render existing services obsolete and unmarketable. To
succeed, we must address the increasingly sophisticated needs of higher
education by improving our software and services to keep pace with requirements.
We may not be able to do so successfully. Our future success may depend on our
ability to do the following:
- Both license and internally develop leading technologies useful in our
business;
- Enhance our existing services;
- Develop new services and technologies that address the increasingly
sophisticated and varied needs of our prospective customers; and
- Respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis.
ANY SIGNIFICANT DECLINE IN STUDENT POPULATIONS OR DECREASE IN PER-STUDENT
SCHOOL EXPENDITURES MAY PREVENT SUFFICIENT GROWTH IN OUR BUSINESS FOR US TO
OBTAIN OR MAINTAIN PROFITABILITY. Our growth strategy and profitability depend
upon growth in the student population and expenditures per student in public and
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private education. The level of student enrollment is largely a function of
demographics, while expenditures per student are also affected by government
budgets and the prevailing political and social attitudes towards education. A
significant and sustained decline in student enrollment and/or expenditures per
student could prevent our growth or reduce our sales volume below the level
required for us to be profitable.
WE MAY BE UNABLE TO MEET THE SECURITY NEEDS OF OUR MARKET, AND ANY RESULTING
LOSS OF CUSTOMER CONFIDENCE IN OUR SECURITY MAY REDUCE OUR REVENUES. Our
learning classrooms may be vulnerable to security risks. Our success depends on
our ability to provide superior internal and external network security
protection. Security risks of improper access may include pirating of course
content, unauthorized disclosure of confidential information, and insertion of
improper material into the content we provide to users. Further, we may not be
able to prevent unauthorized disruptions whether caused unintentionally or
caused by computer "hackers." These disruptions may harm our customers and
result in liability to us. While every Internet-based e-commerce business must
satisfy its customers that their credit, invoicing, delivery address and similar
information is secure, our business is anticipated to be subject to especially
high security requirements, associated with the orientation of our site toward
youth consumer educational products and educational institutions. Our market
involves persons who are in a protected class. Our market also involves persons
and institutions that have been particular targets of focused activities of
hackers and on-line criminals. Accordingly, our security needs should be
considered substantial. Unfortunately, we are aware that site content has been
altered and secure information compromised on many high security government web
sites, weapons procurement sites, and law enforcement sites. Accordingly, we can
offer no assurance that a hacker or criminal will not compromise the security of
our site, or that neither we nor a third party service or content provider will
employ an unsuitable individual who may compromise our security. We have
acquired the use of a secure server, but we cannot prevent a breach of our
security. A security breach may cause our customers to lose confidence in our
security, and may result in lost sales, lost market share and declining
revenues.
RISKS RELATING TO OUR E-COMMERCE BUSINESS
OUR E-COMMERCE BUSINESS IS DIFFICULT TO EVALUATE, BECAUSE WE HAVE BEEN
OPERATING UNDER OUR REVISED BUSINESS MODEL FOR LESS THAN NINE MONTHS. We have a
very limited operating history upon which you can evaluate our e-commerce
business. We have not launched our web site, nor have we begun selling
educational products on-line. In November 1999, we began diverging our business
model to on-line sales of educational products. From that period to the present,
we have invested substantial resources to achieve a launch of our e-commerce web
site in the fourth quarter of 2000.
You must consider the challenges, risks and difficulties frequently
encountered by early stage companies using new and unproven business models in
new and rapidly evolving markets. Some of these challenges, which are even of
greater magnitude in e-commerce markets, include:
- Challenges relating to our ability to manage our supplier/distributor
relationships;
- Challenges relating to our ability to expand our customer base;
- Challenges relating to our ability to continually upgrade the
functionality and ease of use of our web site, while remaining "on-line;"
- Challenges relating to our ability to develop and augment
transaction-processing systems capable of managing a widely fluctuating
and possibly quite large volume of transactions; and
- Challenges relating to maintaining adequate inventory levels and shipment
of product may limit our ability to meet the demands of our customers.
Providing customers up to date information on the web site about products,
orders, shipping status and delivery may present further
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challenges. We rely on our suppliers to provide adequate inventory levels,
product availability, shipping of products and information about order
status.
WE MAY NOT BE ABLE TO RELY UPON THE THIRD PARTIES UPON WHICH WE DEPEND TO
ADEQUATELY MANAGE EACH OF THE CRITICAL ISSUES RELEVANT TO OUR SUCCESS IN OUR
E-COMMERCE STRATEGY. Management of each of the challenges listed above, upon
which we depend for success in our e-commerce strategy, depends on performance
by third party service providers, third party software providers, and third
party fulfillment infrastructure providers. Each of our third party providers is
itself in the process of evolving to develop greater capability to address our
e-commerce initiatives and those of other businesses. Innovation in the Internet
based e-commerce business is crucial to the success of our strategy. We have
elected to enter into critical business relationships with providers whom we
believe to be capable and inventive, regardless of their inexperience or lack of
long-term business success. While we depend upon such third parties to handle
critical issues in our e-commerce business, we would have little recourse and
few alternative remedies were any such third party fail to perform in a timely
or effective manner.
WE EXPECT TO EXPERIENCE CONTINUING AND INCREASING OPERATING LOSSES IN OUR
E-COMMERCE BUSINESS, AND WE CANNOT BE CERTAIN THAT OUR BUSINESS STRATEGY WILL BE
SUCCESSFUL OR THAT WE WILL SUCCESSFULLY ADDRESS THESE AND OTHER CHALLENGES,
RISKS AND UNCERTAINTIES. We expect operating losses and negative cash flow to
continue for the foreseeable future. We anticipate our losses will increase
significantly from current levels, because we expect to incur significant
additional costs and expenses related to:
- brand development, advertising, marketing and promotional activities,
including product discounts;
- expansion of our supplier/distributor relationships;
- continued development of our web site, transaction-processing systems,
fulfillment capabilities and network infrastructure;
- expansion of our product offerings and web site content; and
- employment of additional personnel as our business expands.
MARKETING COSTS REQUIRED TO ATTRACT ON-LINE CUSTOMERS MAY EXCEED LEVELS
WHICH PERMIT US TO BECOME PROFITABLE. Our ability to become profitable depends
on our ability to generate and sustain substantially higher revenue, while
maintaining reasonable expense levels. To achieve higher revenues, we intend to
increase significantly our spending on marketing and promotional activities.
These advertising and marketing efforts may not be effective in converting a
large number of customers from traditional shopping methods to on-line shopping
for educational products and services or effective in attracting on-line
customers to our web site. In addition, we are obligated to pay commissions,
based on a percentage of revenue achieved as a result of click-throughs, to
companies with which we have on-line marketing relationships. Our on-line
marketing relationships will initially be at a higher per-unit cost while our
volumes are small, but will be at a lower per unit cost when volumes increase.
As is ordinarily the case with on-line marketing relationships, our
advertisements and marketing opportunities may be cut, or even eliminated, if
our marketing relationship partner does not achieve revenue goals out of the
relationship.
WE MAY SELECT ON-LINE MARKETING RELATIONSHIPS WITH PARTIES FROM WHICH OUR
SITE DERIVES INSIGNIFICANT TRAFFIC. Our strategy to establish on-line marketing
relationships is to focus on sites and opportunities where we are likely to be
noticed by parents and educators. Many of these sites are themselves in the
development stage or may currently have only limited functionality and
relatively low numbers of site visits. Accordingly, our click-throughs from such
sites may be limited, and may not justify the cost of our continued presence in
the site, either from the host's standpoint, or ours.
OUR MARKETING STRATEGY TO OFFER VOLUME-BASED PREMIUMS AND BENEFITS TO
SCHOOLS AND SCHOOL-BASED ORGANIZATIONS MAY NOT SUCCEED. We intend to permit
schools and school-based organizations to earn
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credits for future purchases, based upon the volume of transactions resulting
from their referrals. After expending substantial effort to develop the software
protocols to implement this program, we recently learned that several other
on-line retailers have begun implementing marketing strategies which seek
referral based customers through school based organizations, and offer products
and cash to school based organizations based upon the volume of referral
business. At least one of these programs has been announced through parent
mailers sponsored by parent organizations in technologically proficient
neighborhoods. Although we are not aware of any other educational products
enterprise currently using a marketing strategy, such as ours, which awards
volume based premiums and benefits schools, there can be no assurance that our
competitors will not employ such a strategy, or even achieve first mover status
in this marketing category.
WE MAY NOT BE ABLE TO RAPIDLY ATTRACT A HIGH VOLUME OF CUSTOMER BUSINESS TO
OUR E-COMMERCE SITE, WHICH WOULD INHIBIT OUR REVENUE GROWTH. If we do not
attract, service and retain a high volume of on-line customers at a reasonable
cost, we will not be able to generate our revenues or achieve profitability.
Although we intend to increase significantly our expenditures for marketing and
promotional activities, these efforts may not be effective in converting a large
number of customers from traditional shopping methods to on-line shopping for
educational products and services or attracting on-line customers to our web
site. We do not know if the forms of marketing and promotional activities that
we intend to implement will have the desired result. Even if we are successful
at attracting additional on-line customers to our web site, we cannot predict
whether their per visit expenditures will be sufficient to meet our costs. Even
if we attract sufficient numbers of customers, and their order volume becomes
substantial, we expect it will take several years to adequately build our
customer base for long-term success. Factors that could prevent us from
attracting and retaining customers include:
- Lack of customer awareness of our web site;
- Customer concern about the security of on-line transactions and privacy of
information that customers supply;
- Shipping charges which are invisible to the consumer, when shopping at
traditional stores;
- Longer delivery times associated with Internet orders, as compared to the
immediate receipt of products at a traditional store;
- Pricing that does not meet customer expectations or prices offered by our
competitors;
- Product damage from shipping and improper shipments arising from
incorrectly filled orders;
- Delayed response to customer service requests; and
- Difficulty in returning or exchanging orders.
BECAUSE OUR MARKET IS SEASONAL, OUR OPERATING RESULTS MAY FLUCTUATE FROM
QUARTER TO QUARTER WITH THE RESULT THAT OUR REVENUES MAY NOT MEET EXPENSES FOR
THE PERIODS IN WHICH A DECLINE IN SALES OCCURS. The market for educational
books, and technology products, and software is highly seasonal due to the
academic calendar and holiday season. In addition, Internet usage generally
declines in the summer. Accordingly, we expect to experience significant
seasonal fluctuations in our revenue. Excessive costs per unit sold by our
suppliers may result from excess capacity, but lost sales and reputation may
result from insufficient capacity. If for any reason our revenue is below
expectations, our annual operating results would be adversely affected.
Our limited operations during last year's holiday season provide us with no
meaningful comparative data indicating the volume or timing of holiday orders.
We may not accurately predict appropriate inventory levels or staffing needs. In
the future, our seasonal sales patterns may become more pronounced, may strain
our personnel and fulfillment relationships and may cause a shortfall in revenue
as compared to expenses in a given period. These seasonal fluctuations in
operating results
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may limit our ability to match capacity to sales volume, result in higher per
unit costs and reduce profitability.
OUR ON-LINE ADVERTISING OPPORTUNITIES MAY BE ADVERSELY AFFECTED BY THE
SEASONALITY OF OUR BUSINESS. The seasonality of our business may cause our
on-line advertising opportunities to be severely limited as a result of the
decreased volume of click-through activity during our off-season. Typically,
Internet portals and sites with substantial site-visit volume sell advertising
to on-line merchants on the basis of a fee per click-through, plus a percentage
of participation in the resulting sales revenue. During our off-season, such
click-throughs and sales-based revenue will be diminished. Successful
advertising sites ordinarily re-shuffle their advertising openings every month,
or every quarter, to seek increasing revenues from the finite number of
click-through buttons and banners reasonably available on the site. Any
business, such as ours, which is markedly seasonal is at a serious disadvantage,
not only during the off-season, but even during its busy periods, in its
competition to obtain valuable advertising slots. We also face serious problems
in accessing advertising opportunities as a result of the coincidence of our
busy period with that of many other businesses which accordingly seek on-line
advertising slots on a seasonal basis.
MANUFACTURERS MAY MARKET DIRECTLY TO OUR CUSTOMERS ON THE INTERNET AT COSTS
BELOW OUR ABILITY TO COMPETE. Our Internet based e-commerce business strategy
involves on-line re-intermediation, in the sense that we are offering our
on-line market as an alternative to the retail marketplaces where our customers
have traditionally purchased educational products. Accordingly, to a certain
extent, we depend upon alteration of traditional habits regarding acquisition of
educational products. However, some analysts suggest that the Internet will
result in a complete dis-intermediation, whereby customers directly access
manufactured goods from the manufacturer, without use of any intermediary.
Although most manufacturers, including those which manufacture the educational
products which we market, do not offer their goods for sale in sufficiently
small quantities to directly market to the consumer, some manufacturers have
begun to engage in direct marketing, using the Internet to attract customers.
Should educational products manufacturers directly compete with us in offering
consumer quantities of their products on the Internet, their pricing structure
may limit or eliminate our ability to compete effectively in this market.
IF WE ARE UNABLE TO RETAIN OR ACQUIRE THE NECESSARY DOMAIN NAMES, OUR BRAND
AND REPUTATION COULD BE DAMAGED AND WE COULD LOSE CUSTOMERS. We currently hold
the Web domain name Learningwire.com-TM- as well as several other variations of
this domain name. The acquisition and maintenance of domain names generally is
regulated by governmental agencies and their designees. In the United States,
the National Science Foundation has appointed Network Solutions, Inc., and
recently several others, as the current registrars for the ".com," ".net," and
".org" generic top-level domains. The regulation of domain names in the United
States and in foreign countries is subject to change in the near future. As a
result, we may be unable to acquire or maintain relevant domain names in all
countries in which we conduct business. Furthermore, the relationship between
regulations governing domain names and laws protecting trademarks and similar
proprietary rights is unclear. Therefore, we may be unable to prevent third
parties from acquiring domain names that are similar to, infringe upon or
otherwise decrease the value of our trademarks and other proprietary rights. In
addition, other parties hold domain names that are similar to ours and any
confusion of our web site with another party's could diminish our brand.
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WE MAY FAIL TO COMPETE EFFECTIVELY IN OUR MARKET. The on-line market for
educational products is new, rapidly evolving and intensely competitive. We
expect competition to intensify in the future. Barriers to entry are minimal,
and current and new competitors can launch new web sites at a relatively low
cost. In addition, the markets for books, and software in general, including
those for educational products, are very competitive and highly fragmented, with
no clear dominant leader and increasing public and commercial attention.
Our competitors can be divided into several groups, including:
- mass market retail chains;
- mass market book sellers, toy stores and computer hardware and software
stores;
- traditional regional or local bookstores, toy stores and computer and
software stores;
- on-line book sellers, toy sellers and computer software sellers; and
- educational catalog distributors.
Many of our current and potential competitors have or may have, longer
operating histories, larger customer or user bases, greater brand recognition
and significantly greater financial, marketing and other resources than we do.
Many of these current and potential competitors can devote substantially greater
resources to marketing and promotional campaigns and web site and systems
development than are available to us. Their financial strength could prevent us
from increasing market share. In addition, larger, more well-established and
more well-financed entities are acquiring, investing in and forming joint
ventures with on-line competitors and publishers or suppliers of educational
books, toys and games, and software, as the use of the Internet increases.
Our competitors may be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently and adopt more
aggressive pricing or inventory availability policies than are available to us.
Traditional store-based retailers also enable customers to see, feel and return
products in a manner that is not possible over the Internet. Some of our
competitors have significantly greater experience in selling educational
products.
Our strategy to achieve market share is based in part upon our reputation
with educational institutions, but our reputation may not be easily transferable
to the on-line educational product marketplace. Many of the institutions with
which we have worked have little influence upon the on-line market choices of
their participants whom we seek as customers. Additionally, within the
institutions we have served there may be little awareness of our identity
outside the information technology department, facilities department or
purchasing department.
WE MAY NOT ACHIEVE "FIRST MOVER" STATUS, AND IN SUCH EVENT WE WOULD FORFEIT
THE PERCEIVED MARKET ADVANTAGE OF "FIRST MOVER" STATUS IN ESTABLISHING
SIGNIFICANT MARKET SHARE. Analysts of Internet based e-commerce businesses have
told us that "first mover" status is critical to achieve the high volume of
traffic and brand identification which marks successful Internet based
businesses. First mover status results from being the first business in a
specific on-line market, which provides the functionality, ease of use and
product access required by customers. We are not aware of any other on-line
business which has achieved "first mover" status or market dominance in the
on-line market we seek to enter. However, several competitors in the educational
product market are currently seeking entry to the on-line market, and more may
attempt to go on-line prior to our launch. Should any of these alternatives
achieve first mover dominance before we launch our on-line service or before our
on-line service establishes a reputation as first mover, an important market
advantage will have been forfeited and we may be handicapped in our future
ability to compete for market share.
WE MAY NOT ACHIEVE THE NECESSARY OPERATIONAL CAPABILITIES TO GO ON-LINE WITH
A CAPABILITY TO EFFECT INTERNET BASED E-COMMERCE TRANSACTIONS. We have expended
substantial resources to achieve an Internet based
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business capable of effecting on-line transactions to sell educational products.
However, an element of uncertainty remains regarding our ability to actually go
on-line with this business. There are many anecdotes regarding businesses which
were either unable to "go live," or which were required to expend substantial
additional sums to achieve on-line operational protocols which actually
permitted effective commercial use of their sites. Until we "go live," in the
fourth quarter of 2000, significant uncertainty will remain regarding the
operational capabilities which we are building into our site.
WE MAY BE UNABLE TO STRIKE AN ATTRACTIVE BALANCE BETWEEN INNOVATION AND
PREDICTABILITY, TO ATTRACT CUSTOMERS AND REPEAT VISITS TO OUR SITE. Our success
as an Internet-based e-commerce business will depend upon our having what is
referred to as a "sticky site," which is a site to which customers will return
to make purchases again and again. The "stickiness" of our site may depend upon
ease of use, availability of significant breadth of inventory, advantageous
pricing, and useful non-commercial content. The "stickiness" of our site will
also depend upon whether we strike the right balance between innovation and
predictability which will keep our site "fresh" to repeat customers, and yet
permit them to conduct transactions in a predictable fashion.
HIGH QUALITY INTERNET SITE CONTENT MAY BE UNAVAILABLE OR VERY COSTLY. The
"stickiness" of our web site may depend, in part, on our ability to make high
quality education content available on our site. Use of site content, as a means
to attract repeat customers to a web site and to build on-line purchasing
communities, is a strategy which has been employed by medical product sites,
with varying degrees of success. The experience of medical product sites
suggests that content may become progressively more expensive, as the consumers
using a site require ever-increasing professional credentials for site content
providers. Many medical product sites have entered into site content agreements
with well-known professionals, universities and research centers, all of which
require substantial payments, including cash and securities of the
Internet-based business. In addition, many of the content provider relationships
require that the product sales site offer below market advertisement
opportunities for the other businesses, for-profit web sites and not-for-profit
web sites of the content providers. These developments have not occurred in our
educational product business. However, both medicine and education are areas
where professional credentials of information providers are of great
significance to consumers. Accordingly, content providers for our educational
product site may demand increasing financial benefits from the relationship, as
we develop our business. Any inability to meet the demands of content providers
may diminish our brand, and adversely affect our relative ability to compete
effectively in our market.
WE WILL BE REQUIRED TO UNDERGO RISKY AND COSTLY INNOVATIONS TO ACCOMMODATE
ONGOING CHANGES IN THE MANNER IN WHICH INTERNET BASED BUSINESS TRANSACTIONS ARE
CONDUCTED. Fast-paced, ongoing development of the Web infrastructure, and rapid
change in the manner in which on-line transactions are effected, will result in
ever evolving requirements to introduce new elements and functionalities to our
site protocols. These developments, in conjunction with our use of third party
service providers, will involve substantial financial investment, intellectual
capital and Internet business management skills. Such financial investment,
intellectual capital and Internet business management skills may be unavailable
to us, unless we have achieved a degree of success in our business model, which
cannot currently be predicted. In addition, assuming that we have established
effective on-line operational protocols, each innovation which we adopt will
involve a degree of risk that a portion or all of our then existing Web
capability will not satisfactorily interact with the innovation. To maintain our
Web presence, once we "go live," we will be required to effect such innovations
without "going dark." In short, we must become able to make substantial and
wide-ranging changes in the hardware, software, internal protocol and external
environment of our Internet-based e-commerce business, while remaining available
for on-line purchases by our customers.
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RISKS RELATED TO THE INTERNET INDUSTRY
IF THE INTERNET INDUSTRY FAILS TO SUBSTANTIALLY IMPROVE RELIABILITY, SPEED,
DATA CAPACITY AND SECURITY OF THE WEB INFRASTRUCTURE, OUR E-COMMERCE SALES MAY
FAIL TO ACHIEVE SUFFICIENT VOLUME FOR US TO OBTAIN OR MAINTAIN
PROFITABILITY. Our success depends, in large part, upon the maintenance of the
Web infrastructure as a reliable network with the speed, data capacity, and
security demanded by consumers. We depend as well on timely development of
enabling products such as high speed modems, to provide reliable Web access and
services. In addition, our Internet based business will depend upon improved
content generally available on the Web, as well as on our site. Currently,
Internet access is exciting, but involves significant frustration for most
consumers. Unless there are substantial improvements in reliability and ease of
access, Internet based business generally, and our business in particular, will
not achieve our goals.
OUR BUSINESS MAY EXPERIENCE RISKS ASSOCIATED WITH INCREASED VOLUME OF
WEB-BASED OPERATIONS AND THE CHANGES IN THE STRUCTURE OF THE WEB RESULTING FROM
INCREASED VOLUME. We depend on a single company to maintain the operational
integrity of our network backbone. Increases in the number of users, frequency
of use or bandwidth requirements may strain the Web infrastructure and degrade
the performance and reliability of the Web. Furthermore, the Web has experienced
a variety of outages and delays as a result of damage to portions of its
infrastructure. Future outages or delays could adversely affect our on-line
campuses, as well as our e-commerce business.
RESOLUTION OF LEGAL ISSUES INVOLVING REGULATION OF E-COMMERCE AND INTERNET
BASED BUSINESS ACTIVITIES MAY LIMIT OUR ABILITY TO BECOME PROFITABLE. Critical
issues concerning the commercial use and government regulation of the Internet
(including security, cost, ease of use, access, intellectual property ownership
and other legal liability issues) remain unresolved and could materially and
adversely impact the growth of the Internet and our business and financial
results. A continued atmosphere of uncertainty regarding intellectual property
rights on the Web may inhibit the willingness of participants to make the
substantial investments required to enhance reliability, security and ease of
use of both the Web generally, and e-commerce sites such as ours in particular.
On the other hand, further development of Web infrastructure and intellectual
property law governing Internet access may result in further requirements to
obtain intellectual property rights to operate a viable Internet based business.
The costs to obtain such rights may adversely affect our ability to become
profitable.
COSTS AND COMPETITIVE DISADVANTAGES ASSOCIATED WITH CONNECTIVITY WITH MAJOR
INTERNET SERVICE PROVIDERS MAY IMPAIR OUR DEVELOPMENT. Popular and powerful
Internet service providers, web-browsers, network access companies and portal
operations, such as America Online, Yahoo, Lycos and Microsoft, may promote our
competitors or charge us a substantial fee for promotion and for connection to
our web site. Either of these developments, in which Internet service providers
burden commerce by imposition of a "toll," may reduce the margins at which we
can market our products and services below the level at which our business can
obtain or maintain profitability.
OUR BUSINESS IS SUBJECT TO GOVERNMENT REGULATION OF THE INTERNET AND OTHER
LEGAL UNCERTAINTIES, WHICH COULD NEGATIVELY IMPACT OUR OPERATIONS. Laws and
regulations directly applicable to communications or commerce over the Internet
are becoming more prevalent. The United States Congress recently enacted
Internet laws, including laws relating to children's privacy, the transmission
of sexually explicit material and taxation of Internet-based enterprises. As
directed by Congress in the Children's Online Privacy Protection Act, also know
as COPPA, the Federal Trade Commission recently adopted regulations, effective
April 21, 2000, prohibiting unfair and deceptive acts and practices in
connection with the collection and use of personal information from children
under 13 years old on the Internet.
In addition, the European Union recently enacted its own privacy
regulations. The European Union Directive on the Protection of Personal Data,
which became effective in October 1998, fosters electronic commerce by
establishing a stable framework to ensure both a high level of protection for
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private individuals and the free movement of personal data within the European
Union. The EU and the U.S. Department of Commerce are currently negotiating an
agreement under which the privacy policies of American businesses may be deemed
to be adequate under the EU Directive. Until such time as an agreement is
reached, the EU has voluntarily agreed to a moratorium on enforcement of the EU
Directive against U.S. businesses. Although n-Gen received less than 1% of
revenues from outside of the United States in the nine months ended
September 30, 1999, the European legislation and its adoption via any agreement
could adversely affect our ability to expand our sales efforts to Europe by
limiting how information about us can be sent over the Internet in the EU and
limiting our efforts to collect information from European users.
The U.S. Omnibus Appropriations Act of 1998 places a moratorium on taxes
levied on Internet access from October 1, 1998 to October 21, 2001. However,
states may place taxes on Internet access, if taxes had already been generally
imposed and actually enforced prior to October 1, 1998. States which can show
they enforced Internet access taxes prior to October 1, 1998 and states after
October 21, 2001 may be able to levy taxes on Internet access resulting in
increased cost of access to the Internet. Upon any increase in cost of access,
assuming an efficient market with non-Internet sales channels, we will be
required to reduce prices, perhaps below the level at which our business can be
profitable.
The laws governing the use of the Internet, in general, remain largely
unsettled, even in areas where there has been some legislative action. It may
take years to determine whether and how existing laws such as those governing
intellectual property, privacy, libel and taxation apply to the Internet. In
addition, the growth and development of the market for on-line commerce may
prompt calls for more stringent consumer protection laws, both in the United
States and abroad. This occurrence may impose additional burdens on companies
conducting business on-line by limiting how information can flow over the
Internet and the type of information that can flow over the Internet. The
adoption or modification of laws or regulations relating to the Internet could
adversely affect our business. Because we receive a significant amount of orders
as a result of e-mail advertising, new regulations affecting the use of
unsolicited e-mail advertising would impair our marketing efforts.
OUR REVENUES COULD DECREASE IF WE BECOME SUBJECT TO SALES AND OTHER
TAXES. We do not currently collect sales or other similar taxes for physical
shipments of goods into states. However, one or more local, state, federal or
foreign jurisdictions may seek to impose sales tax collection obligations on us.
A number of legislative proposals have been made at the federal, state and local
level, and by foreign governments, that would impose additional taxes on the
sale of goods and services over the Internet and certain states have taken
measures to tax Internet-related activities. Although Congress recently placed a
three-year moratorium on new state and local taxes on Internet access or on
discriminatory taxes on electronic commerce, existing state or local laws were
expressly excepted from this moratorium. Further, once this moratorium expires,
some type of federal and/or state taxes may be imposed upon Internet commerce.
The moratorium is presently scheduled to expire on October 20, 2001. Such
legislation or other attempts at regulating commerce over the Internet may
substantially impair the growth of commerce on the Internet and, as a result,
adversely affect our opportunity to derive financial benefit from such
activities. If one or more states or any foreign country successfully asserts
that we should collect sales or other taxes on a sale of products or services,
we may have liability for taxes not collected in prior periods. Taxes on sales
of our products or services may require us to reduce our prices, to maintain
competitive after tax prices for our customers, and the resulting loss in
revenues may reduce our profitability.
RISKS RELATING TO OUR COMPANY
WE DEPEND UPON OUR KEY PERSONNEL AND MAY EXPERIENCE DIFFICULTY ATTRACTING
AND RETAINING KEY EMPLOYEES. Our success depends on the continued service of our
key management personnel, including Robert Arnold, Michael Schranz, Gary Nelson,
Dean Myers and Joseph Ford. Currently, only Messrs. Nelson and Myers have
entered into written employment agreements with us. At this time, we do not
carry life
17
<PAGE>
insurance policies on any of our key management personnel. The loss of services
from one or more of these persons would have a material adverse effect on our
business, operations and financial results. Our success also depends on our
ability to attract, motivate and retain highly-skilled managerial, sales,
marketing, customer service and support and technology development personnel.
Competition for such personnel in our business is intense. Any significant
success which we achieve as an Internet-based e-commerce business will only
enhance the reputation of and alternatives available to our key personnel in
that segment of our business. Currently, e-commerce personnel are in very high
demand, and receive frequent offers of alternative employment, with salaries,
stock options and other benefits, which we may not be able to match. We may not
be able to retain our key employees or attract, motivate and retain additional
key employees in the future. Our failure to retain these key employees, or
failure to attract new technically proficient managers as our needs arise would
entail significant additional employment costs, and management personnel changes
may result in management strategy shifts which may diminish our ability to
achieve profitability.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE WHICH MAY NOT BE
AVAILABLE ON ACCEPTABLE TERMS, OR AT ALL. We may need to raise additional funds
in the future to fund our operations, to finance the investments in equipment
and corporate infrastructure that we will need for our expansion, to enhance or
expand the range of services we offer or to respond to competitive pressures or
perceived opportunities, such as investment, acquisition and expansion
activities. Additional financing may not be available on terms favorable to us,
or at all. Moreover, we may only be able to obtain adequate funds in the future
by offering securities with rights senior to or more favorable than the
Securities offered in this offering. If adequate funds are not available when
required or adequate funds are not available on acceptable terms, we may be
unable to take advantage of opportunities, or perhaps remain viable.
BECAUSE OUR OFFICERS AND DIRECTORS ARE PROTECTED BY LIMITATION OF THEIR
LIABILITY TO US AND TO YOU, AND BY THEIR INDEMNIFICATION, UNDER OUR CERTIFICATE
OF INCORPORATION, THEY ARE NOT LIABLE TO YOU FOR LOSSES AND LIABILITIES
RESULTING FROM THEIR MANAGERIAL ACTS. Our officers and directors are required
to exercise good faith and high integrity in the management of our affairs. The
certificate of incorporation and bylaws provide, however, that the officers and
directors have no liability to the shareholders for losses sustained or
liabilities incurred arising from any transactions entered into in their
managerial capacities, unless they violate their duty of loyalty, do not act in
good faith, engage in intentional misconduct, engage in a knowing violation of
the law, approve an improper dividend or stock repurchase or derive an improper
benefit from the transaction. As a result, we and you have a more limited right
to action than would have been available, if such provisions were not present.
The certificate of incorporation and bylaws also provide for the indemnification
by us of the officers and directors, against any losses or liabilities they may
incur as a result of the manner in which they operated our business or conducted
our internal affairs, provided that in connection with these activities they
acted in good faith and in a manner which they reasonably believed to be
consistent with (or at least, not against) our best interest, and their conduct
did not constitute gross negligence, misconduct or a breach of their fiduciary
obligations to us or you.
WE DO NOT ANTICIPATE PAYMENT OF DIVIDENDS, AND INVESTORS WILL BE WHOLLY
DEPENDENT UPON THE MARKET FOR THE COMMON STOCK TO REALIZE ECONOMIC BENEFIT FROM
THEIR INVESTMENT. As holders of our securities, you will only be entitled to
receive those dividends that are declared by our board of directors out of
surplus. We do not expect to have surplus available for declaration of dividends
in the foreseeable future. Indeed, there is no assurance that such a surplus
will ever materialize to permit payment of dividends to you as holders of the
Securities. The board of directors will determine future dividend policy based
upon our results of operations, financial condition, capital requirements,
reserve needs and other circumstances.
OUR BUSINESS AND OPERATIONS MAY SUBJECT US TO LIABILITY, FOR WHICH OUR
INSURANCE MAY BE INSUFFICIENT. We provide training and related services to our
customers in connection with our technology, products
18
<PAGE>
and systems. We also provide educational products to be used by children, a
class of potential plaintiffs accorded greater than usual solicitude by the
courts. We therefore may be exposed to the substantial risk of significant
liability for injury. We maintain quality control programs in an attempt to
reduce the risk of potential injuries, damage to individual interests, and any
associated potential liability. We also maintain liability insurance, with the
limits of $1,000,000 per loss event and $6,000,000 for the policy aggregate,
covering damages resulting from negligent acts, errors, mistakes or omissions in
rendering or failing to render our services or liability arising from use or
misuse of our products. As with any insurance policy, we may suffer a loss which
is not a covered loss under the policy, or which exceeds the policy limits. We
are not a party to any legal proceedings and, to the best of our information,
knowledge and belief, none is contemplated or has been threatened.
AFTER THIS OFFERING, OUR EXECUTIVE OFFICERS, DIRECTORS AND 5% OR GREATER
STOCKHOLDERS WILL STILL CONTROL ALL MATTERS REQUIRING A STOCKHOLDER
VOTE. Currently, our existing officers, directors and 5% or greater
stockholders (and their affiliates) in the aggregate, beneficially own
approximately 82.3% of our outstanding stock. Upon consummation of this
offering, this group will continue to own approximately 64.8% of our outstanding
stock. As a result, such persons, acting together, will have the ability to
control the vote on all matters requiring approval of our stockholders,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership among a small number of our
stockholders may have the effect of delaying, deferring or preventing a change
in control.
RISKS RELATING TO OUR OFFERING
NEW INVESTORS WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION. Investors
participating in the initial public offering will incur an immediate,
substantial dilution of $4.21 in the net tangible book value per share of the
common stock from the initial public offering price of $5.00 per share.
Furthermore, to the extent that we issue additional shares of our common stock
pursuant to acquisitions or our strategic relationships, or issue options or
warrants to purchase our common stock, these options, when exercised, will
result in further dilution. For more information, see "Dilution."
OUR MANAGEMENT WILL HAVE BROAD DISCRETION OVER THE USE OF PROCEEDS. Our
board of directors and management team will have significant flexibility in
applying the net proceeds of this offering. We currently intend to use the net
proceeds from this offering for the following:
- to fund operating losses;
- expansion of our operations;
- advertising and brand promotion;
- operate and maintain our web site;
- content development; and
- working capital and other general corporate purposes.
The failure of our management team to apply such funds effectively could have a
material adverse effect on our business, financial condition and results of
operations. See "Use of Proceeds" and "Management."
THE WARRANTS OFFERED FOR SALE IN THIS OFFERING MAY BE REDEEMED AT $.05 PER
WARRANT UNDER CERTAIN CONDITIONS AND THERE MAY BE NO MARKET FOR THE WARRANTS, OR
THE COMMON STOCK ISSUABLE UPON EXERCISE OF THE WARRANTS, IN CERTAIN
JURISDICTIONS WHERE WE FAIL TO QUALIFY OUR SECURITIES FOR SALE. The warrants
are redeemable by n-Gen for $.05 per warrant, if the closing bid price for our
common stock equals or exceeds $10.00 per share during the thirty (30)
consecutive trading day period ending no more than fifteen (15) days prior to
the mailing of the notice of redemption, provided there is then a current
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<PAGE>
effective registration statement under the Securities Act, for the common stock
issuable upon the exercise of the warrants. Warrant redemption during the
one-year period from the date of this prospectus requires the underwriter's
consent. We cannot issue common stock upon exercise of the warrants in those
states where state securities laws exemptions are unavailable or we have failed
to qualify the common stock issuable upon exercise of the warrants. If the
warrants cannot be exercised or sold in a state, the warrants will expire and
have no value. The market for the warrants may be limited by the requirement to
comply with such legal requirements.
NASDAQ HAS CERTAIN MARKET ELIGIBILITY AND MAINTENANCE REQUIREMENTS TO
MAINTAIN OUR ELIGIBILITY FOR INCLUSION ON THE NASDAQ SMALLCAP MARKET(SM), WHICH
WE MAY NOT BE ABLE TO SUSTAIN, WITH THE CONSEQUENCE THAT THE COMMON STOCK, UPON
ANY SUCH FAILURE, MAY BE TRADED ONLY OVER-THE-COUNTER OR ON THE BULLETIN BOARD,
AND BROKERS MAY BE REQUIRED TO COMPLY WITH "PENNY STOCK" TRADING
RESTRICTIONS. Under the current rules relating to the listing of securities on
the Nasdaq SmallCap Market(SM), we must have:
- at least $4,000,000 in net tangible assets, or $750,000 in net income in
two of the last three years, or a market capitalization of at least
$50,000,000;
- public float of at least 1,000,000 shares;
- market value of public float of at least $5,000,000; and
- a minimum bid price of $4.00 per share, among other requirements.
For a continued listing, a company must maintain:
- at least $2,000,000 in net tangible assets, or $500,000 in net income in
two of the last three years, or a market capitalization of at least
$35,000,000;
- public float of at least 500,000 shares;
- market value of public float of at least $1,000,000; and
- a minimum bid price of $1.00 per share among other requirements.
Our common stock and the warrants are expected to be eligible for initial
listing on the Nasdaq SmallCap Market(SM), under the current rules upon the
closing of this offering. If at any time after issuance, the common stock and
warrants are not listed on the Nasdaq SmallCap Market(SM), and no other
exclusion from the definition of a "penny stock" under the Exchange Act were
available, transactions in the securities would become subject to the penny
stock regulations which impose additional sales practice requirements on
broker-dealers who offer and sell penny stocks.
If we should experience losses from operations, we may be unable to maintain
the standards for a continued listing and the securities may be subject to
delisting from the Nasdaq SmallCap Market(SM). Trading, if any, in the
Securities would thereafter be conducted in the over-the-counter market on an
electronic bulletin board established for securities that do not meet the Nasdaq
SmallCap Market(SM) listing requirements or in what are commonly referred to as
the "pink sheets." As a result, an investor may find it more difficult to
dispose of or to obtain accurate quotations as to the price of our securities.
SHOULD WE FAIL TO MAINTAIN NASDAQ SMALLCAP MARKET(SM) ELIGIBILITY AND THE
COMMON STOCK IS THEREAFTER TRADED ONLY IN THE OVER-THE-COUNTER MARKET OR
BULLETIN BOARD, LIQUIDITY IN THE COMMON STOCK MAY BE SEVERELY LIMITED. Stocks
in the over-the-counter, bulletin board or "pink sheet" market ordinarily have
much lower trading volume than in the Nasdaq SmallCap Market(SM). Very few
market makers take interest in securities traded over-the-counter, and
accordingly the market for such securities are less orderly than is usual for
Nasdaq SmallCap Market(SM) stocks. As a result of the low trading volumes
ordinarily obtained in over-the-counter markets, sales of common stock or
warrants in any significant amount could not be absorbed without a dramatic
reduction in price. Moreover, thinly traded securities in the
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<PAGE>
over-the-counter markets are more susceptible to trading manipulations than is
ordinarily the case for more actively traded securities.
IF OUR COMMON STOCK BECOMES SUBJECT TO "PENNY STOCK" REGULATIONS, SECURITIES
AND EXCHANGE COMMISSION REGULATIONS MAY IMPOSE SIGNIFICANT LIMITATIONS ON THE
ABILITY OF BROKER DEALERS TO ENTER TRADES IN OUR COMMON STOCKS. The Securities
and Exchange Commission has adopted regulations which generally define "penny
stock" to be any equity security which has a market price less than $5.00 per
share, subject to certain exceptions. Upon authorization of the common stock
offered hereby for quotation, such securities will initially be exempt from the
definition of "penny stock." After the effectiveness of the offering, the common
stock will be exempt from the "penny stock" definition, for so long as the
common stock is quoted on the Nasdaq SmallCap Market(SM), which offers "real
time" transaction information. In addition, our common stock will be excluded
from the "penny stock" definition, based upon our net tangible assets when our
net tangible assets exceed $5 million, or after three (3) years of continuing
operations when our net tangible assets exceed $2 million. Net tangible book
value on the closing date is anticipated to be approximately $6.4 million. If
the common stock falls within the definition of a "penny stock" following the
effective date, our securities may become subject to rules that impose
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally those with assets in excess of $1,000,000 or annual income exceeding
$200,000, or $300,000 together with their spouse). For transactions covered by
these rules, the broker-dealer must make a special suitability determination for
the purchase of such securities and have received the purchaser's written
consent to the transaction prior to the purchase. Additionally, for any
transaction involving a penny stock, unless exempt, the rules require the
delivery, prior to the transaction, of a risk disclosure document mandated by
the Commission relating to the penny stock market. The broker-dealer also must
disclose the commissions payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the broker-dealer
is the sole market-maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market. Finally, monthly statements
must be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks. Consequently, the
"penny stock" rules may restrict the ability of broker-dealers to sell our
securities and may affect the ability of purchasers in this offering to sell our
securities in the secondary market.
THE OFFERING PRICE FOR OUR SECURITIES DOES NOT NECESSARILY BEAR ANY
RELATIONSHIP TO OUR ASSETS, BOOK VALUE, EARNINGS OR OTHER ESTABLISHED CRITERIA
OF VALUE. There has been no prior public market for our securities. The price
to the public of the Securities offered hereby has been determined by
negotiations between us and the underwriter. Among factors considered in
determining the offering prices were the history of, and the prospects for, our
business, an assessment of our management, our past and present operations, our
development and the general condition of the securities market at the time of
this offering. The offering prices for the securities does not necessarily bear
any relationship to our assets, earnings, book value or any other recognized
criteria of value. The offering price of $5.00 per share is substantially in
excess of our net tangible book value of $(.19) per share, and in excess of the
price received by n-Gen for shares sold in prior recent securities transactions.
WE ARE REQUIRED TO KEEP OUR PROSPECTUS AND STATE BLUE SKY REGISTRATIONS
CURRENT, AND ANY FAILURE BY US TO DO SO MAY LIMIT YOUR ABILITY TO TRADE OUR
SECURITIES. We will be able to issue shares of our common stock upon the
exercise of the warrants and the common stock underwriter's warrants, only if:
- there is a current prospectus relating to the securities offered hereby
under an effective registration statement filed with the Securities and
Exchange Commission; and
- such common stock is then qualified for sale or exempt from the
requirement to be so qualified, under applicable state securities laws of
the jurisdictions in which the various holders of warrants reside.
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<PAGE>
Although we intend to maintain a current registration statement, there can be no
assurance that we will be successful in maintaining a current registration
statement.
After our registration statement becomes effective, we will be required to
file a post-effective amendment, if facts or events occur which represent a
material change in the information contained in the registration statement. We
intend to qualify the sale of the warrants in a limited number of states,
although certain exemptions under certain state securities ("Blue Sky") laws may
permit the warrants to be transferred to purchasers in states other than those
in which the warrants were initially qualified. Qualification for the exercise
of the warrants in the states is essential for the establishment of a trading
market in the Securities. We can make no assurances that we will be able to
qualify our Securities in any state. We will be prevented, however, from issuing
common stock upon exercise of the warrants in those states where exemptions are
unavailable and we have failed to qualify, or maintain qualification of, the
common stock issuable upon exercise of the warrants. We may decide not to seek,
or may not be able to obtain or maintain qualification of the issuance of such
common stock in all of the states in which the ultimate purchasers of the
warrants reside. In such a case, the warrants of those purchasers will expire
and have no value if such warrants cannot be exercised or sold.
NO MARKET CURRENTLY EXISTS FOR OUR SECURITIES, AND NONE MAY DEVELOP
FOLLOWING THIS OFFERING. No prior market exists for the Securities being
offered in this prospectus. Further, although we intend to apply for inclusion
of the common stock for quotation on the Nasdaq SmallCap Market(SM), no
assurance can be given that a stable, actively trading market in the common
stock will develop subsequent to this offering. Although it is anticipated that
market makers will enroll as such in respect of the common stock, in connection
with our Nasdaq SmallCap Market(SM) application, there can be no assurance that
such market makers will continue indefinitely to act as such in respect of the
common stock, nor that their continued presence will stimulate active trading in
the common stock. Were such market-makers to cease to serve as such and not be
replaced, our common stock may be delisted from the Nasdaq SmallCap Market.
IN THE PAST, RELATED PARTY TRANSACTIONS WERE APPROVED BY LESS THAN A
MAJORITY OF INDEPENDENT DIRECTORS, AND IT IS POSSIBLE SUCH TRANSACTIONS WERE
LESS FAVORABLE TO THE COMPANY THAN THIRD PARTY TRANSACTIONS. As noted in this
prospectus we have, in the past, entered into related party transactions with
certain officers, directors and affiliates. In addition, we currently rent our
corporate office space from One Capital Corporation, an affiliated entity and
have reimbursed them for costs advanced on our behalf. This arrangement was only
ratified by Dave Clem, an independent director. We now have Mr. Stephen K. Smith
on our board of directors who is an independent director and all future
transactions of this nature are required will have to be approved by both of our
independent directors, currently Messrs. Clem and Smith.
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<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus and in our periodic
filings with the Commission constitute forward-looking statements. These
statements involve risks known to us, significant uncertainties and other
factors which may cause our actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by such forward-
looking statements. Such factors include, among other things those listed under
"Risk Factors" and elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "intends," "potential" or "continue" or the
negative of such terms or other comparable terminology. These statements are
only predictions. In evaluating these statements, you should specifically
consider various factors, including the risks outlined above. These factors may
cause our actual results to differ materially from any forward-looking
statement.
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING
We will receive estimated net proceeds of $6,884,000 from the sale in this
offering of 1,600,000 shares of common stock and warrants at an initial public
offering price of $5.00 per share and $.125 per warrant after deducting expenses
of the offering. If the underwriters' over-allotment option is exercised in
full, we will receive net proceeds of $7,954,000.
We intend to use the proceeds as follows:
<TABLE>
<S> <C> <C>
Development of our web site and e-commerce business....... $2,400,000 34.9%
Expansion of our sales and marketing capabilities......... 1,200,000 17.4%
Potential acquisitions.................................... 1,800,000 26.1%
Working capital and general corporation purposes.......... 1,484,000 21.6%
---------- ----
Total................................................. $6,884,000 100%
========== ====
</TABLE>
Although we may use a portion of the net proceeds to acquire technology or
businesses that are complementary to our business, we currently have no
commitments or agreements for such acquisitions and are not involved in
negotiations regarding any acquisitions. Pending use of the net proceeds for the
above purposes, we intend to invest the net proceeds in short-term,
interest-bearing, investment-grade securities.
DIVIDEND POLICY
We currently intend to retain all future earnings, if any, for funding our
growth and, therefore, do not expect to pay any dividends in the foreseeable
future. The declaration and payment of dividends are subject to the discretion
of our board of directors.
DILUTION
As of June 30, 2000, we had a net tangible book value of $( 1,097,174) or
$(.19) per share, after completion of a private placement of stock in 2000. Our
net tangible book value per share means our tangible assets, less all
liabilities, divided by the number of shares of common stock outstanding. After
giving effect to the sale of the common stock in this offering at an assumed
price of $5.00 per share after deducting underwriting discounts and estimated
offering expenses, adjusted net tangible book value would be $5,976,453 or $.79
per share. The result will be an immediate increase in net tangible
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<PAGE>
book value per share of $.98 to existing shareholders and an immediate dilution
to new investors of $4.21 per share. As a result, investors in this offering
will bear most of the risk of loss since their shares are being purchased at a
cost substantially above the price that existing shareholders acquired their
shares. "Dilution" is determined by subtracting net tangible book value per
share after the offering from the offering price to investors. The following
table illustrates this dilution assuming no exercise of the warrants, the
underwriter's over-allotment option, the underwriter's common stock option on
the underwriter's warrant option:
<TABLE>
<S> <C> <C>
Public offering price per share of the common stock offered
hereby.................................................... $5.00
Net tangible book value per share, before the offering...... $(.19)
Increase per share attributable to the sale by n-Gen of the
shares offered hereby..................................... $ .98
-----
Pro forma net tangible book value per share, after the
offering.................................................. $ .79
-----
Dilution per share to new investors......................... $4.21
=====
</TABLE>
The above table assumes no exercise of the warrants, the underwriter's
over-allotment option or the underwriter's common stock option on the
underwriter's warrant option purchase option. The following table summarizes the
investments of all existing stockholders and new investors after giving effect
to the sale of the shares in this offering assuming no exercise of the
underwriter's over-allotment option:
<TABLE>
<CAPTION>
PERCENTAGE
SHARES OF TOTAL AGGREGATE
PURCHASED SHARES CONSIDERATION
--------- ---------- -------------
<S> <C> <C> <C>
Present Stockholders(1).................... 6,045,250 79.1% $1,108,535
Public Stockholders........................ 1,600,000 20.9% $8,000,000
--------- ---- ----------
Total.................................... 7,645,250 100% $9,108,535
========= ==== ==========
</TABLE>
------------------------
(1) Includes the sale of certain promissory notes and the issuance 105,250
shares of common stock upon completion of this offering.
If the over-allotment option is exercised in full, the investors in this
offering will have paid $9,200,000 and will hold 1,840,000 shares of common
stock, representing 89.2% percent of the total consideration and 23.7% percent
of the total number of outstanding shares of common stock.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000:
- on an actual basis, giving effect to our acquisition of our wholly-owned
subsidiary, n-Gen Solutions.com, Inc. (formerly known as Lab Technologies
in March 1999 (effective January 1999) and our subsequent name change to
n-Gen Solutions. com, Inc. (formerly known as AAE Education Corporation)
in January 2000,
- on a pro forma basis to reflect the payment of the outstanding promissory
notes in accordance with their terms and the issuance of 105,250 shares of
common stock on completion of this offering, and
- on a pro forma as adjusted to give effect to the receipt of the estimated
net proceeds from the sale of 1,600,000 shares of common stock and
1,600,000 warrants offered by us in this offering at the assumed public
offering price of $5.00 per share and $.125 per warrant, after deducting
underwriting discounts and commissions and estimated offering expenses.
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of June 30, 2000 and does not
include the following:
- 240,000 shares of common stock and warrants that the underwriters may
purchase within 45 days after the date of this prospectus solely to cover
over-allotments, if any;
- 1,600,000 shares of common stock which may be issued upon the exercise of
the 1,600,000 warrants to purchase up to 1,600,000 shares of common stock;
- Additional underwriter's warrants to purchase additional shares of common
stock.
The information below is qualified by, and should be read in conjunction
with, our "Management's Discussion and Analysis or Plan of Operations" and the
financial statements and the notes to those statements appearing at the end of
this prospectus.
<TABLE>
<CAPTION>
JUNE 30, 2000
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED
----------- ------------ -----------
<S> <C> <C> <C>
Capital lease obligations, long-term portion............ $ 60,946 $ 60,946 $ 60,946
----------- ----------- -----------
Shareholders' equity:
Common Stock, $.0001 par value; 25,000,000 shares
authorized; 5,940,000 shares issued and outstanding,
actual; 6,045,250 shares issued and outstanding,
pro forma; 7,645,250 shares issued and outstanding,
pro forma as adjusted............................... 594 605 765
Additional paid-in capital.............................. 1,107,941 1,107,930 7,802,143
Accumulated deficit..................................... (1,829,618) (1,829,618) (1,829,618)
----------- ----------- -----------
Total shareholders' equity (deficit).................... $ (721,083) $ (721,083) $ 5,973,290
----------- ----------- -----------
Total capitalization (deficit).......................... $ (660,137) $ (660,137) $ 6,034,236
=========== =========== ===========
</TABLE>
------------------------
(1) Includes the 105,250 shares of common stock previously sold and to be
delivered on completion of this offering.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ TOGETHER WITH THE
FINANCIAL STATEMENTS AND RELATED NOTES OF N-GEN INCLUDED IN THIS PROSPECTUS,
BEGINNING ON PAGE F-1. THE DISCUSSION IN THIS PROSPECTUS CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY
STATEMENTS MADE IN THIS PROSPECTUS APPLY TO ALL RELATED FORWARD-LOOKING
STATEMENTS WHEREVER THEY APPEAR IN THIS PROSPECTUS. OUR ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS.
FACTORS THAT MAY CAUSE OR CONTRIBUTE TO DIFFERENCES INCLUDE THOSE DISCUSSED IN
"RISK FACTORS," AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW OF THE CURRENT COMPANY
We were initially incorporated in Delaware in July 1998 under the name AAE
Education Corporation and in March 1999, we began operations in our present form
when we acquired all of the issued and outstanding shares effective January 1,
1999 of Technology Learning Systems, Inc. d.b.a. Lab Technologies from Gary D.
Nelson, our current President and a Director. After the acquisition and
reorganization, we changed Lab Technologies' name to n-Gen Solutions.com, Inc.
(Colorado) and also subsequently changed our name in Delaware to n-Gen
Solutions.com, Inc. in January 2000. To consolidate operations and change our
corporate domicile to Delaware, on January 21, 2000, we merged our wholly owned
Colorado subsidiary into n-Gen Solutions.com, Inc. (Delaware), which remains as
the surviving corporation. All of our business is now conducted under n-Gen
Solutions.com, Inc. a Delaware corporation.
We currently specialize in designing, selling and installing interactive,
computerized classrooms to public, private and charter educational institutions,
government agencies, corporations and individuals. We believe our classroom
products provide teachers and students with the ability to:
- access meaningful content from specially-designed data bases;
- utilize computers for distance learning and access to on-line course
materials and supplements;
- learn and interact with instructors and with curriculum that can be
personalized to each student's needs; and
- engage students in state-of-the-art computer technology and software that
enhances and enlivens the learning experience compared to a traditional
classroom.
We have designed web-enabled software programs which have the ability to
store, manage and deliver digital media across specially designed internal
networks or over the Internet when used in conjunction with our distance
learning applications. Our students and instructors can use these applications
to instantly locate, access and play on demand media resources ranging from
digital video, digital images, web sites and web audio, to software applications
and CD-ROMs. Our software applications allow our users to pre-index hundreds of
lesson plans, web sites and media resources, by grade levels and content areas.
In addition, we currently are developing an e-commerce web site to
complement our current business model which is expected to allow us to offer a
centralized source for purchasing a wide range of educational products, software
titles, office/school supplies and hardware. We have selected products which we
feel will be of particular interest to our target customers, primarily school
and district administrators.
Currently our customers are comprised of educational institutions (75%),
commercial users (22%) and training individuals (3%). Our current revenues are
comprised of product sales (95%), commissions from manufacturers (1%) and
training (4%). Product sales consist of sales of interactive,
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computerized classrooms to educational institutions and sales of computer aided
design software to commercial users.
Our business involves a high degree of risk as a result of the following
factors and other factors discussed throughout this prospectus:
- our business model recently changed to include an e-commerce solution;
- we have a history of losses;
- our past revenues have been derived from product sales; and
- the change in our business model makes past revenue comparisons less
meaningful.
We expect to incur significant losses for the foreseeable future. Over the
next twelve months, we expect that our losses will increase significantly from
current levels as we continue to incur additional expenses to advertise and
promote our web site, expand our product offerings and increase our in-house
sales staff.
Our marketing efforts will target those customers who currently purchase our
computer classrooms or who are potential users such as school districts,
governmental agencies and corporations. By using the new business to business
approach for the educational industry, we will attempt to concentrate and
enhance our selling efforts in a viable and financially stable market niche.
Since we only recently commenced operations in our present form when we
acquired our subsidiary, interperiod comparisons are not as meaningful as would
be the case if we had a longer operating history.
WEB SITE AND TECHNOLOGY DEVELOPMENT
Competition for user traffic among business-to-business related web sites is
intense. Web sites can differentiate themselves from others by providing users
with an on-line experience that is easy, efficient and useful. By providing an
on-line experience that is also informative and entertaining and visually
pleasing, web sites can increase the percentage of first time users that return
to the web site again. The quality of the on-line experience is directly related
to the underlying technologies utilized by the web site. This technology
includes:
- web site content,
- design,
- operational software,
- transaction processing systems, and
- telecommunications infrastructure.
We will be required to consistently update our hardware and software systems in
order to deliver leading-edge technical solutions on our web site and provide
users with an on-line experience superior to that provided by competitors.
Accordingly, we will incur significant ongoing expense with respect to our
technology.
Currently, we rely on The August Group, Inc. for our technical
infrastructure and to host and deliver our web sites and e-commerce solution. We
have negotiated an agreement with The August Group, whereby The August Group
will perform and deliver certain services in the development of our web site(s).
The agreement provides that The August Group will undertake the following:
- Web Site Business Issues including SSL application and Merchant Account
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- Database Development
- Web Site Graphical and User Interface Design
- EDI--Development
- Help Functionality
- Login Features
- Reporting and Administration
- Security
- Shopping Cart
- Sign-up Features
- Back-end Sales Automation
We believe that by initially outsourcing a large portion of our technology
infrastructure, we will be able to reduce the up-front costs associated with
constructing and expanding a complex e-commerce and business information
community, pay for a large portion of the services provided by third-party
technology providers only as we generate revenues from our web site, and harness
the proven experience of these technology providers. Over time, as our web site
and operations mature, we intend to internally develop or otherwise internalize
a significant portion of the technology used to operate our business.
DISCUSSION OF PREDECESSOR OPERATING COMPANY
The predecessor operating company, formerly known as Lab Technologies,
existed as a stand-alone company prior to our acquiring it.
The company sold its products predominantly to education institutions in the
Rocky Mountain States through its own representatives or through other reseller
arrangements. Most products sold had approximately a 25% discount as an
authorized distributor. This, plus their commission income on sales generated
for a California manufacturer, which are not included in reseller product sales,
resulted in gross profit of approximately 29%. Most costs of generating these
sales were selling or general and administrative expenses. Included in general
and administrative expenses were the salary and associated expenses for the
owner prior to our acquisition.
Since they carried only a limited amount of inventory, there were few costs
associated with holding inventory or inventory write off. Bad debt expenses were
minimal, less than 1%, as a majority of the sales were to public school
districts or other established educational institutions.
SEASONALITY
Due to the seasonality inherent in the academic calendar, as well as our
customers' plans for on-line learning centers and course development, our
operating company experiences seasonal fluctuations from quarter to quarter.
Many orders, especially for our digital classrooms for schools are received in
the spring or early summer for installation in late summer, prior to the
academic year. Therefore, higher revenues are booked in the fourth quarter of
our fiscal year (third calendar quarter) resulting in higher than average
accounts receivable and accounts payable. This in turn results in higher cash
inflows and period-end cash balances for the quarter ended September 30 and
lower accounts receivable and payable. Our operating expenses are relatively
fixed in nature and seasonal fluctuations in revenue will result in seasonal
fluctuations in our operating results. As a result, quarter-to-quarter financial
results are not directly comparable.
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In view of the rapidly evolving nature of our e-commerce business and our
limited operating history in this regard, we believe that our historic revenue
and other operating results should not be relied upon as indications of future
performance.
RESULTS OF OPERATIONS
CURRENT COMPANY FOR THE PERIOD JULY 13, 1998 (INCEPTION) THROUGH DECEMBER 31,
1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999
In the accompanying financial statements, the statements for periods in 1999
are consolidated and include the accounts of n-Gen and its wholly owned
subsidiary. The statements for periods in 1998 are not consolidated since they
are prior to the acquisition of Lab Technologies.
Effective January 1, 1999, we became operational with the acquisition of Lab
Technologies (n-Gen Solutions.com, Inc., a Colorado corporation). The
acquisition significantly changed our operations since we now have an operating
company. In addition, we changed the fiscal year from December 31, to
September 30 to more closely match our revenue cycle in the education business.
During the nine months ended September 30, 1999, in addition to continuing the
operations of the acquired company, we focused on raising additional capital to
pay for costs associated with a potential public offering as well as to fund our
expanded working capital needs and web site development costs.
Our initial period of approximately six months in 1998 consisted primarily
of organizing our company, developing our business plan and searching for
acquisition targets in for-profit education industry sectors. Other than a
nominal amount of interest in the amount of $6,130, we had no revenues in 1998.
We incurred approximately $244,000 of expenses for salaries, office costs,
acquisition due diligence efforts, travel costs, legal and accounting services
and capital fund raising.
As a result of the continuing operations of our operating company, in the
nine months ended September 30, 1999, we had total revenues of $3,830,353
compared to no sales in 1998. Those revenues consisted primarily of equipment
and software sales of $3,328,944 (87%). Of the product sales, $2,497,000 were
school sales. Of total revenues, $395,381 (10%) were commissions and $106,028
(3%) were training. The product and labor cost of those sales were $2,690,979,
or 70% of total revenues.
CURRENT COMPANY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE
PREDECESSOR COMPANY FOR THE YEAR ENDED DECEMBER 31, 1998
While we did not own our operating company subsidiary in 1998, comparing
some financial information of the current company for the nine months ended
September 30, 1999 to the predecessor operating company's operating results for
the twelve months ended December 31, 1998 helps to understand our 1999 operating
results. To compare the results of operations of our subsidiary with the prior
year, the reader should refer to the financial statements of n-Gen
Solutions.com, Inc. (a Colorado corporation) beginning on page F-27 and compare
them with the amounts for the nine months ended September 30, 1999.
REVENUE
The predecessor operating company's total revenues for 1998 were $5,685,563.
Overall, our operating company's revenues in 1999 decreased from 1998 by
approximately $1,855,210 due primarily to our 1999 fiscal year having only nine
months of revenues. In 1998, 90% of our revenues were attributable to product
sales, 8% were attributable to commissions and 2% were attributable to training.
The decrease in commissions from $443,132 in 1998 to $395,381 in 1999 occurred
because of a decrease in the sales generated for a California manufacturer of
education classroom products. We sell a variety of educational software and
hardware products and systems. In the majority of our transactions we act as a
distributor and invoice the customer directly; these transactions appear as
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"Sales" on our Statement of Operations. Our profits come from the difference
between the sales price and the cost of goods sold. For commission revenues, we
act as agent and receive a commission from the manufacturer.
Our training revenues decreased by $23,971 from $129,999 in 1998 to $106,028
in 1999 representing a decrease of approximately 18% due to our nine-month
reporting period in 1999. However, since the profit margins in this segment are
significantly higher than our educational and commercial sales, we intend to
expand this business in 2000 by offering more courses, hiring additional
instructors and increasing the advertising expenditures.
COST OF REVENUES AND GROSS PROFIT
Cost of goods declined from $3,965,661 in 1998 (71% of sales) to $2,690,979
in 1999 (70% of sales). As a percentage of sales, cost of sales declined
resulting in an improvement of gross profit from 29% to 30%. This occurred
primarily because we achieved higher margins on our smart classroom sales.
Revenues decreased from $5,685,563 to $3,830,353 (about 32%), and there was
a 30% decrease in gross profit of $483,528, from $1,622,902 in 1998 to
$1,139,374 in 1999, primarily due to the shorter reporting period in 1999.
SELLING EXPENSES
The operating company's selling expenses also decreased from 1998 to 1999
from $649,330 to $525,730, a decrease of 19%. This was also due to the 1999
period having only nine months compared to twelve months in 1998.
BAD DEBT EXPENSES
Since we have sold the majority of our products to school districts,
collection of receivables on such sales is generally assured in a reasonable
time period after we invoice our customer. Bad debts from sales to schools are
approximately 1% and do not contribute significantly to our operating expenses
and this is a positive aspect of our business sector. However, bad debts in
total in 1998 were $119,026 because of commission revenue of $97,000 judged to
be uncollectible. Overall bad debts expense decreased from 1998 to 1999. This
occurred in 1999 despite our recording an allowance for uncollectibility of a
large, single private institutional account of $60,857 in 1999. We are still
trying to collect this account. As we expand our market beyond school districts,
our bad debt expense may increase.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative costs increased from $626,702 for the twelve
months ended December 31, 1998 to $1,224,204 for the nine months ended
September 30, 1999. This was a result of several key items. n-Gen was formed in
July 1998 to investigate and acquire businesses in the for-profit education
sector utilizing and/or delivering high technology. Substantial expenses were
incurred in 1998 of $244,254 and in first quarter 1999 in developing the
business plan and in the due diligence review and negotiations for the
acquisition of Lab Technologies, renamed n-Gen Solutions.com, Inc. (Colorado).
In 1999, all of the internal payroll of $215,719 and related search, due
diligence costs and negotiation costs of $37,990 were expensed. A majority of
these costs were incurred at the corporate level; the general and administrative
costs at the operating company level remained relatively constant. With future
growth in projected revenues, total general and administrative costs should
decrease substantially as a percentage of total costs and revenue. Additionally,
we expensed $41,390 of the $82,533 we spent in development of our e-commerce web
site.
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OTHER INCOME AND EXPENSE
Interest expenses increased from $13,890 in the year ended December 31, 1998
to $95,160 for the nine months ended September 30, 1999 primarily due to the
debt financing with promissory notes during 1999 and the debt to Gary Nelson for
the acquisition of Lab Technologies.
As of December 31, 1998, the acquired operating company was owed
approximately $97,000 in commissions from a California company which had been
judged uncollectible. In August 1999, the $97,000 was collected through
management efforts in April through July 1999 and was included in the line
"Interest and other income" as revenue. This income is not expected to be
recurring.
CURRENT COMPANY FOR THE NINE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE
NINE MONTHS ENDED JUNE 30, 2000
The nine months ended June 30, 1999 included the negotiation and due
diligence efforts that culminated in the acquisition on March 26, 1999 of Lab
Technologies. Since the effective date of the transaction was January 1, 1999,
only six months of operations of the acquired operating company are reflected in
the statement of operations for the nine months ended June 30, 1999. The period
ending June 30, 2000 reflects full operations of the consolidated companies,
including the ongoing operating business.
Total revenues increased from $1,798,172 to $3,984,208, an increase of
$2,186,036, or 122%. Of total sales, training increased significantly from
$64,884 to $165,091, reflecting our attempts to increase training revenues due
to their higher profit margins. Commission revenues declined from $130,848 for
the nine months ended June 30, 1999 to $48,577 for the nine months ended
June 30, 2000 due to a change in our relationship with the manufacturer in
California. In January 2000, we replaced the sales commission arrangement with a
distributorship agreement with the California manufacturer. Under this new
business relationship, we sell directly to the customer, regarding revenue and
cost of sales for product and installation labor costs. The difference between
our sale price and our cost of sales appears in Gross Profit.
Cost of sales increased as well as revenues and the gross profit percent
increased from 30% to 36%. The gross profit margin improvement in the nine
months ended June 30, 2000 compared to the nine months ended September 30, 1999
was due to increased sales of proprietary products such as our n-Gen Smart
Classroom described elsewhere.
General and administrative expenses increased from $1,014,041 to $1,236,283.
This increase was due to additional expenses of internal administrative and
accounting costs incurred at the corporate level. The selling costs of education
products to schools and commercial customers of the operating company increased
from $308,903 to $522,677, due to costs of additional sales personnel. However,
as a percentage of total sales, selling costs declined from 17% to 14%.
Depreciation and amortization increased significantly between the periods
due primarily to the increased amortization of intangible costs that were
associated with the acquisition of the operating company in January 1999. Bad
debts were relatively insignificant due the company's increased monitoring of
customer receivables and additional collection efforts.
Overall, the loss from operations decreased from $899,565 to $626,045, for
the nine months ended June 30, 1999 as compared to the nine months ended
June 30, 2000.
Interest expenses increased from $20,931 in the nine months ended June 30,
1999 to $117,115 for the nine months ended June 30, 2000 primarily due to the
debt financing with promissory notes completed in December 1999 and to the debt
to Gary Nelson for the acquisition of Lab Technologies incurred in March 1999.
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LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, we had $210,196 in cash and cash equivalents. As
of June 30, 2000, the cash position increased to $284,410.
For the nine months ended September 30, 1999, our operating activities
generated $149,570 of cash which included $254,400 of stock issued for services.
The cash provided by operations also resulted from significant increases in our
accounts payable $918,512, deferred revenues $225,281 and amounts paid by
related parties $319,891. This contrasts with the nine months ended June 30,
2000 in which operations generated $3,917 of cash due to the seasonality of the
business.
For the nine months ended September 30, 1999 we spent $82,533 on web site
and technology development costs. Of these costs, $41,143 were capitalized as
internally developed software and $41,390 were incurred in the preliminary
project or training stages and were expensed and are included in General and
Administrative costs. In addition, we expended $38,701 for the purchase of other
office equipment. For the nine months ended June 30, 2000, we spent $86,100 on
web site application development costs, all of which was capitalized. It is our
policy to expense costs which consist of conceptualization of web site elements,
evaluation of the alternatives, verification of the existence of canned software
and related technology, selection of the final specifications and training.
Costs directly associated with application development of the web site are
capitalized. In addition to capitalized web site costs, we expended $123,656 on
the purchase of office equipment.
On March 26, 1999 and effective January 1, 1999, we purchased 100% of an
operating company, Lab Technologies, for a combination of cash of $50,000, notes
payable in the amount of $550,000 and 160,000 shares of common stock. The total
purchase price was $737,500. As part of the purchase we agreed to distribute
cash of $200,000 to the seller, which represented part of the cumulative
earnings of the purchased company prior to our purchase. In this transaction, we
in turn received $167,087 in cash held by the company we purchased. Our net
outlay of cash to purchase the company was $82,913.
Since inception, we have financed the majority of our operations through
capital contributions made by management and through private placements of
promissory notes and shares of our common stock for total proceeds of
$1,441,250. In the nine months ended September 30, 1999, financing activities
provided cash of $160,779 compared to $280,053 in the nine months ended
June 30, 2000. In the nine months ended September 30, 1999, the changes in cash
provided was due to debt financing proceeds of an aggregate of $262,500, and a
bank loan of $350,000 reduced by repayment of debt and related party payables of
$421,721 and payment of $30,000 to our underwriter for initial public offering
expenses. In the nine months ended June 30, 2000, changes in cash provided from
financing activities occurred from private placement stock sale proceeds of
$421,000 and debt of $413,750, reduced by repayment of debt and related party
payables of $395,070 and payment of initial public offering costs of $159,627.
Our future capital requirements will depend on several factors which are:
- Market acceptance of our services;
- Marketing promotions;
- The amount of resources we devote to the development of our current and
future products; and
- The expansion of our in-house sales force and marketing our services.
We have estimated the costs to expand our sales and marketing capabilities
at $1,200,000 and development of our web site and e-commerce business at
$2,400,000. Currently, we have no known material commitments for any
expenditures.
In June 1999, we entered into a letter of intent with the underwriter in
connection with this public offering. The net proceeds of this offering,
totaling approximately $6,884,000, should provide adequate
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working capital for us to enhance and otherwise stabilize cash flow during at
least the 12 months of operations following the closing of this offering.
Although we prefer to retain our working capital in reserve, we may be required
to expend part or all of these offering proceeds as our financial demands
dictate.
Although it is uncertain that the market price of our shares of common stock
will rise to a level at which the warrants may be exercised, in the event
investors in this offering elect to exercise the warrants at $5.50 per warrant
(not including the underwriter's over-allotment option or the underwriter's
purchase option), we will receive gross proceeds of up to $8,800,000. We
anticipate that the proceeds from the exercise of the warrants would be
contributed to working capital. Nonetheless, we may at the time of exercise
allocate a portion of the proceeds to any other corporate purposes.
We are unable to predict the precise period for which this offering will
provide financing, although we believe that we should have sufficient working
capital to meet our cash requirements for the 12 month period following the date
of this offering. Accordingly, we may need to seek additional funds through
loans or other financing arrangements during this period of time. No such
arrangements exist or are currently contemplated and we cannot be sure that they
may be obtained in the future should the need arise.
Pending utilization, we intend to invest the net proceeds of this offering
in insured, short-term, investment-grade, interest-bearing securities.
IMPACT OF INFLATION
We do not believe that inflation has had a material adverse effect on our
income since our inception. Increases in supplies or other operating costs may
adversely affect our operations in our future. However, we believe we will be
able to increase the prices of our products, systems and services to offset
increases in operating costs.
YEAR 2000 COMPLIANCE
Many computer systems and software programs were written to accept and
process only two digit entry codes for the year when storing dates. Beginning
with the year 2000 these entry codes will need to accept four digit entries to
distinguish 21st century dates from the 20th century dates. As a result,
computer systems and software programs may need to be updated to solve this
problem and avoid incorrect or lost data.
To date we have not experienced any material problems attributable to the
inability to recognize dates beginning with the year 2000 in our products or
internal systems. We face risks associated with the year 2000 issue if we
encounter undetected errors or defects. Our operations could be adversely
affected if systems do not correctly recognize date information when the year
changes to 2000. We face risks primarily in the following areas:
- systems used by us to run our business including information systems,
equipment and facilities;
- systems used by our suppliers; and
- potential warranty or other claims from our customers.
We continue to evaluate and mitigate our exposure in these areas where
appropriate.
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BUSINESS
COMPANY OVERVIEW
N-Gen designs, installs and outfits computer classrooms for schools,
businesses and government agencies which are customized to teach the various
subjects that each customer wants taught. Our business model consists of our
computer classrooms and an integrated e-commerce web site, both tailored to meet
the needs of our customers. We focus our computer classrooms on providing
schools and businesses with:
- high technology, interactive, computer classrooms;
- audio, video and multi-media capabilities within the classrooms; and
- distance learning technology and features.
Our e-commerce web site will complement our computer classrooms by offering our
customers on-line shopping for:
- computer hardware;
- computer software;
- educational materials;
- school and office supplies;
- school and office furniture; and
- entertainment products.
Through our computer classrooms and e-commerce web site, we believe that we can
build technological infrastructures for our customers that can enhance,
streamline and compliment the traditional educational system.
The goal of our computer classrooms is to combine interactive,
educationally-sound computer classrooms and curriculum with the dynamics of the
Internet, digital video, audio and multimedia applications. The computer
classrooms we provide typically contain the following integral components, some
of which are n-Gen proprietary products and some of which are provided by
third-party suppliers:
- 10 to 30 computer workstations for students;
- 1 instructor computer workstation;
- specially designed furniture and seating;
- audio and video switching equipment;
- an electronic whiteboard for visual projections and demonstrations; and
- a digital video server and a software database for searching and accessing
customer identified Internet sites, video materials, audio files, software
and images.
Based on management's experience, we believe our computer classrooms provide the
following benefits:
- giving the teacher the ability to work closely with students by allowing
the teacher to display their computer screen to students as a whole class
or to individual students who may require additional assistance;
- giving the teacher the ability to work closely with the students by
allowing the instructor to talk with the class as a whole or to individual
students via headsets;
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- giving students the ability to use many forms of information available on
their computer workstation, such as the Internet, video, audio, pictures
and photographs. Each student can access this information when they need
it or when the teacher asks them to;
- allowing students to work at their own pace and at their own level while
following a curriculum that is interactive and that contains the many
forms of data described above; and
- giving the teacher the ability to monitor student progress through the
computer database. Students can be prompted by the instructor either
verbally or over the computer system to answer questions. The classroom's
audio/video system automatically collects the students' answers for the
instructor and displays the results for the instructor to review.
Our computer classrooms have the ability to deliver relevant, meaningful
content to students using the latest technology. Based on management's own
limited experience with technology in the education industry, we believe that
our computer classrooms will assist and enhance many students' learning
experience and will become a standard in many educational environments. However,
we have not conducted any formal study to independently verify our belief.
In addition, we have designed web-enabled software programs which have the
ability to store, manage and deliver digital media across internal networks or
the Internet when used in conjunction with our distance learning applications.
Students and instructors can use this application to instantly locate, access
and play on demand media resources ranging from digital video, digital images,
web sites and web audio, to software applications and CD-ROMS. Our software
allows the user to pre-index thousands of lesson plans, web sites and media
resources, by grade levels and content areas.
We are developing an e-commerce web site which will allow us to offer a
centralized source for purchasing a wide range of educational products, software
titles, office and school supplies and hardware. We are in the process of
selecting a wide range of products which we feel will be a particular interest
to the educational market. The site is designed to help our customers manage
their purchasing by tracking their order history. Customers will be able to view
their current orders and past orders, view which items have been shipped and
which items have already been paid for. We have entered into a web development
agreement with The August Group to assist our developers in implementing this
strategy and in constructing a high quality e-commerce web site. We expect our
e-commerce web site to launch on-line operations in the fourth quarter of 2000.
EDUCATION INDUSTRY
BACKGROUND
A recent study published by Market Data Retrieval Education, a private
marketing firm, analyzed the three major educational markets and came up with
the following statistics:
- THE K-12 MARKET has 108,520 schools with 50.7 million students and spends
over $6.9 billion a year on instructional technology.
- THE POST-SECONDARY MARKET consists of 1,723 two-year colleges and 2,595
four-year colleges. The National Center for Education Statistics estimates
that $263.7 billion a year will be spent in higher education in 2007-2008,
which is a 40% increase from 1994-1995.
- THE FOR-PROFIT MARKET, consisting of corporate America, is the third
largest market. Corporate America invested $58.6 billion in 1997 to enable
its employees to maintain, enhance and upgrade their skill level to
effectively compete in today's technologically advanced workplace.
Congress has taken a strong position to ensure the workforce of tomorrow is
prepared and well educated. Increased spending on education has translated into
increased spending on education related technology. For example, the proportion
of public elementary and secondary schools with Internet
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access increased from 32 percent in 1996 to 85 percent in 1998, according to the
Market Data Retrieval study.
LEARNING TECHNOLOGY
Technology and the Internet are allowing for changes in how we educate.
Educators are striving to incorporate technology into the classroom in an effort
to graduate a student body that is well prepared to compete for jobs in our
technology driven society. According to a report issued by the U.S. Department
of Commerce, the national expenditures in 1997-1998 for computer hardware and
software was estimated at $2.8 billion.
SCHOOL SUPPLIES
The demand for school supplies is driven primarily by the level of the
student population and, to a lesser extent, expenditures per student. Student
population is a function of demographics, while expenditures per student are
also affected by government budgets and the prevailing political and social
attitudes toward education. Current projections by the U.S. Department of
Commerce indicate that student enrollment will continue to grow to 53.7 million
by the year 2000. We believe that the current political and social environment
is currently favorable for education spending.
E-COMMERCE
Because of the inherent limitations of traditional channels of distribution,
the Internet is dramatically affecting the way businesses and consumers buy and
sell products and services. Computer Industry Almanac, in a study available
online, estimates that there were 259 million Internet users worldwide at the
end of 1999, and projects that this number will grow to over 490 million users
by the end of 2002. Forrester Research, in a study published online, estimates
that the worldwide e-commerce market will grow to approximately $6.9 trillion by
2004. Management believes that the Internet is well-suited for consumer commerce
for a number of reasons:
- Increased convenience due to the ability to access the Internet at any
time from almost any location;
- Virtually unlimited "shelf" space to allow merchants to offer a wide
selection of products and services;
- Low facilities and staffing costs;
- Merchandising flexibility due to merchant's ability to quickly update and
customize product selection and presentation, editorial content and
prices; and
- Enhanced knowledge of customers' needs from the merchant's ability to
gather, process and store large amounts of customer information.
OUR SOLUTION
We specialize in building technological infrastructures that can enhance,
streamline and complement traditional educational systems. Our technological
infrastructures include computer classrooms and an e-commerce web site.
COMPUTER CLASSROOMS:
We provide interactive, computerized classrooms, which combine the dynamics
of the Internet with computerized technologies to give students access to
instructional material via their computers in many different forms, including
video materials, audio files, software, and Internet sites. We provide schools
and business with the resources and technology necessary to transform ordinary
classrooms into
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electronically enhanced and fully interactive classrooms. Starting with an empty
classroom, we customize the classroom to fit our customer's needs. Examples of
the types of classrooms that we can create include Digital Language Labs,
Interactive Distance Learning Centers, Multimedia Design Labs, Visual
Mathematics Classrooms, Certification Training Centers, Community Learning
Centers, Staff Development Classrooms, Computer-Aided Design ("CAD") Labs and
Science Labs.
The computer classroom we design and install is more interactive than a
traditional classroom. A typical workstation in the classroom is equipped with a
personal computer, keyboard, monitor, headset and student console. The teacher's
station has a display panel allowing the teacher to access each student's
workstation to view what a student is working on. Students have the power to
access many different curriculums, resources and instructional materials, on
demand and in whatever media format is most likely to be effective for each
individual student. The material is delivered directly to each individual
student's desktop computer. In addition, the classroom technology gives the
instructor or the student the ability to make presentations to the class as a
whole, to select groups or to individual students. The delivery of the
curriculum may be made through On-line Content, DVD, Laserdiscs, Satellite and
Cable TV, Digital Video, web sites, Streaming Audio, Electronic Textbooks,
Computer Applications and CD-Roms. Our system can also provide for interactive
distance learning to link together students and facilities from across the city,
nation and around the world.
In our computer classroom, the instructor can personalize the instruction
for each student, or can teach in a more traditional group format. The
instructor can also use the technology to gather feedback from the students, so
the teaching can be adjusted to more efficiently meet each student's needs.
DISTANCE LEARNING:
Our computer classrooms also provide distance learning capabilities, which
we believe will become an increasingly popular means of instruction. Distance
learning means using various methods to teach people who are widely dispersed
geographically. Historically, this has meant using a video to broadcast a
lecture. Due to the high costs of education and the limited supply of qualified
teachers, experts in all fields are in high demand. Based on its own limited
experience, n-Gen management believes that the benefits of using our distance
learning technology include:
- Increased student comprehension & performance;
- Increased interaction between students and teachers and between students;
- Decreased travel costs;
- Decreased training cost per student; and
- Increased content coverage;
Our distance learning systems integrate the latest computer-based
interactive teaching tools with the traditional instructor-led classroom to
create virtual classrooms. A virtual class is comprised of one or more physical
classroom sites, with an instructor who is physically distant from at least one
of the classrooms. The virtual classroom integrates multi-site interactive
videoconferencing, computerized classroom management tools and computer based
instructional resources.
HARDWARE AND SOFTWARE USED IN OUR COMPUTER CLASSROOMS:
Our multi-media learning environment uses a custom designed digital video
server in conjunction with our web-enabled software programs. The server can be
custom designed to fit each customer's specific needs and budget. Our digital
server and web-enabled software programs have the ability to
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store, manage and deliver digital media across internal networks or the
Internet. Our server and software allow users to:
- Locate, access and play on demand media resources ranging from digital
video, digital images, web sites and web audio, to software applications
and CD-ROMs;
- Pre-index lesson plans, web sites and media resources by grade levels and
content areas;
- Archive the location of print materials and analog based media;
- Retrieve and review assignments, leave comments for teachers, and examine
attendance records;
- Teachers can give students on-line feedback about their work and general
performance; and
- Parents can review their child's lessons and performance from their home
computer and see how their child compares to other students in the class,
in the school or around the country.
DESIGN OF OUR COMPUTER CLASSROOMS:
Our staff works side by side with school technology directors, curriculum
directors, superintendents, principals and teachers to design and implement
technology plans focused on budget requirements and goals. We assist in the
planning and design of network architecture, Internet access, information and
instructional management, facilities planning, curriculum design, multimedia
utilization, media delivery systems, technology education and staff development.
We build 3-D computer drawings and walk-through visuals for our customers,
in an effort to present concepts and ensure accurate planning and successful
implementation of our learning environments. We are capable of creating
corporate training classrooms, educational computer classrooms, science labs,
CAD classrooms, lecture halls, technology education labs, teacher and staff
development centers and many other technology-enriched facilities.
COST OF OUR COMPUTER CLASSROOMS:
A computer classroom may cost between $140,000 and $250,000. This cost
includes a custom designed classroom to meet the specifications of each school's
particular space, computer hardware and software, installation and training. We
are often able to use a customer's existing computer hardware to provide a
lower-cost alternative. A full classroom can usually be operational within six
to eight weeks from the order date. Once an order is placed, we notify our
vendors and the equipment is shipped directly to our customer's site. We then
inventory and install the classroom on site, and provide technical training and
instructional staff development.
E-COMMERCE WEB SITE:
Our soon to be launched e-commerce web site, LearningWire.com, will provide
a business-to-business solution for the educational product market. Our site
will be targeted at school purchasing agents, administrators, businesses and
individuals.
It is our hope that our e-commerce site will provide a single centralized
source for purchasing a wide range of products, including software, office and
school supplies, education related hardware, furniture, books, and entertainment
products.
INCENTIVE PROGRAM:
An additional feature of our e-commerce site will be the incentive program.
Under this program, schools earn credits toward future purchases and districts
simultaneously earn cash rebates. When a purchase is made, the customer will be
asked to designate a school as the recipient of reward points. The school will
earn points every time that customer makes a purchase through our web site.
These
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reward points then transfer into credits for that school on future purchases
made by the school on the web site. Additionally, the district in which that
school is a member will automatically receive points that transfer into cash
rebates paid by us directly to the district. We believe that this cash back
incentive will encourage districts, schools, businesses and individuals to make
purchases on our e-commerce site.
MARKETING AND PROMOTION
We will be aggressively targeting regional and national education markets.
We believe that our computer classrooms, coupled with our e-commerce web site,
will provide a one-stop solution for our customer's education and technology
needs. Our goal is to reach school association and governing boards through our
web site and direct sales. Currently, we have 8 sales representatives stationed
throughout the Rocky Mountain region, in Colorado, Utah, Arizona, New Mexico,
Idaho, Montana, Nevada and Wyoming. We have also contracted with several
independent companies to distribute and re-sell our products and services in
twelve other states throughout the United States. The states include Washington,
Arkansas, Oregon, Wisconsin, Michigan, Illinois, Indiana, Ohio, Pennsylvania,
New York, Delaware and Texas. The companies use n-Gen marketing materials at
trade shows and conferences and sell our products and services in exchange for a
commission on each sale they make. Currently, the amount of revenue generated
from these relationships is insignificant. Our goal is to develop a strong
electronic Web presence while supporting the sales and marketing strategy
through strong customer-oriented marketing, advertising and printed media
support. Our soon to be launched e-commerce site, LearningWire.com, will use our
already established sales force to promote the sites use to schools, districts,
businesses and individuals. Through this strategy, we hope to build a membership
base and establish a customer base that views LearningWire.com as a trusted
source for purchasing. Our sales and marketing strategy is based on three
complimentary models:
- TOP DOWN MODEL: We will aggressively market our products and services to
school administrators at the state, regional and local levels using our
regional sales force and our e-commerce presence. Strategic press releases
and publication campaigns will promote customer awareness and enhance name
recognition. This support will enhance the direct sales efforts and the
e-commerce sales opportunities. Marketing will be directed to specific
educational trade magazines, educational conferences, seminars and school
site decision makers;
- BOTTOM UP MODEL: We will also target our products and services to
community associations, parent associations, parents and individual
teachers through direct mailings and selected advertising. Parents and
community alliances will be targeted in n-Gen's marketing campaigns for
the support of implementing new teaching strategies and improving the
learning process for all students.
- DIRECT CONTACT MODEL: New technology and educational teaching methods have
to be seen, touched, manipulated and experienced by customers in order to
understand the full utility of the learning that takes place in a highly
technical environment. The expansion into new geographic markets will
require a strategic increase in the operational activities of the sales
and marketing programs. These activities will include our e-commerce
presence, developing distribution channels and expanding the technical and
customer support teams.
GROWTH STRATEGY
Our objective is to become the leading provider of computer classrooms,
instructional technology products and technology-based, performance-driven
consultative services for educational institutions and corporate training
centers worldwide.
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We hope to accomplish our growth strategy as follows:
- AGGRESSIVE MARKETING OF OUR NEWLY ENGINEERED, DESIGNED AND DEVELOPED
LEARNING SOLUTION. We will target learning organizations, including public
and private schools, colleges, universities, technical training centers
and corporations. Worldwide corporations, research centers, global
learning foundations, educational leaders in foreign countries, and
parents will be targeted in our marketing campaigns for universal
acceptance and implementation;
- POSITIONING LEARNINGWIRE.COM AS THE WEB PORTAL FOR ON-LINE ELECTRONIC
EDUCATIONAL BUSINESS TRANSACTIONS WORLDWIDE. We will market our e-commerce
site to school purchasing agents, administrators, businesses and
individuals. The site will be marketed as a complementary component to our
learning solution classrooms and as a separate solution for online
shoppers. Our existing sales representatives will help market our site and
will be available to personally assist our customers with their online
purchases. This type of personalized service, combined with the
incentive/rebate program and the variety of products offered on the site
should help establish our site as a centralized source for online
educational and entertainment purchasing. The site will also help promote
our learning solution offerings, including our classroom technology, and
increase brand recognition;
- AGGRESSIVE ACQUISITION PROGRAM. We feel we can achieve growth through
acquisitions without creating distractions from the focus of our other
growth opportunities along the way. Acquisitions will allow n-Gen to
consolidate and open new territories faster, secure and integrate new
learning technologies, grow globally, create higher profit margins by
becoming a more powerful seller and provide the educational community
highly integrated and simplified technological solutions.
N-GEN SOLUTIONS.COM CUSTOMERS
We build long-term relationships with our customers and their respective
facilities to ensure that the computer classrooms and educational products we
sell become an important and successful extension of the schools' and
businesses' learning processes. We believe that we establish and maintain
relationships with our customers in several ways. We offer year-round
professional development programs for teachers and staff to help them learn how
to use our products in their classrooms. We also provide toll-free technical
support, quarterly newsletters containing special promotions and new product
offerings, and routine visits to schools and businesses by our sales staff.
While we believe that these aspects of our business help us build long-term
relationships with our customers, we currently do not maintain any statistics
identifying the portion of our revenues attributed to purchases by customer's
after the initial sale.
Currently, we have customers in:
- Secondary education (K through 12 public, private and charter educational
institutions);
- Community colleges and universities;
- Vocational & technical education centers;
- Corporate training centers;
- Information technology training centers;
- Government agencies; and
- Engineering firms.
We have an established customer base among educational institutions in
Colorado, Utah, Arizona, New Mexico, Idaho, Montana and Wyoming. We currently do
not collect data to quantify the exact
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number of education institutions with which we have done business, but
management estimates that it is about 500 school districts and 3000 schools. We
also have an established customer base in Colorado among businesses and
government agencies. Management estimates that we have done business with about
1,900 businesses and government agencies.
Typically, we agree to a set fee with our customer based on the type of
computer classroom the customer desires. The fee will vary depending on the
number of workstations and the type of equipment, products and software that the
customer wishes to utilize in the classroom. The computer classroom packages
that we typically sell include design and installation as part of the cost of
the classroom, along with the equipment and the software. We require our
customers to pay for all of the services and equipment on 30 days net terms once
the installation is completed. Occasionally, our customers lease the equipment
and services from a third party leasing agent that is not affiliated with n-Gen.
If our customer uses a leasing agent, we require full payment from the leasing
agent once the installation and training is complete.
TECHNOLOGY
The technology used in our computer classrooms consists of off-the-shelf
components organized by us to create a proprietary architecture. The hardware
and software we develop, design or select supports industry-standard technology.
The technology used in our classrooms includes digital video delivered through
Ethernet and ATM networks; a video server that provides varying bandwidth for
video delivery and storage of thousands of hours of high quality audio and
video; distance learning capabilities that utilize desktop videoconferencing
protocols; classroom instructional control systems with touch screen, icon-based
interfaces; interactive student response and monitoring systems; computer
monitor video signals up to 2000 resolution to allow for delivery of high-end
software applications; audio network systems connecting students and instructors
with each other and with the audio devices employed in the classroom; large
electronic, touch-sensitive white boards and multimedia projection systems to
provide presentation capabilities; and Internet access through the use of
satellite based systems and phone lines.
We have several licenses that allow us to incorporate technology of other
companies into our computer classrooms. The material licenses and agreements
include:
- An agreement with Robotel to resell their audio and video switching
technology;
- An agreement with Smart Technologies to resell their electronic,
touch-sensitive whiteboard; and
- An agreement with Interior Concepts to resell their customized furniture.
We also sell many different software packages with our classrooms, but the
software is only sold by us, and any software license arrangement is between the
software developer and our customer. We do not have any specific software
licenses for our classrooms.
We have implemented an advanced Internet electronic data exchange systems in
conjunction with our education portal and e-commerce web site. These systems
result in improved speed and efficiency. Our information systems include:
- Electronic Data Interchange (EDI) to ensure fulfillment from suppliers,
distributors and manufacturers;
- Virtual Private Networks (VPN) solutions for secure transactions;
- Web-based e-mail, order approval and processing, payment processing and
merchant account processing;
- Office administration, electronic accounting and reporting; and
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- Real time pricing, auto-generated proposal templates and on-demand
customer profiles.
Our on-line information systems infrastructure, including our e-commerce web
site, are hosted by The August Group, Inc. in Frederick, Maryland. The
August Group provides redundant communication lines on honed T3 backbones from
multiple stand-by providers, 24-hour monitoring and engineering support, its own
independent generators and multiple data back-up systems. Our operations offices
utilize T1 landlines for voice and data, Satellite communications and
Fast-Ethernet networking, providing high-speed access to our information systems
for all staff. The Satellite communications system provides each and every user
with 400kbs bandwidth, providing the optimal customer support response times and
efficiency of business operations.
Our systems are based on industry-standard architectures, which have been
designed to minimize downtime in case of outages or catastrophes. Our systems
are designed to ensure 24-hours-a-day, 7-days-a-week availability. Our
transaction processing methods and databases are designed without arbitrary
capacity constraints and are scalable to handle increased volume demands that
are both expected and unexpected. We have implemented load balancing systems and
redundant servers to provide for fault tolerance and secure systems, to promote
maximum uptime.
COMPETITION
The education market is diverse and new technological teaching strategies
are becoming a requirement. n-Gen believes that the principal competitive
factors in our market include:
- Teacher and trainer staff development and skill sets;
- Service features such as adaptability, scalability and the ability to
integrate customer curriculum requirements;
- Quality control of implementation and service teams;
- Ever-greening of technology (keeping all aspects of the technology up to
date); and
- Pricing and budgets.
Our competitors vary in size and in the scope and breadth of the products
and services they offer. Schools' and businesses' in-house technical personnel,
systems integrators and hardware vendors are competition for our solutions.
Large computer manufacturers, such as Gateway, are installing computer
classrooms in schools and businesses. There are several small regional education
resellers in the United States that are also competitors with us in their
respective territories.
Competition in the e-commerce sector is similarly varied and diverse. Our
competitors with substantial market share in e-commerce include:
- CLASSROOMDIRECT.COM(TM) sells a variety of educational products and
services on the Internet. Formerly known as Re-Print, ClassroomDirect.com
began selling direct to classroom teachers in 1992 and has grown into one
of the largest distributors of educational goods and services. Technology
solutions for education were added in 1998 with the acquisition and
integration of Education Access.
- KICKSTART.COM(TM) is an on-line fundraising service for non-profit
organizations that allows non-profit organizations to build a portal site
with a search engine, links to other sites, and information about the
organization. The non-profit organization raises funds by promoting links
to other sites that sell items and the non-profit is given a specified
percentage of the revenue. KickStart.com(TM) is actively marketing through
parent organizations in technologically-advanced neighborhoods.
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- AMAZON.COM(TM) is one of the most widely recognized e-commerce portals.
The company offers a wide range of books, videos, CDs, DVDs, and other
published products to adult and youth on-line buyers.
We believe that the growth of competitors in the educational market
demonstrates the viability of the market for businesses that understand the
market. We do not believe that all the needs of the market are being addressed.
We believe the educational market demands:
- Capacity to purchase products on-line securely;
- A large and diverse product base;
- Educational products or services; and
- A rewards or incentives program for on-line purchasing.
CUSTOMER SERVICE
We are dedicated to providing exceptional customer and technical support
services. We currently have 4 employees dedicated to customer service and plan
to add additional technical and customer service employees in the near future.
Our customer service personnel are trained and proficient in a wide range of
technologies including the full scope of our products. The staff has a broad
knowledge base that allows them to assist with and solve technical issues. Our
various methods of technical and customer support include toll-free technical
telephone support, web site "on-line" technical assistance, and email
correspondence. It is our intent that by utilizing many different styles and
methods of support protocol, we can provide services that result in superior
results and a high degree of customer satisfaction.
Customer service and support is also critical to the success of any business
that involves the Internet. We believe that our sales approach will be crucial
to providing the support that schools and businesses need for on-line
purchasing. In addition to providing personal support, we are building a
customer support and call center that focuses on providing useful product
knowledge through friendly, courteous customer representatives. A third party
will operate this call center under an agreement with us. Customer
representatives will be trained within specific content areas such as office
supplies, computers and networking, software, and entertainment products.
INTELLECTUAL PROPERTY
Although our business model and the services we provide define our business,
our software and copyrights, service marks, trademarks, trade dress, trade
secrets, proprietary technology and similar intellectual property are also very
important to our success. We intend to rely on a combination of trademark and
copyright laws, trade secret protection, confidentiality and/or license
agreements with our employees, customers, suppliers, consultants and others to
protect our proprietary rights. We have applied for the registration of certain
trademarks and service marks in the United States and may seek international
protection where appropriate and feasible. We have applied for trademark
protection for our proprietary software and related products. Currently we have
one trademark application pending: It is N-GEN LEARNING ENVIRONMENT.
We also have four servicemark applications pending. They are:
- N-GEN SOLUTIONS
- LEARNINGWIRE.COM
- N-GEN LEARNING SUITE
- n-Gen ENABLE
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Our trademark and servicemark applications are newly filed and have not yet been
assigned to an examining attorney.
In the future, we may license certain proprietary rights such as trademarks,
technology and copyrighted material to third parties. Currently, protection of
our intellectual property has been limited due to a lack of funds. Our current
financial circumstances reduce our ability to prosecute any potential
infringement.
We also have several licenses that allow us to incorporate the technology of
other companies into our computer classrooms. The material licenses and
agreements are:
- An agreement with Robotel to resell their audio and video switching
technology;
- An agreement with Smart Technologies to resell their electronic,
touch-sensitive whiteboard; and
- An agreement with Interior Concepts to resell their customized furniture.
The licenses for the software sold with our computer classrooms exists
between the software developer and our customer. We do not have any specific
software licenses.
EMPLOYEES
As of August 1, 2000, we had 29 full-time employees, including 14 in
marketing and sales development, 5 in customer service, 3 in development and 7
with management and administrative responsibilities. We also use both individual
and corporate independent contractors to support in house capabilities of
marketing and professional relations, graphics design, software development and
programming. No union represents our employees, and we believe our employee
relations are good.
FACILITIES
Our corporate headquarters is located in Denver, Colorado, which we sublease
on a month to month sublease from an affiliated company for $3,200. The
headquarters leasehold consists of 2,500 square feet. Our operations office,
located in Longmont, Colorado, encompasses approximately 6,300 square feet and
is leased at $5,900 per month, for five years with the lease expiring in 2003.
Our operations office includes one seven station and one twelve station
state-of-the-art computerized training classroom. The facilities also include a
thirteen-station learning solution classroom, showcasing the latest in
technology from on-demand video delivery to interactive desktop distance
learning. We believe our existing facilities are adequate for current
requirements and that additional space can be obtained on commercially
reasonable terms to meet future requirements.
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MANAGEMENT
DIRECTORS, OFFICERS AND KEY PERSONNEL
The officers and directors of n-Gen are as follows:
<TABLE>
<CAPTION>
NAME TITLE
---- ------------------------------------------------------------
<S> <C>
Robert D. Arnold.............. chairman of the board of directors, chief executive officer,
director
Michael V. Schranz............ treasurer, secretary, chief financial officer, director
D. Gary Nelson................ president, director
Dean C. Myers................. vice president of operations, director
Robert C. Vaughan............. vice president, director
David Clem(1)(2).............. director
Allan R. Short................ director
Stephen K. Smith.............. director
</TABLE>
------------------------
(1) Messrs. Clem, Short and Smith serve as the members of n-Gen's audit
committee. Mr. Schranz attends meetings of the audit committee in an
advisory capacity.
(2) Messrs. Clem, Short and Smith serve as the members of n-Gen's compensation
committee. Mr. Nelson attends meetings of the compensation committee in an
advisory capacity.
Each of the directors of n-Gen hold office for a one-year period expiring
August 16, 2001. At present, n-Gen's by-laws provide for not less than five
directors nor more than eleven directors. Currently, there are seven directors
in n-Gen. The by-laws permit the board of directors to fill any vacancy and such
director may serve until the next annual meeting of shareholders or until his
successor is elected and qualified. Officers serve at the discretion of the
board of directors. There are no family relationships among any officers or
directors of n-Gen. The officers of n-Gen devote full time to the business of
n-Gen.
The principal occupations and business experience for each officer and
director of n-Gen for at least the last five years are as follows:
ROBERT D. ARNOLD, age 61, became chairman of the board of directors, chief
executive officer and director of n-Gen in March 1998. In addition, he served as
a director, chairman and chief executive officer of our former subsidiary.
Mr. Arnold has 33 years of investment banking, entrepreneurial management, and
sales experience with companies in the technology, proprietary education,
finance, and energy sectors, including extensive private placement financing in
the USA and Europe. Prior to entering the investment business, Mr. Arnold spent
12 years as a teacher and supervisor in secondary education. From August 1973 to
July 1978, Mr. Arnold was in sales management with Aegon USA, a life insurance
and financial company; from July 1978 to August 1979, Mr. Arnold was an
institutional sales manager with NYSE member Newhard, Cook, and Co. an NASD
member broker-dealer and institutional investment advisor; from September 1979
to June 1992, Mr. Arnold was an independent consultant; and from August 1992 to
March 1999, Mr. Arnold is the managing director of One Capital Corporation, a
financial consulting firm in Denver and New York City. Mr. Arnold holds a
Masters in Educational Administration and Supervision from the University of
Illinois earned in 1968 and a Bachelor of Arts from Wheaton College awarded in
1961.
MICHAEL V. SCHRANZ, age 57, became treasurer, secretary, chief financial
officer and director of n-Gen in March 1998. In addition, he served as
secretary, treasurer, chief financial officer and a director of our former
subsidiary. Mr. Schranz has 29 years advising public companies on financial and
regulator issues, including management experience in the energy industry. From
June 1975 to
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January 1977, Mr. Schranz worked as an audit and tax manager of Laventhol &
Horwath, a public accounting firm in Denver, Colorado. From February 1977 to
January 1980, he was the chief financial officer of CleveRock Energy, Inc. of
Denver, Colorado, which was subsequently purchased by Lexicon Resources, Inc.
From January 1980 to August 1990, Mr. Schranz was an officer and director of
Overthrust Resources, Inc. of Denver, Colorado. From August 1990 to March 1998,
he was a managing partner of One Capital Corporation, a financial consulting
firm in Denver, Colorado. Mr. Schranz holds a Masters of Business Administration
from the University of Denver earned in 1975, a Bachelors of Science in Civil
Engineering/Industrial Management from Purdue University earned in 1965, a CPA
license awarded in 1977, and is a member of the Colorado and American Societies
of Certified Public Accountants.
D. GARY NELSON, age 47, is the founder of Lab Technologies, Inc. the
predecessor company to N-Gen. In January 2000, he became our president and a
director. Since 1984, he served as a director and president of our former
subsidiary. From 1976-1977, Mr. Nelson taught Industrial Arts in the Dallas
Independent School District. From 1977-1984, he served as an educational
consultant for Brodhead-Garrett, a technical education and supply company. In
1984, Mr. Nelson founded Lab Technologies, Inc. to assist educators in
integrating academic and technological skills into the classroom. Mr. Nelson
received his Bachelor of Science Degree in Industrial Arts from North Texas
State University in 1976.
DEAN C. MYERS, age 30, joined Lab Technologies, Inc., the predecessor
company to N-Gen, in 1992 providing technical as well as sales support. In
January 2000 he became our vice president of operations, chief technical officer
and a director. As chief technical officer, Mr. Myers works with our customers
in designing and implementing the technology used in our learning solution
classrooms. Mr. Myers graduated from Colorado State University in 1992, with a
Bachelor of Science Degree in Electrical Engineering.
ROBERT C. VAUGHAN, age 64, has served as vice president and director of
n-Gen since January 2000 and has served as a chief executive officer and chief
operating officer with numerous other firms over the past twenty years. From
August 1981 to December 1999, Mr. Vaughan managed the Orbis Group, a
business-consulting firm in Phoenix, Arizona providing merger and acquisition,
marketing, finance and other services. In addition, from 1994 to 1997,
Mr. Vaughan was a mergers and acquisitions consultant to long distance
telecommunication firms in Phoenix, Arizona and elsewhere. Mr. Vaughan attended
the University of Wisconsin in 1954.
DAVID CLEM, age 45, has served as a director of n-Gen since March 1998. He
has 15 years experience in the telecommunications industry. After spending many
years as a real estate developer/ broker in southern California, he cofounded
and directed the development of Call America, Inc., a long distance
telecommunications company, beginning in 1983. After 11 years, Mr. Clem sold his
business to US Long Distance, a Texas-based major, publicly traded
telecommunications firm, joining them as vice president to develop new markets
and evaluate acquisition candidates. Currently, Mr. Clem manages an investment
portfolio and is active in n-Gen's acquisition selections. He received a
Bachelor's degree in Business Administration from California Polytechnic State
University--San Louis Obispo in 1977.
ALLAN R. SHORT, age 46, became a director of n-Gen in January 2000. In
addition, he served as chief operating officer and director of our former
subsidiary since 1998. Mr. Short has over 20 years of experience in higher
education. From 1979 to 1982, he was the director of administrative services for
Denver Automotive & Diesel College in Denver, Colorado. From 1982-1986,
Mr. Short served as the director of administration for American Diesel &
Automotive College in Denver, Colorado. Mr. Short was a director and chief
executive officer of Wooster Business College in Cleveland, Ohio from 1986 to
1989. From 1989 to 1998, he was the president and chief executive officer of
AccuTech Business Institute in Frederick, Maryland. Mr. Short has extensive
experience in higher education financial aid
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regulations, school administrative and business plan development, new program
approvals and curriculum development, accreditation procedures and requirements,
and marketing and sales staff training. He received a Bachelor of Science in
Theology and Economics from Edgewood Dominican College in Madison, Wisconsin in
1979 and completed graduate courses in Education at University of Denver, in
Denver, Colorado from 1984 to 1985.
STEPHEN K. SMITH, age 58, became a director of n-Gen in May 2000. Mr. Smith
has over 11 years of experience in the computer industry, all of those years
with Dell Computer Corporation. Currently, Mr. Smith serves as the director of
operations for Dell, since 1997, directing all operations involving assembly,
test and distribution of the core desktop line of Dell. From 1995 to 1997
Mr. Smith was the director of worldwide product development for Dell. From 1992
to 1995, he served as the director of customer service and technical support for
the Dell. He was a senior manufacturing manager and executive assistant from
1989 to 1992, overseeing the manufacturing and production operations for
assembly and distribution of computer products worldwide. Mr. Smith is a retired
colonel in the U.S. Marine Corps, serving from 1964 to 1989. He received a
Bachelor of Arts degree from Hanover College in Hanover, Indiana in 1964 and a
Masters of Arts degree from the University of Northern Colorado in Greeley,
Colorado in 1978.
KEY EMPLOYEES
JOSEPH FORD, age 28, joined n-Gen in October 1999, as our e-commerce
director. He is in charge of developing our e-commerce initiative and
integrating this concept into our existing business model. From 1997 to 1998 he
was a program analyst in the Office of the Secretary of the United States
Department of Health and Human Services. From 1998 to 1999 he was in charge of
sales and marketing for The August Group, Inc., an e-commerce design,
development and implementation company, in Frederick, Maryland. Mr. Ford
received his Masters Degree in social work from the University of Maryland at
Baltimore in 1998 and received his Bachelor of Arts Degree from Mt. St. Mary's
College in Emmitsburg, Maryland in 1995.
47
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth remuneration in excess of $100,000 has been
paid by n-Gen to certain officers and directors of n-Gen whose total
compensation will or currently exceeds $100,000 and to all officers and
directors as a group:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS
--------------------------------------------- --------------------------------------------------
OTHER RESTRICTED ALL
ANNUAL STOCK OPTIONS/ LTIP OTHER
SALARY BONUS(1) COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION(2)
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
--------------------------- -------- -------- -------- ------------ ---------- -------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert D. Arnold......... 1999 $156,000 $0 $0 N/A -0- N/A $10,000
Chairman of the 1998 $ 0 $0 $0 -- -0- -- $ 0
Board, CEO, 1997 $ 0 $0 $0 -- -0- -- $ 0
Director
Michael V. Schranz....... 1999 $125,000 $0 $0 N/A -0- N/A $10,000
Treasurer, 1998 $ 0 $0 $0 -- -0- -- $ 0
Secretary, CFO, 1997 $ 0 $0 $0 -- -0- -- $ 0
Director
D. Gary Nelson........... 1999 $108,000 $0 $0 N/A -0- N/A $10,000
President, 1998 $ 0 $0 $0 -- -0- -- $ 0
Director 1997 $ 0 $0 $0 -- -0- -- $ 0
Dean C. Myers............ 1999 $ 92,000 $0 $0 -- -0- -- $10,000
Vice President 1998 $ 0 $0 $0 -- -0- -- $ 0
and Director 1997 $ 0 $0 $0 -- -0- -- $ 0
</TABLE>
------------------------
(1) The Company has entered into employment agreements with D. Gary Nelson and
Dean C. Myers, which include certain incentive bonuses, not to exceed 50% of
their annual income.
(2) The officers of n-Gen may receive remuneration as part of an overall group
insurance plan providing health, life and disability insurance benefits for
employees of n-Gen. The amount allocable to each individual officer cannot
be specifically ascertained, but, in any event, will not exceed $10,000 as
to each individual. In addition, Messrs. Arnold, Schranz, Nelson, Smith and
Myers are directors and are reimbursed for reasonable expenses incurred in
attending board of directors meetings.
DIRECTOR EXPENSES
Each director of n-Gen is entitled to receive reasonable expenses incurred
in attending meetings of the board of directors of n-Gen. The members of the
board of directors intend to meet at least quarterly during n-Gen's fiscal year,
and at such other times duly called. n-Gen presently has seven directors.
STOCK OPTIONS
We have no currently outstanding options issued to any person, including our
officers and directors. We may issue options in the future. At the conclusion of
the public offering, we may adopt an employee stock option plan. If any such
plan were to receive favorable tax treatment as are incentive stock option
plans, affirmative vote of the shareholders to adopt the plan would be required.
48
<PAGE>
EMPLOYMENT AGREEMENTS
In February 2000, n-Gen entered into an employment agreement with Dean C.
Myers, our vice president of operations, for a three-year period at an annual
salary of $92,000 per year. In addition, Mr. Myers is eligible for annual
bonuses based on revenue targets to be established by the board of directors.
The bonuses payable in any year are not permitted to exceed 50% of Mr. Myers'
annual salary. Mr. Myers received 100,000 shares of n-Gen's common stock in
connection with his employment, subject to future adjustment in the event n-Gen
does not complete a public offering. Such grant of shares to Mr. Myers was not
made subject to any vesting requirement.
In March 1999, n-Gen entered into an employment agreement with Gary D.
Nelson, our President, for a five-year period at an annual salary of $108,000.
In addition, Mr. Nelson may receive incentive bonuses as may be determined by
the board of directors. Bonuses payable in any year may not exceed 50% of
Mr. Nelson's annual salary. Mr. Nelson also receives customary health and life
insurance benefits.
LIMITATION ON LIABILITY OF DIRECTORS
Our certificate of incorporation includes provisions which eliminate the
personal liability of officers and directors for monetary damages resulting from
breaches of their fiduciary duty (except for liability for breaches of the duty
of loyalty, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, violations under Section 174 of the
Delaware General Corporation Law ("DGCL") or for any transaction from which the
director derived an improper personal benefit). We believe that these provisions
are necessary to attract and retain qualified persons as directors and officers.
Section 145 of the DGCL permits indemnification by a corporation of certain
officers, directors, employees and agents. Our certificate of incorporation
provides that we will indemnify, to the fullest extent permitted under law, each
of our directors and officers with respect to all liability and loss suffered
and expenses incurred by such person in any action, suit or proceeding in which
such person was or is made or threatened to be made a party or is otherwise
involved by reason of the fact that such person is or was one of our directors
or officers. We are also obligated to pay the expenses of the directors and
officers incurred in defending such proceedings, subject to their obligation to
reimburse n-Gen, if it is subsequently determined that such person is not
entitled to indemnification.
We intend to obtain a policy of insurance under which our directors and
officers will be insured, subject to the limits of the policy, against certain
losses arising from claims made against such directors and officers by reason of
any acts or omissions covered under such policy in their respective capacities
as directors or officers, including liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that, in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
49
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our outstanding common stock as of May 1, 2000 and as adjusted to
reflect this offering by:
- each person who is the beneficial owner of more than 5% of our capital
stock;
- each of our directors;
- each of our named executive officers in the summary compensation table;
- all of our named executive officers and directors as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
BEFORE OFFERING(1) AFTER OFFERING(1)
-------------------- --------------------
NAME AND ADDRESS SHARES PERCENT SHARES PERCENT
---------------- --------- -------- --------- --------
<S> <C> <C> <C> <C>
Robert D. Arnold........................................ 1,760,000(2) 29.6% 1,760,000(2) 23.3%
410 17th Street
Suite 1940
Denver, CO 80202
Michael V. Schranz...................................... 150,000 2.5% 150,000 2.0%
410 17th Street
Suite 1940
Denver, CO 80202
Allan R. Short.......................................... 140,000 2.4% 140,000 1.9%
1357 43rd Avenue
Greeley, CO 80634
D. Gary Nelson.......................................... 160,000 2.7% 160,000 2.1%
1604 Sunset Street
Longmont, CO 80501
Dean C. Myers........................................... 100,000 1.7% 100,000 1.3%
685 Ridge View Drive
Louisville, CO 80027
Robert C. Vaughan....................................... 1,000,000 16.8% 1,000,000 13.2%
2315 Kachina Street
Mesa, AZ 85203
David Clem.............................................. 1,580,000 26.6% 1,580,000 21.0%
P.O. Box 10379
Zephyr Cove, WV 89448
Stephen K. Smith........................................ 0 0% 0 0%
201 W. Howard Lane
Austin, TX 78753
All Executive Officers and Directors as a group (8
persons).............................................. 4,890,000 82.3% 4,890,000 64.8%
</TABLE>
------------------------
(1) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of 1934.
Unless otherwise stated below, each such person has sole voting and
investment power with respect to all such shares. Under Rule 13d-3(d),
shares not outstanding which are subject to options, warrants, rights or
conversion privileges exercisable within 60 days are deemed outstanding for
the purpose of calculating the number and percentage owned by such person,
but are not deemed outstanding for the purpose of calculating the number and
percentage owned by each other person listed.
(2) Includes a total of 300,000 shares of common stock owned beneficially by
Mr. Arnold's wife and children.
50
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
On March 26, 1999, Gary D. Nelson, n-Gen's president, sold all of his issued
and outstanding shares of Lab Technologies to n-Gen for $50,000 in cash and a
promissory note in the amount of $550,000 at an interest rate of 8%, with
payments commencing in July 1999 in equal monthly installments with a final
payment of the balance to be paid April 2004. As part of the total purchase,
Mr. Nelson additionally received 160,000 shares of n-Gen common stock, a second
promissory note of $100,000 at 8% per annum with a maturity date of June 30,
2000, distribution of $200,000 of retained earnings in the predecessor
sub-chapter s corporation, payment of an existing $100,000 promissory note and a
five (5) year employment agreement. Mr. Robert D. Arnold, chief executive
officer and a director, and David Clem, a director, have personally guaranteed
50% of the outstanding balance of Mr. Nelson's promissory notes.
N-Gen's executive office is located in the offices of One Capital
Corporation, a company partially controlled by two major stockholders and
officers, Messrs. Arnold and Schranz, of n-Gen. N-Gen subleases under a verbal
contact from One Capital for office space by paying substantially all of the
rent.
Executive office rent expense paid to One Capital was $30,524 and $18,132
for the nine months ended June 30, 2000 and 1999, respectively,$30,084 for the
nine months ended September 30, 1999 and $18,178 for the period from July 13,
1998 (inception) to December 31, 1998.
In addition, One Capital has paid certain expenses which included management
and other salaries, due diligence costs, travel and office equipment on behalf
of n-Gen and $196,809 and $83,218 is still owed to One Capital as of June 30,
2000 and September 30, 1999, respectively. One Capital paid these expenses as
One Capital had established credit arrangements and the necessary office
infrastructure, such as phone and computer systems in place. One Capital has not
marked up any of these costs, only being reimbursed for actual invoiced or
documented costs. No other consideration or compensation has been paid to One
Capital for these advances or payments. The total amount paid by One Capital on
behalf of n-Gen was $448,808 and $290,149 for the nine months ended June 30,
2000 and 1999, $319,891 for the nine months ended September 30, 1999 and
$185,964 for the period from July 13, 1998 (inception) to December 31, 1998. The
total amount reimbursed by n-Gen to One Capital was $335,217 and $213,000 for
the nine months ended June 30, 2000 and 1999, respectively, $230,137 for the
nine months ended September 30, 1999 and $192,500 for the period from July 13,
1998 (inception) to December 31, 1998.
Mr. Robert D. Arnold and Dave Clem have personally guaranteed the revolving
line of credit with a bank for $350,000. Also, Robert D. Arnold and Gary D.
Nelson have personally guaranteed a capital lease for the acquisition of
equipment of approximately $120,000. Mr. Nelson and Mr. Schranz also personally
guaranteed $195,000 of payments under the office lease of the operations office.
N-Gen ratified the foregoing transactions by unanimous consent of the board,
which at the time was comprised of one independent director, David Clem.
Management believes these transactions to be on terms as favorable as could be
obtained from a non-affiliated entity, but did not obtain any independent bids
from non-affiliated entities. Any future transactions with our officers,
directors or 5% shareholder, or their affiliates, will be made or entered into
on terms that are no less favorable to n-Gen than could be obtained from
unaffiliated third parties. Any future forgiveness of loans will be required to
be approved by a majority of our independent directors who have no interest in
the transaction and who have access, at n-Gen's expense, to our legal counsel or
independent legal counsel.
51
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
Our authorized capital stock consists of 30,000,000 shares including
25,000,000 shares of common stock and 5,000,000 shares of preferred stock,
$.0001 par value. There are presently 6,045,250 issued and outstanding shares of
common stock. Holders of the common stock do not have preemptive rights to
purchase additional shares of common stock or other subscription rights. The
common stock carries no conversion rights and is not subject to redemption or to
any sinking fund provisions. All shares of common stock are entitled to share
equally in dividends when declared by the board of directors and, upon
liquidation or dissolution of n-Gen, whether voluntary or involuntary, to share
equally in the assets of n-Gen available for distribution to stockholders. All
outstanding shares are validly authorized and issued, fully paid and
nonassessable. Subject to certain restrictions that may be imposed by the
underwriting agreement, the board of directors is authorized to issue additional
shares of common stock, not to exceed the amount authorized by n-Gen's
certificate of incorporation, and to issue options and warrants for the purchase
of such shares on such terms and conditions and for such consideration as the
Board may deem appropriate without further stockholder action. Each holder of
common stock is entitled to one vote per share on all matters on which such
stockholders are entitled to vote. Since the shares of common stock do not have
cumulative voting rights, the holders of more than 50% of the shares voting for
the election of directors can elect all directors if they choose to do so and,
in such event, the holders of the remaining shares will not be able to elect any
person to the board of directors. The above description concerning the common
stock of n-Gen does not purport to be complete. Reference is made to n-Gen's
certificate of incorporation and by-laws, which are available for inspection at
n-Gen's principal executive offices, as well as to the applicable statutes of
the State of Delaware for a more complete description concerning the rights and
liabilities of stockholders under Delaware law.
PREFERRED STOCK
The board of directors of n-Gen is empowered, without approval of n-Gen's
shareholders, to cause up to 5,000,000 shares of preferred stock to be issued in
one or more series and to establish the number of shares to be included in each
such series and their respective designations, preferences, limitations and
relative rights, including voting rights. Because the board of directors has the
power to establish the preferences and rights of each series, it may afford the
holders of any series of preferred stock preferences, powers and rights, voting
or otherwise, senior to the rights of holders of common stock. This includes,
among other things, voting rights, conversion privileges, dividend rates,
redemption rights, sinking fund provisions and liquidation rights which shall be
superior to the common stock issued to purchasers in this offering. Future
issuance of shares of preferred stock could have the effect of delaying or
preventing a change in control of n-Gen. No shares of preferred stock will be
outstanding at the close of this offering. The board of directors has no current
plans to issue any shares of preferred stock. No preferred stock may be issued
for a three (3) year period, without the underwriter's prior written consent.
WARRANTS
Prior to this offering, there were no warrants issued and outstanding. The
warrants will be issued in registered form under an agreement dated on the date
of this prospectus ("Warrant Agreement"), between n-Gen and Corporate Stock
Transfer, Inc., Denver, Colorado, as warrant agent (the "Warrant Agent"). The
following discussion of certain terms and provisions of the warrants is
qualified in its entirety by reference to the Warrant Agreement. A form of the
certificate representing the warrants which forms a part of the Warrant
Agreement has been filed as an exhibit to the registration statement of which
this prospectus forms a part.
52
<PAGE>
Each of the warrants entitles the registered holder to purchase one share of
common stock. The warrants are exercisable at a price of $5.50 subject to
certain adjustments. The warrants are subject to adjustments up or down in their
exercise prices and in the number of shares of common stock so that each holder
shall be entitled to receive the number and kind of shares which each holder
would have received or owned if he exercised his warrant prior to such corporate
action in the event of a stock dividend, stock split or reclassification. For
example, if we declared a 2 for 1 stock split the exercise price would be
reduced by 50% to $2.75 and the number of your warrants would double so that you
would receive upon exercise twice the number of shares of common stock as you
would have prior to the split.
In the event of a reorganization, merger or consolidation of n-Gen with or
into another corporation (except in the event the merger or consolidation does
not result in any reclassification or change in our outstanding shares of common
stock) the corporation formed or resulting will issue holders a new warrant
entitling them upon exercise (prior to expiration) the kind and amount of shares
of common stock or other securities or consideration receivable upon the
consolidation or merger by the holder's of the company's common stock for which
such warrant might have been exercised immediately prior to such corporate
action. For example, if all of the company's shareholders were entitled to 2
shares in the merged company for each one share owned prior to the merger, all
warrant holders would be entitled to 2 shares of the merged company upon
exercise of one warrant at the $5.50 exercise price.
The warrants may be exercised at any time and continuing thereafter until
the close of five years from the date hereof, unless such period is extended by
n-Gen. After the expiration date, warrant holders shall have no further rights.
Warrants may be exercised by surrendering the certificate evidencing such
warrant, with the form of election to purchase on the reverse side of such
certificate properly completed and executed, together with payment of the
exercise price and any transfer tax, to the Warrant Agent. If less than all of
the warrants evidenced by a warrant certificate are exercised, a new certificate
will be issued for the remaining number of warrants. Payment of the exercise
price may be made by cash, bank draft or official bank or certified check equal
to the exercise price.
Warrant holders do not have any voting or any other rights as shareholders
of n-Gen. N-Gen has the right at any time to redeem the warrants, at a price of
$.05 per warrant, by written notice to the registered holders thereof, mailed
not less than thirty (30) nor more than sixty (60) days prior to the Redemption
Date. N-Gen may exercise this right only if the closing bid price for the common
stock equals or exceeds $10 per share during a thirty (30) consecutive trading
day period ending no more than fifteen (15) days prior to the date that the
notice of redemption is mailed, provided there is then a current registration
statement under the Securities Act of 1933, as amended with respect to the
issuance and sale of common stock upon the exercise of the warrants. If n-Gen
exercises its right to call warrants for redemption, such warrants may still be
exercised until the close of business on the day immediately preceding the
Redemption Date. If any warrant called for redemption is not exercised by such
time, it will cease to be exercisable, and the holder thereof will be entitled
only to the repurchase price. Notice of redemption will be mailed to all holders
of warrants of record at least thirty (30) days, but not more than sixty (60)
days, before the Redemption Date. The foregoing notwithstanding, n-Gen may not
call the warrants at any time that a current registration statement under the
Act is not then in effect. Any redemption of the warrants during the one-year
period commencing on the date of this prospectus shall require the written
consent of the underwriter.
The Warrant Agreement permits n-Gen and the Warrant Agent, without the
consent of warrant holders, to supplement or amend the Warrant Agreement in
order to cure any ambiguity, manifest error or other mistake, or to address
other matters or questions arising thereafter that n-Gen and the Warrant Agent
deem necessary or desirable and that do not adversely affect the interest of any
warrant holder. N-Gen and the Warrant Agent may also supplement or amend the
Warrant Agreement in any other respect with the written consent of holders of
not less than a majority in the number of warrants
53
<PAGE>
then outstanding; however, no such supplement or amendment may (i) make any
modification of the terms upon which the warrants are exercisable or may be
redeemed; or (ii) reduce the percentage interest of the holders of the warrants
without the consent of each warrant holder affected thereby.
In order for the holder to exercise a warrant, there must be an effective
post effective amendment to this registration statement, with a current
prospectus on file with the Securities and Exchange Commission covering the
shares of common stock underlying the warrants, and the issuance of such shares
to the holder must be registered, qualified or exempt under the laws of the
state in which the holder resides.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering we will have outstanding 7,645,250 shares
of common stock, assuming no exercise of the underwriters' over-allotment option
or any other option or warrant. Excluding the 1,600,000 shares of common stock
offered hereby and assuming no exercise of the underwriters' over-allotment
option or any other options or warrants, as of the effective date of the
registration statement, there will be 6,045,250 shares of common stock
outstanding, all of which are "restricted" shares under the Securities Act. All
restricted shares are subject to lock-up agreements with the underwriters
pursuant to which the holders of the restricted shares have agreed not to sell,
pledge or otherwise dispose of such shares for a period of fifteen (15) months
after the date of this prospectus. The underwriter may release the shares
subject to the lock-up agreements in whole or in part at any time with or
without notice. However, the underwriter has no current plans to do so.
The following table indicates approximately when the 6,045,250 shares of our
common stock that are not being sold in the offering but which will be
outstanding at the time the offering is complete will be eligible for sale into
the public market:
ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN PUBLIC MARKET
<TABLE>
<S> <C>
At effective date........................................... 0
Fifteen months after effective date......................... 6,045,250
</TABLE>
Most of the restricted shares that will become available for sale in the
public market after the lock-up period will be subject to volume and other
resale restrictions pursuant to Rule 144 because the holders are our affiliates.
The general provisions of Rule 144 are described below.
In general, under Rule 144, any of our affiliates, or person, or persons
whose shares are aggregated, who has beneficially owned restricted shares for at
least one year, will be entitled to sell in any three-month period a number of
shares that does not exceed the greater of:
- 1% of the then outstanding shares of the common stock, approximately
76,000 shares immediately after this offering, or
- the average weekly trading volume during the four calendar weeks preceding
the date on which notice of the sale is filed with the SEC.
Sales pursuant to Rule 144 are subject to requirements relating to manner of
sale, notice and availability of current public information about us. A person,
or persons whose shares are aggregated, who is not deemed to have been one of
our affiliates at any time during the 90 days immediately preceding the sale and
who has beneficially owned his or shares for at least two years is entitled to
sell such shares pursuant to Rule 144(k) without regard to the limitations
described above.
54
<PAGE>
LOCK-UP AGREEMENTS
All officers and directors and all of the holders of common stock have
agreed pursuant to "lock-up" agreements that they will not offer, sell, contract
to sell, pledge, grant any option to sell, or otherwise dispose of, directly or
indirectly, any shares of common stock or securities convertible or exchangeable
for common stock, or warrants or other rights to purchase common stock for a
period of fifteen (15) months after the date of this prospectus without the
prior written consent of the underwriter.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our securities is Corporate Stock
Transfer, Inc. of Denver, Colorado 80228.
REPORTS TO SECURITY-HOLDERS
We will furnish to holders of our securities annual reports containing
audited financial statements. Contemporaneously, with this offering, we have
registered our securities with the Securities and Exchange Commission under the
provisions of Section 12 (b) of the Securities Exchange Act of 1934, as amended,
and, in accordance therewith, we will be required to comply with certain
reporting, proxy solicitation and other requirements of the Exchange Act.
55
<PAGE>
UNDERWRITING
Subject to the material terms and conditions of the Underwriting Agreement,
all of which are included herein, Barron Chase Securities, Inc., the
underwriter, has agreed to purchase from n-Gen an aggregate of 1,600,000 shares
of common stock and 1,600,000 warrants. The securities are offered by the
underwriter subject to prior sale, when, as and if delivered to and accepted by
the underwriter and subject to legal review of certain matters by legal counsel
and certain other conditions. The underwriter is committed to purchase all of
the securities offered by this prospectus, if any are purchased (other than
those covered by the over-allotment option described below).
We have been advised by the underwriter that the underwriter proposes to
offer the securities to the public at the offering prices set forth on the cover
page of this prospectus. The underwriter has advised us that the underwriter
proposes to offer the securities through members of the National Association of
Securities Dealers, Inc. ("NASD"), and may allow concessions, in its discretion,
to certain selected dealers who are members of the NASD and who agree to sell
the securities in conformity with the NASD's Conduct Rules. Such concessions
will not exceed the amount of the underwriting discount that the underwriter is
to receive.
We have granted to the underwriter an over-allotment option, exercisable for
45 days from the effective date of the offering, to purchase up to an additional
240,000 shares of common stock and an additional 240,000 warrants at the
respective public offering prices less the underwriting discounts set forth on
the cover page of this prospectus. The underwriter may exercise this option
solely to cover over allotments in the sale of the securities being offered by
this prospectus.
Our officers and directors may introduce the underwriter to persons to
consider this offering and to purchase securities either through the underwriter
or through participating dealers. In this connection, no securities have been
reserved for those purchases and officers and directors will not receive any
commissions or any other compensation. We have agreed to pay to the underwriter
a commission of ten percent (10%) of the gross proceeds of this offering which
is the underwriting discount, including the gross proceeds from the sale of the
over-allotment option, if exercised. In addition, we have agreed to pay to the
underwriter the non-accountable expense allowance of three percent (3%) of the
gross proceeds of this offering, including proceeds from any securities
purchased pursuant to the over-allotment option. We have paid to the underwriter
a $50,000 advance with respect to the non-accountable expense allowance. The
underwriter's expenses in excess of the non-accountable expense allowance will
be paid by the underwriter. To the extent that the expenses of the underwriter
are less than the amount of the non-accountable expense allowance received, such
excess shall be deemed to be additional compensation to the underwriter. The
underwriter has informed us that it does not expect sales of discretionary
accounts to exceed five percent (5%) of the total number of securities offered
by us.
We have agreed to engage the underwriter of the offering as a financial
advisor for a fee of $108,000, which is payable to the underwriter on the
closing date. Under the terms of a financial advisory agreement, the underwriter
has agreed to provide, at our request, advice to us concerning potential
financing proposals, whether by public financing or otherwise. We have also
agreed that if we participate in any transaction which the underwriter has
introduced in writing to us during a period of five years after the closing
(including mergers, acquisitions, joint ventures and any other business
transaction for us introduced in writing by the underwriter), and which is
consummated after the closing (including an acquisition of assets or stock for
which it pays, in whole or in part, with shares or other securities of n-Gen),
or if we retain the services of the underwriter in connection with any such
transaction, then we will pay for the underwriter's services an amount equal to
5% of up to one million dollars of value paid or received in the transaction, 4%
of the next one million dollars of such value, 3% of the next one million
dollars of such value, 2% of the next one million dollars of such value, and 1%
of the next million dollars of such value and of all such value above
$4,000,000. With regard to the
56
<PAGE>
underwriter's engagement to locate mergers or acquisitions for us, the
underwriter does not have any current plans, proposals, arrangements or
understandings in this regard.
Prior to this offering, there has been no public market for the shares of
common stock or the warrants. Consequently, the initial public offering prices
for the securities, and the terms of the warrants (including the exercise price
of the warrants), have been determined by negotiation between n-Gen and the
underwriter. Among the factors considered in determining the public offering
prices were the history of, and the prospects for, our business, an assessment
of our management, our past and present operations, our development and the
general condition of the securities market at the time of this offering. The
initial public offering prices do not necessarily bear any relationship to our
assets, book value, earnings or other established criteria of value. Such prices
are subject to change as a result of market conditions and other factors, and no
assurance can be given that a public market for the shares or the warrants will
develop after the closing, or if a public market in fact develops, that such
public market will be sustained, or that the shares or the warrants can be
resold at any time at the offering or any other price.
At the closing, we will issue to the underwriter and/or persons related to
the underwriter, for nominal consideration, the common stock underwriter
warrants to purchase up to 160,000 shares of common stock and the underwriter
warrant options to purchase up to 160,000 warrants. The common stock underwriter
warrants, the underwriter warrant options and the underlying warrants are
registered pursuant to this offering and sometimes referred to in this
prospectus as the "underwriter warrants." The common stock underwriter warrants
and the underwriter warrant options will be exercisable for a five-year period
commencing on the effective date. The initial exercise price of each common
stock underwriter warrant shall be $8.25 per underlying share (165% of the
public offering price). The initial exercise price of each underwriter warrant
option shall be $0.20625 per underlying warrant (165% of the public offering
price). Each underlying warrant will be exercisable for a five-year period
commencing on the effective date to purchase one share of common stock at an
exercise price of $9.075 per share (165% of the public offering price) of common
stock. The underwriter warrants will be restricted from sale, transfer,
assignment or hypothecation for a period of twelve months from the effective
date by the holder, except:
- to officers of the underwriter and members of the selling group and
officers and partners thereof;
- by will; or
- by operation of law.
The common stock underwriter warrants and the underwriter warrant options
contain provisions providing for appropriate adjustment in the event of any
merger, consolidation, recapitalization, reclassification, stock dividend, stock
split or similar transaction. The underwriter warrants contain net issuance
provisions permitting the holders thereof to elect to exercise the underwriter
warrants in whole or in part and instruct n-Gen to withhold from the securities
issuable upon exercise, a number of securities, valued at the current fair
market value on the date of exercise, to pay the exercise price. Such net
exercise provision has the effect of requiring n-Gen to issue shares of common
stock without a corresponding increase in capital. A net exercise of the
underwriter warrants will have the same dilutive effect on the interests of our
shareholders as will a cash exercise. The underwriter warrants do not entitle
the holders thereof to any rights as a shareholder of n-Gen until such
underwriter warrants are exercised and shares of common stock are purchased
thereunder.
The underwriter warrants and the securities issuable thereunder may not be
offered for sale except in compliance with the applicable provisions of the
Securities Act. We have agreed that if we shall cause a post-effective
amendment, a new registration statement or similar offering document to be filed
with the Commission, the holders shall have the right, for seven (7) years from
the effective date, to
57
<PAGE>
include in such registration statement or offering statement the underwriter
warrants and/or the securities issuable upon their exercise at no expense to the
holders. Additionally, we have contractually agreed that, upon request by the
holders of 50% or more of the underwriter warrants during the period commencing
one year from the effective date and expiring four years thereafter, we will,
under certain circumstances, such as failing to maintain a current registration
statement or post effective amendment pursuant to this offering, re-register the
underwriter warrants and/or any of the securities issuable upon their exercise.
In order to facilitate the offering of the common stock and warrants, the
underwriter may engage in transactions that stabilize, maintain or otherwise
affect the price of the common stock and warrants. In addition, the underwriter
may make short sales of our common stock and warrants and may purchase them on
the open market to cover positions created by short sales. Short sales involve
the sale by the underwriter of a greater number of common stock and warrants
than the underwriter is required to purchase in the offering. Covered short
sales are sales made in an amount not greater than the underwriter's
overallotment option to purchase additional common stock and warrants in the
offering. The underwriter may close out any covered short position by either
exercising its overallotment option or purchasing common stock and warrants in
the open market. In determining the source of securities to close out the
covered short position, the underwriter will consider, among other things, the
price of our common stock and warrants available for purchase in the open market
as compared to the price at which it may purchase them through the overallotment
option. Naked short sales are sales in excess of the overallotment option. The
underwriter must close out any naked short position by purchasing common stock
and warrants in the open market. A naked short position is more likely to be
created if the underwriter is concerned that there may be downward pressure on
the price of the securities in the open market after pricing that could
adversely affect the investors who purchase in this offering. Similar to other
purchase transactions, the underwriter's purchases to cover the syndicate short
sales may have the effect of raising or maintaining the market price of our
common stock and warrants or preventing or retarding a decline in the market
price of our securities. As a result, the price of the stock and warrants may be
higher than the price that might otherwise exist in the open market.
Furthermore, the underwriter may reclaim selling concessions allowed to a dealer
for distributing the common stock and warrants in the offering, if the
underwriter repurchases previously distributed common stock or warrants in
transactions to cover the underwriter's short position in stabilization
transactions or otherwise. Any of these activities may stabilize or maintain the
market price of the common stock and warrants above independent market levels.
The underwriter is not required to engage in these activities and may end
any of these activities at any time. To the extent the underwriter engages in
these activities it will deliver a prospectus to all purchasers of shares in
short positions as may be required by the Securities Act of 1933. All short
position purchasers are entitled to the same remedies under the federal
securities laws as any other purchaser of the shares and warrants covered by
this registration statement.
We have agreed to indemnify the underwriter against any costs or liabilities
incurred by the underwriter by reason of misstatements or omissions to state
material factors in connection with the statements made in the registration
statement filed by n-Gen with the Commission under the Securities Act, together
with all amendments and exhibits thereto, and this prospectus. The underwriter
has in turn agreed to indemnify n-Gen against any costs or liabilities by reason
of misstatements or omissions to state material facts in connection with the
statements made in the registration statement and this prospectus, based on
information relating to the underwriter and furnished in writing by the
underwriter. To the extent that these provisions may purport to provide
exculpation from possible liabilities arising under the federal securities laws,
in the opinion of the Securities and Exchange Commission, such indemnification
is contrary to public policy and therefore unenforceable.
We have agreed to allow the underwriter to appoint one observer to attend
our board of directors meetings for a five year period.
58
<PAGE>
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to copies
of each such agreement which are filed as exhibits to the registration
statement.
LEGAL PROCEEDINGS
From time to time, we may be involved in litigation that arises in the
normal course of business operations. As of the date of this prospectus, n-Gen
is not a party to any legal proceedings and, to the best of our information,
knowledge and belief, none is contemplated or has been threatened.
LEGAL MATTERS
The validity of the securities being offered hereby will be passed upon for
n-Gen by Berenbaum, Weinshienk & Eason, P.C., 370 Seventeenth Street, Suite
2600, Denver, Colorado 80202-5626. Certain legal matters will be passed upon for
the underwriter by David A. Carter, P.A., 2300 Glades Road, Suite 210W, Boca
Raton, Florida 33431.
EXPERTS
The financial statements of n-Gen Solutions.com, Inc. (a Delaware
corporation) and n-Gen Solutions.com, Inc. (a Colorado corporation) as of and
for the nine months ended September 30, 1999 and the period July 13, 1998
(Inception) to December 31, 1998 and the financial statements of n-Gen
Solutions.com, Inc. (a Colorado corporation) for the year ended December 31,
1998, included in the registration statement and this prospectus have been
included herein in reliance on the report of Gordon, Hughes & Banks LLP,
independent certified public accountants, given on the authority of Gordon,
Hughes & Banks LLP as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the Securities Act of 1933, as amended, with
respect to the securities offered in this prospectus. This prospectus does not
contain all of the information contained in the registration statement and the
exhibits and schedules to the registration statement. Some items are omitted in
accordance with the rules and regulations of the Securities and Exchange
Commission. For further information about n-Gen and the securities offered under
this prospectus, you should review the registration statement and the exhibits
and schedules filed as a part of the registration statement. Descriptions of
contracts or other documents referred to in this prospectus are not necessarily
complete. If the contract or document is filed as an exhibit to the registration
statement, you should review that contract or document. You should be aware that
when we discuss these contracts or documents in the prospectus we are assuming
that you will read the exhibits to the registration statement for a more
complete understanding of the contract or document. The registration statement
and its exhibits and schedules may be inspected without charge at the public
reference facilities maintained by the Securities and Exchange Commission in
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and the Securities
and Exchange Commission's regional offices located at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor,
New York, New York 10048. Copies may be obtained from the Securities and
Exchange Commission after payment of fees prescribed by the Securities and
Exchange Commission. The Securities and Exchange Commission also maintains a web
site that contains reports, proxy and information statements and other
information regarding registrants, including n-Gen, that file electronically
with the Securities and Exchange Commission. The address of this web site is
www.sec.gov. You may also contact the Securities and Exchange Commission by
telephone at (800) 732-0330.
59
<PAGE>
INDEX TO FINANCIAL STATEMENTS
N-GEN SOLUTIONS.COM, INC.
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF N-GEN SOLUTIONS.COM,
INC. (A DELAWARE CORPORATION):
Report of independent public accountant................... F-2
Consolidated Balance Sheets at June 30, 2000 (unaudited)
and September 30, 1999.................................. F-3 - F-4
Consolidated Statements of Operations--For the nine months
ended June 30, 2000 (unaudited) and 1999 (unaudited),
the nine months ended September 30, 1999 and the period
from July 13, 1998 (Inception) to December 31, 1998..... F-5
Consolidated Statement of Stockholders' (Deficit)--For the
period from July 13, 1998 (Inception) to September 30,
1999 and the nine months ended June 30, 2000
(unaudited)............................................. F-6
Consolidated Statements of Cash Flows--For the nine months
ended June 30, 2000 (unaudited) and 1999 (unaudited),
the nine months ended September 30, 1999 and the period
from July 13, 1998 (Inception) to December 31, 1998..... F-7 - F-8
Notes to consolidated financial statements................ F-9 - F-25
FINANCIAL STATEMENTS OF N-GEN SOLUTIONS.COM, INC. (A
COLORADO CORPORATION)
Report of independent public accountant................... F-26
Statement of Operations--For the year ended December 31,
1998.................................................... F-27
Statement of Stockholder's Equity--For the year ended
December 31, 1998....................................... F-28
Statement of Cash Flows--for the year ended December 31,
1998 F-29
Notes to financial statements............................. F-30 - F-33
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
n-Gen Solutions.com, Inc. (a Delaware Corporation)
Denver, Colorado
We have audited the accompanying consolidated balance sheet of n-Gen
Solutions.com, Inc. (a Delaware corporation) and subsidiary as of September 30,
1999 and the related consolidated statements of operations, stockholders'
(deficit) and cash flows for the nine months ended September 30, 1999 and for
the period July 13, 1998 (Inception) to December 31, 1998. 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 consolidated financial position of n-Gen
Solutions.com, Inc. (a Delaware corporation) and subsidiary as of September 30,
1999, and the consolidated results of its operations and cash flows for the nine
months ended September 30, 1999 and for the period July 13, 1998 (Inception) to
December 31, 1998 in conformity with generally accepted accounting principles.
GORDON, HUGHES & BANKS, LLP
February 1, 2000
Englewood, Colorado
F-2
<PAGE>
N-GEN SOLUTIONS.COM, INC. (A DELAWARE CORPORATION)
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
2000 SEPTEMBER 30,
(UNAUDITED) 1999
----------- --------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................... $ 284,410 $ 210,196
Accounts receivable, trade, net of allowances for doubtful
accounts of $98,590 (Unaudited) and $98,590............... 1,307,929 1,399,319
Employee advances........................................... 56,611 35,368
Accounts receivable--related party (Note 10)................ -- --
Work in progress............................................ 909,636 304,719
Inventory................................................... 37,191 42,316
---------- ----------
Total current assets...................................... 2,595,777 1,991,918
PROPERTY AND EQUIPMENT, NET OF ACCUMULATED DEPRECIATION
(NOTE 3).................................................. 408,982 199,464
OTHER ASSETS
Intangible assets, net of accumulated amortization (Note
2)........................................................ 186,464 310,051
Deferred offering costs..................................... 189,627 30,000
Debt acquisition costs, net................................. -- 36,606
Other....................................................... 2,500 2,500
---------- ----------
378,591 379,157
---------- ----------
Total assets.............................................. $3,383,350 $2,570,539
========== ==========
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
N-GEN SOLUTIONS.COM, INC. (A DELAWARE CORPORATION)
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' (DEFICIT)
<TABLE>
<CAPTION>
JUNE 30,
2000 SEPTEMBER 30,
(UNAUDITED) 1999
----------- --------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable............................................ $ 1,061,581 $ 1,186,221
Accounts payable--related party (Note 10)................... 196,809 83,218
Accrued expenses............................................ 225,357 155,081
Deferred sales revenue...................................... 957,623 293,451
Notes payable, current portion--related party (Note 4)...... 237,233 194,459
Notes payable--bank (Note 5)................................ 352,278 354,859
Notes payable--investors (Note 6)........................... 565,149 242,418
Capital lease obligation, current portion (Note 7).......... 71,418 45,087
----------- -----------
Total current liabilities................................. 3,667,448 2,554,794
LONG-TERM LIABILITIES
Notes payable, net of current portion--related party (Note
4)........................................................ 376,039 434,639
Capital lease obligation, net of current portion (Note 7)... 60,946 55,353
----------- -----------
Total long-term liabilities............................... 436,985 489,992
----------- -----------
Total liabilities......................................... 4,104,433 3,044,786
COMMITMENTS (NOTES 4, 6 AND 7)
STOCKHOLDERS' (DEFICIT)
Preferred stock, $.0001 par value, 5,000,000 shares
authorized, none issued or outstanding.................... -- --
Common stock, $.0001 par value, 25,000,000 shares
authorized, 5,940,000 (unaudited) and 5,010,000 shares
issued and outstanding.................................... 594 501
Additional paid-in capital.................................. 1,107,941 614,330
Retained (deficit).......................................... (1,829,618) (1,089,078)
----------- -----------
Total stockholders' (deficit)............................. (721,083) (474,247)
----------- -----------
Total liabilities and stockholders' (deficit)............. $ 3,383,350 $ 2,570,539
=========== ===========
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
N-GEN SOLUTIONS.COM, INC. (A DELAWARE CORPORATION)
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30, JULY 13, 1998
------------------------- NINE MONTHS (INCEPTION) TO
1999 ENDED DECEMBER 31,
2000 (UNAUDITED) SEPTEMBER 30, 1998
(UNAUDITED) (NOTE 1) 1999 (NOTE 1)
----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUE
Sales..................................... $3,770,540 $1,602,439 $3,328,944 $ --
Training.................................. 165,091 64,884 106,028 --
Commissions............................... 48,577 130,848 395,381 --
---------- ---------- ---------- ---------
Total revenue............................. 3,984,208 1,798,171 3,830,353 --
COST OF GOODS SOLD.......................... 2,562,854 1,251,247 2,690,979 --
---------- ---------- ---------- ---------
Gross profit.............................. 1,421,354 546,924 1,139,374 --
OPERATING EXPENSES
Selling expenses.......................... 552,677 308,903 525,730 --
General and administration................ 1,236,283 1,014,040 1,224,204 244,254
Depreciation and amortization............. 253,802 123,546 178,788 --
Bad debts................................. 4,637 -- 75,060 --
---------- ---------- ---------- ---------
Total operating expenses.................. 2,047,399 1,446,489 2,003,782 244,254
---------- ---------- ---------- ---------
(Loss) from operations...................... (626,045) (899,565) (864,408) (244,254)
OTHER INCOME (EXPENSE)
Interest (expense)........................ (117,115) (33,602) (95,160) --
Interest and other income................. 2,620 16,967 108,614 6,130
---------- ---------- ---------- ---------
NET (LOSS)................................ $ (740,540) $ (916,200) $ (850,954) $(238,124)
========== ========== ========== =========
Net (loss) per common share
Basic and dilutive earnings per share..... $ (0.14) $ (0.21) $ (0.18) $ (0.06)
========== ========== ========== =========
Basic and dilutive weighted average shares
outstanding............................... 5,429,011 4,406,397 4,690,515 3,994,561
========== ========== ========== =========
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
N-GEN SOLUTIONS.COM, INC. (A DELAWARE CORPORATION)
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT)
FOR THE PERIOD JULY 13, 1998 (INCEPTION) TO JUNE 30, 2000
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
--------- -------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance, July 13, 1998 (Inception)..... -- $ -- $ -- $ -- $ --
Issuance of shares for services at
$.001 per share...................... 2,170,000 217 1,953 -- 2,170
Issuance of shares for cash at $.15 per
share................................ 2,000,000 200 299,800 -- 300,000
Net (loss)............................. -- -- -- (238,124) (238,124)
--------- ---- ---------- ----------- ---------
Balance, December 31, 1998............. 4,170,000 417 301,753 (238,124) 64,046
Issuance of common stock ($.15 per
share) to acquire business (Note
2)................................... 250,000 25 37,475 -- 37,500
Issuance of common stock pursuant to
sale of debt securities ($.15 per
share)............................... 100,000 10 14,990 -- 15,000
Return of shares....................... (770,000) (77) 77 -- --
Issuance of common stock for services
to employees ($.19 per share)........ 1,260,000 126 239,274 -- 239,400
Common stock to be issued pursuant to
debt offering (Note 6)............... -- -- 20,761 -- 20,761
Net (loss)............................. -- -- -- (850,954) (850,954)
--------- ---- ---------- ----------- ---------
Balance, September 30, 1999............ 5,010,000 501 614,330 (1,089,078) (474,247)
Common stock to be issued pursuant to
debt offering (Note 6) (Unaudited)... -- -- 72,704 -- 72,704
Issuance of common stock for cash ($.50
per share) (Unaudited)............... 930,000 93 420,907 -- 421,000
Net (loss) (Unaudited)................. -- -- -- (740,540) (740,540)
--------- ---- ---------- ----------- ---------
Balance, June 30, 2000 (Unaudited)..... 5,940,000 $594 $1,107,941 $(1,829,618) $(721,083)
========= ==== ========== =========== =========
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
N-GEN SOLUTIONS.COM, INC. (A DELAWARE CORPORATION)
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30, JULY 13, 1998
------------------------- NINE MONTHS (INCEPTION) TO
1999 ENDED DECEMBER 31,
2000 (UNAUDITED) SEPTEMBER 30, 1998
(UNAUDITED) (NOTE 1) 1999 (NOTE 1)
----------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net (loss)................................... $(740,540) $(916,200) $(850,954) $(238,124)
Adjustments to reconcile net (loss) to net
cash provided (used) by operating
activities:
Depreciation and amortization.............. 253,802 123,546 178,788 --
Stock for services......................... -- 254,400 254,400 2,170
Loss on disposal of assets................. -- 21,254 19,441 --
Private placement stock accretion.......... 31,685 -- 679 --
Payment of expenses by related party....... 448,808 290,149 319,891 185,964
(Increase) decrease in:
Accounts receivable...................... 70,147 208,134 (677,879) --
Inventory................................ 5,125 68,790 55,209 --
Work in process.......................... (604,917) (129,358) (304,719) --
Increase (decrease) in:
Accounts payable......................... (124,640) 169,791 918,512 5,094
Deferred sales revenue................... 664,172 14,030 225,281 --
Accrued expenses......................... 70,275 20,251 10,921 --
--------- --------- --------- ---------
Net cash provided (used) by operating
activities............................... 73,917 124,787 149,570 (44,896)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiary.................... -- (82,913) (82,913) --
Acquisition of equipment..................... (209,756) (40,579) (79,844) --
--------- --------- --------- ---------
Net cash (used) by investing activities.... (209,756) (123,492) (162,757) --
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease.................... (40,196) (23,433) (30,435) --
Payment of debt--related party............... (15,826) (100,000) (120,902) --
Reimbursement to related party............... (335,217) (213,000) (230,137) (192,500)
Proceeds from issuance of common stock....... 421,000 150,000 -- 300,000
Proceeds from debt--private placement........ 413,750 150,000 262,500 --
Payment of debt.............................. (50,000) -- -- --
Proceeds from debt--bank..................... -- 150,000 350,000 --
Payment of debt--bank........................ (2,581) (1,582) (3,641) --
Payment of debt costs........................ (21,250) (13,472) (36,606) --
Payment of offering costs.................... (159,627) (30,000) (30,000) --
--------- --------- --------- ---------
Net cash provided by financing
activities............................... 210,053 68,513 160,779 107,500
--------- --------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS.... 74,214 69,808 147,592 62,604
Cash and Cash Equivalents:
Beginning of period........................ 210,196 44,093 62,604 --
--------- --------- --------- ---------
Ending of period........................... $ 284,410 $ 113,901 $ 210,196 $ 62,604
========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements
F-7
<PAGE>
N-GEN SOLUTIONS.COM, INC. (A DELAWARE CORPORATION)
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30, NINE MONTHS JULY 13, 1998
------------------------- ENDED (INCEPTION) TO
2000 1999 SEPTEMBER 30, DECEMBER 31,
(UNAUDITED) (UNAUDITED) 1999 1998
----------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
OTHER INFORMATION:
Cash basis interest paid.................. $ 69,764 $ 13,654 $ 35,156 $ --
========= =========== =========== =========
NON-CASH TRANSACTIONS:
Issuance of stock for note................ $ -- $ -- $ 15,000 $ --
========= =========== =========== =========
Issuance of stock for services............ $ -- $ -- $ 239,400 $ --
========= =========== =========== =========
Acquisition of equipment through capital
lease................................... $ 72,120 $ -- $ -- $ --
========= =========== =========== =========
NON-CASH INVESTING AND FINANCING
TRANSACTIONS:
Acquisition of subsidiary:
Fair value of net assets acquired....... $ -- $(1,647,234) $(1,647,234) $ --
Distribution to prior owner............. 200,000 200,000 --
Liabilities assumed..................... -- 1,364,321 1,364,321 --
--------- ----------- ----------- ---------
Net cash paid to acquire subsidiary..... $ -- $ (82,913) $ (82,913) $ --
========= =========== =========== =========
</TABLE>
See accompanying notes to financial statements
F-8
<PAGE>
N-GEN SOLUTIONS.COM, INC.
(A DELAWARE CORPORATION) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND ORGANIZATION
n-Gen Solutions.com, Inc. (the "Company"), formerly AAE Education
Corporation ("AAEE") was incorporated in Delaware on July 13, 1998. The Company
was initially created to raise capital and locate and purchase a business in the
educational industry. For the period July 13, 1998 to December 31, 1998, the
Company was considered to be in the development stage. On March 26, 1999 and
effective January 1, 1999, AAEE purchased all of the outstanding common stock of
n-Gen Solutions.com, Inc. (a Colorado corporation) ("n-Gen Colorado") in
exchange for cash, notes payable and common stock of AAEE. n-Gen Colorado
thereby became the Company's wholly owned subsidiary. With the purchase of n-Gen
Colorado, the Company exited the development stage and became an operating
company. n-Gen Colorado was formerly known as Technologies Learning
Systems, Inc., dba Lab Technologies. In 1999 the Company changed its year end
from December 31 to September 30.
On January 19, 2000, AAEE amended its articles of incorporation to change
its name to n-Gen Solutions.com, Inc. (a Delaware corporation) ("n-Gen
Delaware").
In 1984, n-Gen Colorado, the Company's wholly owned subsidiary, began
business as a sole proprietorship and was incorporated on March 1, 1989 in
Colorado as an S corporation. The Company, through its wholly owned subsidiary,
is primarily engaged in the business of selling educational computer hardware
and software to schools, computer aided design ("CAD") software to businesses
and providing installation and training services. The Company sells its products
in Montana, Wyoming, Nevada, Arizona, Colorado, New Mexico, Utah and Idaho.
Training is done both in the Company's own classrooms and at the customer's
location. The Company also earns sales commissions from vendors and acted as a
sales agent for a company in California that manufactures computerized
classrooms through December 31, 1999.
CONSOLIDATION
In the accompanying financial statements, the statements as of June 30, 2000
(unaudited) and September 30, 1999 and for the nine months ended June 30, 2000
and 1999 (unaudited), the nine months ended September 30, 1999, and the period
from July 13, 1998 (Inception) to December 31, 1998 are consolidated and include
the accounts of the Company and its wholly owned subsidiary. All significant
intercompany transactions have been eliminated in consolidation.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information as of June 30, 2000 and for the nine months ended
June 30, 2000 and 1999 is unaudited, but includes all adjustments (consisting of
only normal recurring adjustments) that the Company considers necessary for the
fair presentation of the financial position and the results of operations and
cash flows for those periods. The operating results for the unaudited nine-month
periods may not be indicative of results that may be expected for the entire
fiscal years or annual periods.
INVENTORIES AND WORK IN PROCESS
Inventories consist primarily of computer software held for sale and are
stated at the lower of cost (determined on the first-in, first-out method) or
market. All inventories are pledged as collateral for a bank loan (Note 5).
F-9
<PAGE>
N-GEN SOLUTIONS.COM, INC.
(A DELAWARE CORPORATION) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Work in process consists of product in transit to the customer or at the
customer's location but not yet installed.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Major improvements are
capitalized, while repairs and maintenance, which do not improve or extend the
life of the respective assets, are expensed currently. All equipment is pledged
as collateral for a bank loan. (Note 5)
Depreciation is recorded for all equipment and property placed in service
using straight-line and accelerated methods over the estimated useful lives of
the assets with lives ranging from three to five years.
Depreciation expense was $72,359 (unaudited) and $41,156 (unaudited) for the
nine months ended June 30, 2000 and 1999, respectively, $55,201 for the nine
months ended September 30, 1999 and $-0- for the period from July 13, 1998
(Inception) to December 31, 1998.
WEB SITE AND SOFTWARE COSTS
The Company utilizes American Institute of Certified Public Accountants
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" to account for software and web
site costs. In accordance with SOP 98-1, the Company expenses costs incurred in
the preliminary project stage and, thereafter, capitalizes costs incurred in
developing the website or obtaining software for the website. Costs, such as
planning and conceptualization, maintenance and training and site updates, are
expensed as incurred. Capitalized costs at June 30, 2000 and September 30, 1999
amounted to $ 199,852 (unaudited) and $41,143, respectively, and will be
amortized over a period of not more than 5 years after the web site is placed
into operation. The capitalized costs are subject to impairment evaluation in
accordance with SFAS No. 121.
INTANGIBLE ASSETS
Intangible assets include the excess of cost over fair market value of
identifiable assets acquired through the purchase of n-Gen Colorado (Note 2).
Intangible items are being amortized on a straight-line basis over their
estimated useful lives, which range from two to five years.
On an ongoing basis, the Company reviews intangible assets and other
long-lived assets for impairment whenever events or circumstances indicate that
carrying amounts may not be recoverable. To date, no such events or
circumstances have occurred. If such events or changes in circumstances occur,
the Company will recognize an impairment loss if the discounted future cash
flows expected to be generated by the assets (or acquired business) are less
than the carrying value of the related assets. The impairment loss would adjust
the assets to their fair value. Amortization expense was $ 181,443 (unaudited)
and $82,390 (unaudited) for the nine months ended June 30, 2000 and 1999,
respectively, $123,587 for the nine months ended September 30, 1999 and $-0- for
the period from July 13, 1998 (Inception) to December 31, 1998.
DEFERRED COSTS
Deferred offering costs are direct cumulative costs of the proposed public
offering. These costs will reduce the net proceeds of the public offering if it
is successful. If the offering is not successful, the costs will be expensed.
F-10
<PAGE>
N-GEN SOLUTIONS.COM, INC.
(A DELAWARE CORPORATION) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Debt acquisition costs are direct expenditures incurred with regard to the
private placement debt offering. These costs are being amortized to interest
expense over the expected term of the related debt instruments, which is
approximately 8 months.
REVENUE RECOGNITION
The Company generates three types of revenues: product sales, training and
sales commissions. Products are sold primarily to two general types of
customers: schools and commercial businesses. For sales to schools, the Company
generally considers a sale to be completed and revenue recognized after the
equipment is installed and the customer has received initial familiarization
needed to operate the system. In the case of commercial sales, for which
installation and initial familiarization is not required, revenue is recognized
at the time the Company or the manufacturer delivers the products to the
customer. The Company records amounts invoiced to customers but not yet
recognizable as sales as deferred revenue until such time as the revenue
recognition criteria have been met. The Company does not include extensive
in-depth training in its sales contracts. Training revenues are separately
recognized at the time such service is provided.
The Company earns vendor commissions, the significant portion of which
derive from sales that it generates for a manufacturer in California. The
Company records commission revenues when the underlying sale and delivery of
product to the customer are completed. The Company earned commission revenue
from the California manufacturer of $-0- (unaudited) and $ 103,261 (unaudited)
for the nine months ended June 30 , 2000 and 1999, respectively, $174,414 for
the nine months ended September 30, 1999 and $-0- for the period from July 13,
1998 (Inception) to December 31, 1998, based on sales generated of approximately
$-0- (unaudited) and $1,303,307 (unaudited) for the nine months ended June 30,
2000 and 1999, respectively, $2,286,501 for the nine months ended September 30,
1999 and $-0- for the period from July 13, 1998 (Inception) to December 31,
1998. As of December 31, 1998, the predecessor operating company, n-Gen
Colorado, was owed approximately $97,000 from the California company. n-Gen
Colorado recorded the amount as commission revenue and as a receivable but
recorded an allowance for bad debts for $97,000 since at the time collection was
doubtful. In August 1999, the $97,000 was collected and has been included in
"Interest and other income" in 1999 as a recovery of a bad debt.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. Significant differences can arise
between the fair value and carrying amount of financial instruments that are
recognized at historical cost amounts. The carrying value of the Company's
financial instruments approximate fair value.
For certain financial instruments, the following methods and assumptions
were used to estimate fair value:
Cash and cash equivalents--The carrying amount approximates fair value
because of the short maturities of such instruments.
Debt--The fair value of the Company's debt approximates the carrying cost
as their applicable interest rates approximate current market rates
likely to be obtained from the creditors.
F-11
<PAGE>
N-GEN SOLUTIONS.COM, INC.
(A DELAWARE CORPORATION) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
CONCENTRATION OF CREDIT RISK
Statement of Financial Accounting Standards No. 105, "Disclosure of
Information about Financial Instruments with Off-Balance Sheet Risk and
Financial Instruments with Concentrations of Credit Risk" requires disclosure of
significant concentrations of credit risk regardless of the degree of such risk.
As of June 30, 2000 and September 30, 1999, the financial instruments which
potentially expose the Company to credit risk consist of bank depository
accounts and accounts receivable. The Company transacts its business with one
financial institution. The amount on deposit in that one financial institution
exceeded the $100,000 federally insured limit at June 30, 2000 (unaudited) and
September 30, 1999. However, management believes that the financial institution
is financially sound, in part because it is the Colorado operation of a national
interstate bank corporation.
The Company extends credit to substantially all of its customers who have
generally demonstrated a high level of credit worthiness. A substantial portion
of the Company's revenues derives from public schools and similar educational
institutions where purchase commitments are based only on appropriated funds.
The Company's commercial customers are geographically and economically dispersed
in the Western mountain states of the United States. The Company historically
has not had to record material amounts of allowances for doubtful accounts.
Management believes that the allowance for doubtful accounts is adequate to
cover potential credit risk losses.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates. Significant estimates are made
regarding collectibility of receivables, depreciation, amortization of
intangible assets and realizability of long-term assets.
STATEMENT OF CASH FLOWS
For the purposes of the statements of cash flows, the Company considers
short-term, highly liquid investments and savings instruments with original
maturities of three months or less to be cash equivalents.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company adheres to the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed of." The Company reviews the carrying
value its long-lived assets and certain identifiable intangibles for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Any long-lived assets to be disposed of are
reported at the lower of the carrying amount or fair value less estimated costs
to sell.
EARNINGS (LOSS) PER SHARE
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
requires two presentations of earnings per share--"basic" and "diluted." Basic
earnings (loss) per share is computed by dividing income available to common
stockholders (the numerator) by the weighted-average number of common shares
(the denominator) for the period. The computation of diluted earnings per share
is
F-12
<PAGE>
N-GEN SOLUTIONS.COM, INC.
(A DELAWARE CORPORATION) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
similar to basic earnings per share, except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potentially dilutive common shares had been issued. In the case of an
operating net (loss), the dilutive calculation is considered equivalent to the
basic earnings per share. There are no potentially dilutive common shares.
STOCK BASED COMPENSATION
The Company follows Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25") in accounting for stock based
compensation. Under APB 25, the Company recognizes no compensation expense
related to employee or director stock options unless options are granted with an
exercise price below fair value on the day of grant. Subsequently, the Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") became effective. SFAS No. 123 provides an
alternative method of accounting for stock-based compensation arrangements,
based on fair value of the stock-based compensation utilizing various
assumptions regarding the underlying attributes of the options and stock. The
Financial Accounting Standards Board encourages, but does not require, entities
to adopt the fair-value based method. The Company will continue its accounting
under APB No. 25 but uses the disclosure-only provisions of SFAS No. 123 for any
options and warrants issued to employees and directors. No options have been
granted.
CAPITAL STRUCTURE
The Company utilizes Statement of Financial Accounting Standards No. 129,
"Disclosure of Information about Capital Structure" ("SFAS No. 129"), which
requires companies to disclose all relevant information regarding their capital
structure.
COMPREHENSIVE INCOME
The Financial Accounting Standards Board has issued SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"), which establishes standards for the
reporting of comprehensive income. This pronouncement requires all items
considered under accounting standards as components of comprehensive income to
be reported in the statement of operations and displayed with the same
prominence as other financial statements items. Comprehensive income components
include all changes in equity during a period except those resulting from
transactions with common or preferred stockholders. There are no comprehensive
income items.
SEGMENT REPORTING
The Company adheres to the provisions of Statement of Financial Accounting
Standards No. 131, "Disclosure about Segments of an Enterprise and Related
Information" ("SFAS No. 131"), which requires a public enterprise to report
financial and descriptive information about its reportable operating segments.
Operating segments, as defined in the pronouncement, are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the Company in deciding how to allocate resources and in
assessing performance. The financial information is required to be reported on
the basis that is used internally for evaluating segment performance and
deciding how to allocate resources to segments.
F-13
<PAGE>
N-GEN SOLUTIONS.COM, INC.
(A DELAWARE CORPORATION) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PENSION AND OTHER POST RETIREMENT BENEFITS
The Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pension and Other Post Retirement Benefits" ("SFAS No. 132")
requires certain disclosures about employers' pension and other post retirement
benefit plans and specifies the accounting and measurement or recognition of
those plans. SFAS No. 132 requires disclosure of information on changes in the
benefit obligations and fair values of the plan assets that facilitates
financial analysis. This standard currently has no impact on the Company.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes standards for
recognizing all derivative instruments, including those for hedging activities,
as either assets or liabilities on the balance sheet and measuring those
instruments at fair value. This Statement is effective for fiscal years
beginning after June 30, 1999. The Company will adopt SFAS No. 133 in the year
2000 and believes that there will be no impact on its financial statements.
MORTGAGE BACKED SECURITIES RETAINED AFTER THE SECURITIZATION OF MORTGAGE
LOANS BY MORTGAGE BANKING ENTERPRISES
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 134, "Accounting for Mortgage Backed
Securities Retained after the Securitization of Mortgage Loans Held by Mortgage
Banking Enterprises" ("SFAS No. 134"). SFAS No. 134 establishes new reporting
standards for certain activities of mortgage banking enterprises. The Company
believes this statement has no impact on its financial statements.
NOTE 2--ACQUISITION OF BUSINESS AND INTANGIBLE ASSETS
On March 26, 1999 and effective January 1, 1999, the Company purchased 100%
of the outstanding common stock of n-Gen Colorado (a subchapter S corporation)
in exchange for cash, notes payable and common stock of n-Gen Delaware as
follows:
<TABLE>
<S> <C>
Cash........................................................ $ 50,000
Note payable................................................ 100,000
Note payable................................................ 550,000
250,000 shares of common stock, valued at $.15 per share 37,500
--------
Total....................................................... $737,500
========
</TABLE>
As part of the sales agreement, n-Gen Colorado, as an S corporation,
distributed cash of $200,000 to the seller. While this distribution occurred on
March 26, 1999, constructively, it was considered to have occurred immediately
prior to the sale on January 1, 1999. The agreement also requires the Company to
enter into a five-year employment contract with the former stockholder, paying
compensation of approximately $100,000 per year. After the acquisition, the
seller of n-Gen Colorado owned 250,000 shares (subsequently reduced by 90,000
shares to 160,000 shares) or 5.7% of the common stock of the Company. The
Company valued the originally issued 250,000 shares at $.15 per
F-14
<PAGE>
N-GEN SOLUTIONS.COM, INC.
(A DELAWARE CORPORATION) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITION OF BUSINESS AND INTANGIBLE ASSETS (CONTINUED)
share which approximates the value of the combined companies based on the amount
of cash and notes paid by the Company for the acquisition.
The acquisition has been accounted for as a purchase by the Company and the
results of operations of the acquired business are included in the consolidated
financial statements from the effective date of the acquisition. For accounting
purposes, the purchase price of $737,500 has been allocated first to the book
value of the net assets of the acquired company in the amount of $403,862 The
Company has determined that the book value equaled the fair value. The excess of
the purchase price over the net assets in the amount of $433,638 has been
allocated to various intangible assets. No goodwill has been recorded as a
result of this purchase.
The following unaudited pro forma financial information summarizes the
results of operations as if the acquisition had occurred at January 1, 1998:
<TABLE>
<S> <C>
Revenues.................................................... $5,558,563
Net (loss).................................................. $ (162,002)
(Loss) per share............................................ $ (.04)
</TABLE>
As of June 30, 2000 and September 30, 1999, the cost basis and useful lives
of intangible assets consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
2000 SEPTEMBER 30, ESTIMATED
(UNAUDITED) 1999 LIVES
----------- ------------- ---------
<S> <C> <C> <C>
Goodwill................................... $ -- $ -- --
Customer list.............................. 43,364 43,364 2 years
Distributor contracts...................... 216,819 216,819 2 years
Non-compete covenant....................... 173,455 173,455 5 years
--------- ---------
433,638 433,638
Less accumulated amortization.............. (247,174) (123,587)
--------- ---------
$ 186,464 $ 310,051
========= =========
</TABLE>
F-15
<PAGE>
N-GEN SOLUTIONS.COM, INC.
(A DELAWARE CORPORATION) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
<TABLE>
<CAPTION>
JUNE 30, 2000 SEPTEMBER 30,
(UNAUDITED) 1999
------------- -------------
<S> <C> <C>
Demonstration supplies............................. $ 16,169 $ 16,169
Demonstration equipment............................ 388,983 361,839
Office furniture and equipment..................... 155,488 131,584
Office equipment (under capital lease)............. 72,120 --
Automobiles........................................ 65,745 65,745
Training and demonstration equipment (under capital 86,242 86,242
lease)...........................................
Internally developed software...................... 199,852 41,143
--------- ---------
984,599 702,722
Less accumulated depreciation and amortization..... (575,617) (503,258)
--------- ---------
$ 408,982 $ 199,464
========= =========
</TABLE>
All furniture, equipment and vehicles are pledged as collateral for the bank
loans, except for the $72,120 of office equipment and $86,242 of training and
demonstration equipment, which are pledged to capital leases.
NOTE 4--NOTES PAYABLE--RELATED PARTY
The Company owed to the former owner of n-Gen Colorado, and a director, two
note payable amounts of $513,272 (unaudited) and $100,000 (unaudited) as of
June 30, 2000 and $529,098 and $100,000 as of September 30, 1999, plus accrued
interest of $28,227 (unaudited) and $16,582 at June 30, 2000 and September 30,
1999, respectively. These notes were issued in connection with the Company's
purchase of n-Gen Colorado (Note 2). The $529,098 note, bearing 8% interest, has
principal and interest payments of $33,500 due quarterly, with the outstanding
balance due in April 2004. Fifty-percent of the outstanding balance is
personally guaranteed by the Company's chairman and majority stockholder. The
$100,000 unsecured note, bearing 8% interest, was originally due December 31,
1999. That note has been extended to September 30, 2000, but with the interest
rate increased from 8% to 10%. Current and long-term portions of the aggregate
debt to the related party are $237,233 (unaudited) and $376,039, respectively,
as of June 30, 2000. Current and long-term portions of the aggregate debt to the
related party are $194,459 and $434,639, respectively, at September 30, 1999.
F-16
<PAGE>
N-GEN SOLUTIONS.COM, INC.
(A DELAWARE CORPORATION) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--NOTES PAYABLE--RELATED PARTY (CONTINUED)
Principal maturities of the above related party debt for each of the next
five years are as follows:
<TABLE>
<CAPTION>
JUNE 30,
2000 SEPTEMBER 30,
YEAR ENDED (UNAUDITED) 1999
---------- ----------- --------------
<S> <C> <C>
2000........................................... $ N/A $194,459
2001........................................... 237,233 102,245
2002........................................... 99,777 110,674
2003........................................... 110,224 119,797
2004........................................... 121,766 101,923
2005 and thereafter............................ 44,272 --
-------- --------
Total............................................ $613,272 $629,098
======== ========
</TABLE>
NOTE 5--NOTES PAYABLE, BANK
Notes payable to a bank consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
2000 SEPTEMBER 30,
(UNAUDITED) 1999
----------- -------------
<S> <C> <C>
Outstanding principal on a $350,000 revolving line of credit
from a bank, monthly interest payments at an annual rate
of one and one-half percent above prime rate, due
September 30, 2000, collateralized by all inventories,
equipment and accounts receivable. Chairman of the Board
and majority stockholder and a Director are jointly and
severally liable for the debt............................. $350,000 $350,000
Note due to bank, principal and interest payable monthly,
interest at 9.750%, matures February 2001, collateralized
by automobile............................................. 2,278 4,859
-------- --------
Total notes payable......................................... $352,278 $354,859
======== ========
</TABLE>
The notes have been included on the balance sheet as current liabilities. As
of June 30, 2000 and September 30, 1999, the weighted average interest rate on
the above outstanding borrowings is 10.52% (unaudited) and 11.45%, respectively.
NOTE 6--NOTES PAYABLE--INVESTORS
In March and April 1999, the Company issued notes payable, at $50,000 each,
to three individuals for an aggregate of $150,000. Each of these investors also
received a certain number of shares of the Company's common stock. The notes had
initial due dates of approximately September 30, 1999 but were all extended to
dates in 2000. During January, 2000 one investor note of $50,000 was repaid. At
June 30, 2000 and September 30, 1999, the Company owed accrued interest on the
notes of $25,000 (unaudited) and $28,189, respectively. The stock issued to the
investors was valued at $15,000, or $.15 per share. The Company recorded the
$15,000 as additional interest expense which was fully recognized through
September 1999. One of the investors, who invested $50,000, is considered by the
Company to be a related party.
F-17
<PAGE>
N-GEN SOLUTIONS.COM, INC.
(A DELAWARE CORPORATION) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--NOTES PAYABLE--INVESTORS (CONTINUED)
In 1999, the Company initiated the sale of debt securities (notes payable)
in a private placement offering. The notes payable are non-interest bearing and
automatically redeemable in cash, upon the earlier of December 31, 2000 or
completion of a proposed public offering of the Company's common stock, at 90%
of the investment proceeds. In addition, at the time of debt repayment the
investors in the notes payable will receive shares of the Company's "restricted"
common stock at a rate of one share for every $5.00 of their cash investment.
Through June 30, 2000 and September 30, 1999, the Company raised gross proceeds
of $526,250 (unaudited) and $112,500, respectively. Based on the amount of debt
proceeds, the Company will issue 105,250 shares at the time of debt repayment.
One of the investors, who invested $50,000, is considered by the Company to be a
related party.
The Company has recorded the debt portion (ninety percent) of the proceeds
from each investor as a current liability, discounted at 10% per annum to
reflect imputed interest. The Company has recorded the imputed interest and the
equity portion (ten percent) of the proceeds as additional paid-in capital. The
imputed interest discount is being amortized to interest expense over the
anticipated term of the notes using the interest method. As a result, the
Company has recorded increases in additional paid-in capital of $20,761 and
$72,704 for the nine months ended September 30, 1999 and for the nine months
ended June 30, 2000, respectively, or an aggregate of $93,465 ($.89 per share)
for the 105,250 shares to be issued.
In connection with the debt private placement, the Company has recorded
direct debt offering costs of $57,856 (unaudited) and $36,606 as of June 30,
2000 and September 30, 1999, respectively, which amounts are being amortized to
interest expense over approximately 8 months, the expected term of the debt. The
accumulated amortization expense was $57,856 (unaudited) and $-0- at June 30,
2000 and September 30, 1999, respectively.
Notes payable to investors consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
2000 SEPTEMBER, 30
(UNAUDITED) 1999
----------- -------------
<S> <C> <C>
Note payable to investor, interest at 12% per annum,
extended due date April 15, 2000, uncollateralized, 50,000
shares of common stock granted in conjunction with the
note payable.............................................. $ -- $ 50,000
Note payable to investor, non-interest bearing, principal
repayable with a premium of $12,500, extended due date
November 6, 2000, uncollateralized, 25,000 shares of
common stock granted in conjunction with the note payable,
investor a related party.................................. 50,000 50,000
Note payable to investor, non-interest bearing, principal
repayable with a premium of $12,500, extended due date
November 6, 2000, uncollateralized, 25,000 shares of
common stock granted in conjunction with the note
payable................................................... 50,000 50,000
Notes payable to investors through private placement, net of
unamortized interest imputed at 10% per annum and amount
attributable to beneficial equity interest, notes
uncollaterized............................................ 465,149 92,418
-------- --------
Total notes payable--investors.............................. $565,149 $242,418
======== ========
</TABLE>
F-18
<PAGE>
N-GEN SOLUTIONS.COM, INC.
(A DELAWARE CORPORATION) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--CAPITAL LEASE OBLIGATIONS
In 1998, the Company borrowed $140,000 from a leasing company and is
repaying the amount under a capital lease agreement. The proceeds were
substantially used to acquire its "smart classroom," which is used for sales
demonstration and training. The underlying asset has been capitalized at
$86,242, net of internal labor used to construct the classroom. At June 30, 2000
and September 30, 1999, the present value of the lease was $67,140 (unaudited)
and $100,440, respectively, payable in monthly installments of $4,564 (including
interest at 12% per annum plus sales tax) and collateralized by the acquired
equipment. This lease has been personally guaranteed by a Director of the
Company.
In February 2000, the Company borrowed $47,328 (unaudited) from a leasing
company and is repaying the amount under a capital lease agreement. The proceeds
were used to acquire computer equipment and furniture which is used for a
classroom. The underlying assets were capitalized at $47,328 (unaudited). At
June 30, 2000 and September 30, 1999, the present value of the lease was $42,704
(unaudited) and $-0- (unaudited), respectively, payable in monthly installments
of $1,514 (unaudited) (including interest at 10% (unaudited) per annum plus
sales tax) and collateralized by the acquired equipment.
In March 2000, the Company borrowed $24,792 (unaudited) from a leasing
company and is repaying the amount under a capital lease agreement. The proceeds
were used to acquire computer equipment used in connection with the Company's
e-commerce site. The underlying assets were capitalized at $24,792 (unaudited).
At June 30, 2000 and September 30, 1999, the present value of the lease was
$22,520 (unaudited) and $-0- (unaudited), respectively, payable in monthly
installments of $1,514 (unaudited) (including interest at 10% (unaudited) per
annum plus sales tax) and collateralized by the acquired equipment.
The Company leases computer equipment and related furniture under capital
leases expiring in December 2001, March 2002 and March, 2003. The assets and
liabilities under capital leases are recorded at the lower of the present value
of the minimum lease payments or the fair value of the asset. The assets are
depreciated over their estimated productive lives. Depreciation of assets under
capital leases is included in depreciation expense for the nine months ended
June 30, 2000 (unaudited) and the nine months ended September 30, 1999.
Minimum future lease payments under the capital leases for each of the next
five years are:
<TABLE>
<CAPTION>
JUNE 30,
2000 SEPTEMBER 30,
YEAR ENDED (UNAUDITED) 1999
---------- ----------- -------------
<S> <C> <C>
2000.............................................. N/A $ 54,768
2001.............................................. $ 83,454 54,768
2002.............................................. 46,942 4,564
2003.............................................. 19,124 --
-------- --------
Total minimum lease payments........................ 149,520 114,100
Less: amount representing interest and executory
costs............................................. (17,156) (13,660)
-------- --------
Present value of net minimum lease payments......... 132,364 100,440
Less: Current portion.............................. (71,418) (45,087)
-------- --------
Long-term portion................................... $ 60,946 $ 55,353
======== ========
</TABLE>
F-19
<PAGE>
N-GEN SOLUTIONS.COM, INC.
(A DELAWARE CORPORATION) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--LEASE COMMITMENTS
As of June 30, 2000 and September 30, 1999, the Company had entered into an
operating lease agreement for the rental of its retail and office facility. The
agreement was signed in 1998, amended in 1999 and requires base monthly rent
payments varying between $5,093 and $5,397 over a lease period of five years.
The Company subleases office space for its headquarters from another company
partially controlled by certain major stockholders and officers of the Company.
The sublease is a verbal agreement under which the total rent for the office
suite shared with the related company is paid by the Company.
Total rent expense for the entire Company was $89,192 (unaudited) and
$51,310 (unaudited) for the nine months ended June 30, 2000 and 1999,
respectively, $35,126 for the nine months ended September 30, 1999 and $18,178
for the period from July 13, 1998 (Inception) to December 31, 1998.
Required minimum rentals, on an annual basis, for the next five years, are
as follows:
<TABLE>
<CAPTION>
JUNE 30,
2000 SEPTEMBER 30,
YEAR ENDED (UNAUDITED) 1999
---------- ----------- -------------
<S> <C> <C>
2000.............................................. N/A $ 70,895
2001.............................................. $ 62,530 62,871
2002.............................................. 63,907 64,144
2003 and thereafter............................... 36,626 36,627
-------- --------
Total minimum lease payments........................ 163,063 234,537
Less: amount representing interest and executory
costs............................................. (7,987) (11,019)
-------- --------
Present value of net minimum lease payments......... $156,076 $223,518
======== ========
</TABLE>
NOTE 9--STOCKHOLDERS' EQUITY
The Company was originally capitalized with common stock of 100,000,000
authorized shares of $.0001 par value stock and 25,000,000 shares of preferred
stock. The holders of the common stock are entitled to one vote per share. On
April 16, 1999, the Board of Directors and shareholders decreased the total
authorized number of shares to 30,000,000, divided into 25,000,000 shares of
common stock and 5,000,000 shares of preferred stock. The Board of directors
will designate the voting powers, preferences and rights, and the
qualifications, limitations or restrictions of the preferred stock, as needed,
in the future. No shares of preferred stock have been issued.
On July 13, 1998, in connection with the formation of the Company, the
Company issued 2,000,000 and 170,000 shares (240,000 and 20,000 shares,
respectively, later returned) of its common stock to two officers and directors
in exchange for services valued at $2,000 and $170, respectively.
On July 28, 1998, the Company issued 2,000,000 (420,000 shares later
returned) shares of its common stock valued at $.15 per share to a current
Director of the Company in exchange for $50,000 cash and a $250,000 note payable
to the Company. The note required monthly payments of $50,000 and was
effectively non-interest bearing. Interest income of $6,310 at 10% per annum was
imputed,
F-20
<PAGE>
N-GEN SOLUTIONS.COM, INC.
(A DELAWARE CORPORATION) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--STOCKHOLDERS' EQUITY (CONTINUED)
recognized as income and charged to compensation expense. As of December 31,
1998, the Director had paid all amounts due to the Company.
In March 1999, the Company issued 250,000 shares (90,000 shares later
returned) of common stock valued at $.15 per share as partial consideration for
its purchase on n-Gen Colorado (Note 2). In March and April 1999, the Company
issued 100,000 shares of common stock valued at $.15 per share to three
individuals as consideration for working capital loans (Note 6).
In June 1999, the Company cancelled 770,000 shares of common stock. These
shares were returned by four directors without consideration.
In June 1999, the Company issued 1,260,000 shares of common stock valued at
$239,400 ($.19 per share) to four employees of the Company in consideration of
past services.
In September 1999, the Company recorded an increase of $20,761 to additional
paid-in capital which constituted equity interest granted to individuals who
loaned the Company money under the private debt offering (Note 6).
In the months of October through December 1999, the Company recorded an
increase of $72,704 to additional paid-in capital which constituted equity
interest granted to individuals who loaned the Company money under the private
debt offering (Note 6). (Unaudited)
From December 1999 through February 2000, the Company sold 930,000 shares of
common stock in a private placement transaction to twelve investors in
consideration of $465,000, or $.50 per share. Consideration at $.50 per share
was the fair value that willing and unrelated buyers agreed to pay. The Company
paid commissions of $44,000 for net proceeds of $421,000 for these transactions.
(Unaudited)
NOTE 10--RELATED PARTY TRANSACTIONS
The Company's headquarters is located in the offices of One Capital
Corporation ("One Capital"), a company partially controlled by certain major
stockholders and officers of the Company. The Company subleases under a verbal
contract from One Capital for office space by paying substantially all of the
rent for the shared office space. Headquarters rent expense paid to One Capital
was $30,524 (unaudited) and $18,132 (unaudited) for the nine months ended
June 30, 2000 and 1999, $30,084 for the nine months ended September 30, 1999 and
$18,178 for the period from July 13, 1998 (Inception) to December 31, 1998.
In addition, One Capital Corporation has paid certain expenses on behalf of
the Company and for which it will be reimbursed by the Company. Amounts of
$196,809 (unaudited) and $83,218 are owed to One Capital as of June 30, 2000 and
September 30, 1999, respectively. The total amount paid by One Capital on behalf
of the Company was $448,808 (unaudited) and $290,149 (unaudited) for the nine
months ended June 30, 2000 and 1999, $319,891 for the nine months ended
September 30, 1999 and $185,964 for the period from July 13, 1998 (Inception) to
December 31, 1998. The total amount reimbursed by the Company to One Capital was
$335,217 (unaudited) and $213,000 (unaudited) for the nine months ended
June 30, 2000 and 1999, $230,137 for the nine months ended September 30, 1999
and $192,500 for the period from July 13, 1998 (Inception) to December 31, 1998.
F-21
<PAGE>
N-GEN SOLUTIONS.COM, INC.
(A DELAWARE CORPORATION) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--RELATED PARTY TRANSACTIONS (CONTINUED)
A Director has personally guaranteed the revolving line of credit with a
bank (Note 5). In addition, the Director has personally guaranteed 50% of the
outstanding note payable balance to the prior owner of n-Gen Colorado (Note 4).
A Director and prior owner of n-Gen Colorado have personally guaranteed a
capital lease for the acquisition of equipment and the rent payments for the
operations office.
NOTE 11--INCOME TAXES
There is no current or deferred tax expense for the nine months ended
June 30, 2000 (unaudited) and 1999 (unaudited), the nine months ended
September 30, 1999 and the period from July 13, 1998 to December 31, 1998 due to
net losses from operations by the Company.
Deferred income taxes are recorded to reflect the tax consequences on future
years of differences between the tax basis of assets and liabilities and their
financial reporting amounts at each year-end. Deferred income tax assets are
recorded to reflect the tax consequences on future years of income tax
carry-forward benefits, reduced by benefit amounts not expected to be realized
by the Company.
The net deferred tax asset is comprised of the following at June 30, 2000
(unaudited) and September 30, 1999:
<TABLE>
<CAPTION>
JUNE 30, 2000 SEPTEMBER 30,
(UNAUDITED) 1999
-------------- -------------
<S> <C> <C>
Deferred tax asset:
Net operating loss benefit carry forward........... $ 558,021 $ 400,458
Amortization of goodwill........................... 101,396 39,488
Allowance for doubtful accounts.................... 38,204 38,204
Accrued interest................................... 20,007 17,348
--------- ---------
Total............................................ 717,628 495,498
Valuation allowance for deferred tax assets........ (717,628) (495,498)
--------- ---------
Net deferred tax asset............................. $ -- $ --
========= =========
</TABLE>
The temporary differences causing the deferred tax asset are expected to
reverse over the next fifteen years. As of June 30, 2000 and September 30, 1999,
the Company had operating loss carryforwards of $ 1,365,957 (unaudited) and
$982,279, respectively. The operating loss carryforwards expire beginning in
2018 ($238,124 in 2018, $ 744,155 in 2019 and $383,678 in 2020).
F-22
<PAGE>
N-GEN SOLUTIONS.COM, INC.
(A DELAWARE CORPORATION) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--CONCENTRATIONS
For the nine months ended June 30, 2000 and 1999, the nine months ended
September 30, 1999 and the period from July 13, 1998 (Inception) to
December 31, 1998, none of the Company's sales exceed 10% to any one customer.
The Company is dependent upon a relatively few manufacturers of equipment
and software to supply product to sell. The Company relies upon renewable
one-year distribution contracts with these manufacturers. For the nine months
ended June 30, 2000 and 1999, the nine months ended September 30, 1999 and the
period from July 13, 1998 (Inception) to December 31, 1998, the Company's cost
of sales was concentrated in a few suppliers (only those exceeding 10% are
presented) as follows:
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED JULY 13, 1998
JUNE 30, 2000 JUNE 30, 1999 NINE MONTHS ENDED (INCEPTION) TO
(UNAUDITED) (UNAUDITED) SEPTEMBER 30, 1999 DECEMBER 31, 1998
SUPPLIER PER CENT PER CENT PER CENT PER CENT
-------- ------------- ------------- ------------------ -----------------
<S> <C> <C> <C> <C>
A.................... 32% 34% 36% *
B.................... 12% 11% 10% *
C.................... * 10% 10% *
</TABLE>
------------------------
* Less than 10%
NOTE 13--EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution 401(k) profit sharing plan for
the employees of its Colorado subsidiary. Under the plan, all employees age 21
and older with twelve consecutive months of service and 1,000 hours of service
may participate. Eligible employees may voluntarily contribute from 1% to 15%,
but not more than the maximum allowed by law (currently $10,500), of their
compensation annually to the plan. The Company may elect at the Board's
discretion to match participant contributions. Participant contributions are
fully vested and Company contributions become vested for participants over seven
years.
NOTE 14--SEGMENT INFORMATION
The Company's operations consist of three segments: (1) sales of computer
software and hardware and commissions, (2) computer training and (3) e-commerce
site.
Identified assets by segment are those assets that are used in the Company's
operations in each segment. Corporate assets are principally cash, furniture,
fixtures, vehicles, and intangible assets.
The Company has adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131). The adoption of SFAS 131 requires the presentation of descriptive
information about reportable segments which is consistent with that made
available to the management of the Company to assess performance.
The sales segment derives its revenues from the sale of educational computer
hardware and software to schools and computer aided design ("CAD") software to
businesses and from commissions.
F-23
<PAGE>
N-GEN SOLUTIONS.COM, INC.
(A DELAWARE CORPORATION) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14--SEGMENT INFORMATION (CONTINUED)
The training segment derives its revenues from providing computer classroom
and CAD computer training to individuals.
The e-commerce site will derive revenues by providing customers the
opportunity to purchase a broad assortment of educational products, software and
office and school supplies. As of June 30, 2000, the site was in the development
stage and no revenues have been received.
During all periods presented, there were no inter-segment revenues. The
accounting policies applied by each segment are the same as those used by the
Company in general.
Segment information consists of the following:
<TABLE>
<CAPTION>
SALES TRAINING E-COMMERCE CORPORATE CONSOLIDATED
---------- ---------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Nine months ended June 30, 2000
(Unaudited):
Revenues.......................... $3,819,117 $ 165,091 $ -- $ -- $3,984,208
Income (loss) from operations..... 759,702 53,044 -- (1,438,791) (626,045)
Assets............................ 2,430,561 11,480 224,644 716,665 3,383,350
Depreciation and amortization..... 46,788 4,506 -- 202,508 253,802
Capital expenditures.............. 27,144 47,328 86,100 49,184 209,756
Nine months ended June 30, 1999
(Unaudited):
Revenues.......................... $1,733,288 $ 64,884 $ -- $ -- $1,798,172
Income (loss) from operations..... 154,832 54,235 -- (1,108,632) (899,565)
Assets............................ 814,597 13,485 -- 562,237 1,390,319
Depreciation and amortization..... 25,736 3,218 -- 94,592 123,546
Capital expenditures.............. -- -- -- 40,579 40,579
Nine months ended September 30,
1999:
Revenues.......................... $3,724,325 $ 106,028 $ -- $ -- $3,830,353
Income (loss) from operations..... 471,920 30,499 (41,390) (1,325,437) (864,408)
Assets............................ 1,938,830 14,547 -- 617,162 2,570,539
Depreciation and amortization..... 32,135 4,031 -- 142,622 178,788
Capital expenditures.............. -- -- -- 79,844 79,844
July 13, 1998 (Inception) to
December 31, 1998:
Revenues.......................... $ -- $ -- $ -- $ -- $ --
Income (loss) from operations..... -- -- -- (244,254) (244,254)
Assets............................ -- -- -- 69,140 69,140
Depreciation and amortization..... -- -- -- -- --
Capital expenditures.............. -- -- -- -- --
</TABLE>
F-24
<PAGE>
N-GEN SOLUTIONS.COM, INC.
(A DELAWARE CORPORATION) AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15--INITIAL PUBLIC OFFERING
In June 1999, the Company entered into a letter of intent with Barron Chase
Securities, Inc. ("Underwriter"), a broker-dealer firm and NASD member, to
represent the Company in an initial public offering ("IPO") of its common stock
and warrants on a "firm commitment" basis. The letter of intent generally
requires that the Company pay certain expenses of the Underwriter in advance,
and provides for ongoing investment banking services by the Underwriter and a
right of first refusal to act as manager on future sales of the Company's
securities for a period of five years.
The Company expects to offer 1,600,000 shares of common stock and 1,600,000
warrants to purchase common stock in the IPO for $5.00 per share and $.125 per
warrant. Each warrant will exercisable for $5.50 per share for a period of five
years after the close of the IPO. The warrants will be subject to voluntary
redemption by the Company at $.05 per warrant.
The Company has granted the Underwriter an over-allotment option to purchase
after the effective date of the offering up to 240,000 shares of common stock
and 240,000 warrants. The Company must pay a non-accountable expense allowance
of 3% of gross proceeds and a commission of 10% of gross proceeds. The Company
has already paid the Underwriter $30,000 in advance for the non-accountable
fees.
NOTE 16--SUBSEQUENT EVENTS
The Company intends to establish a stock option plan with two million shares
of the Company's common stock reserved for issuance through the plan.
F-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
n-Gen Solutions.com, Inc. (a Colorado corporation)
Longmont, Colorado
We have audited the statements of operations, stockholder's equity and cash
flows of n-Gen Solutions.com, Inc. (a Colorado corporation) for the year ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of n-Gen
Solutions.com, Inc. (a Colorado corporation) for the year ended December 31,
1998 in conformity with generally accepted accounting principles.
GORDON, HUGHES & BANKS, LLP
February 1, 2000
Englewood, Colorado
F-26
<PAGE>
N-GEN SOLUTIONS.COM, INC.
(A COLORADO CORPORATION)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
REVENUE
Sales..................................................... $5,112,432
Training.................................................. 129,999
Commissions............................................... 443,132
----------
Total revenue............................................. 5,685,563
COST OF GOODS SOLD.......................................... 3,965,661
----------
Gross profit.............................................. 1,719,902
----------
OPERATING EXPENSES
Selling expenses.......................................... 649,330
General and administration................................ 626,702
Depreciation.............................................. 36,459
Bad debts................................................. 119,026
----------
Total operating expenses.................................. 1,431,517
----------
Income from operations...................................... 288,385
OTHER INCOME (EXPENSE)
Interest (expense)........................................ (13,890)
Interest income........................................... 11,861
----------
NET INCOME................................................ $ 286,356
==========
Earnings per share.......................................... $ 0.06
==========
Weighted average shares outstanding......................... 5,000,000
==========
</TABLE>
See notes to financial statements
F-27
<PAGE>
N-GEN SOLUTIONS.COM, INC.
(A COLORADO CORPORATION)
STATEMENT OF STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Balance, January 1, 1998.............................. 5,000,000 $7,980 $297,525 $305,505
Net income.......................................... -- -- 286,356 286,356
Distributions to owner.............................. -- -- (88,000) (88,000)
--------- ------ -------- --------
Balance, December 31, 1998............................ 5,000,000 $7,980 $495,881 $503,861
========= ====== ======== ========
</TABLE>
See notes to financial statements
F-28
<PAGE>
N-GEN SOLUTIONS.COM, INC.
(A COLORADO CORPORATION)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES
Net Income.................................................. $ 286,356
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 36,459
(Increase) decrease in:
Accounts receivable..................................... (235,198)
Inventory............................................... 25,807
Employee advances....................................... 32,341
Deposits................................................ (2,500)
Increase (decrease) in:
Accounts payable........................................ (165,348)
Accrued expenses........................................ 71,191
Deferred revenue........................................ 68,170
---------
Net cash provided by operating activities................. 117,278
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment.................................... (45,592)
---------
Net cash (used) by investing activities................... (45,592)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from loans......................................... 44,630
Payments on debt............................................ (2,941)
Distributions to owner...................................... (88,000)
---------
Net cash (used) by financing activities................... (46,311)
---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 25,375
Cash and Cash Equivalents:
Beginning of year......................................... 141,708
---------
Ending of year............................................ $ 167,083
=========
OTHER INFORMATION:
Cash basis interest paid.................................. $ 22,557
=========
Equipment acquired through capital lease.................. $ 86,242
=========
</TABLE>
See notes to financial statments
F-29
<PAGE>
N-GEN SOLUTIONS.COM, INC.
(A COLORADO CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS AND ORGANIZATION
In 1984, n-Gen Solutions.com, Inc. (a Colorado corporation) (formerly known
as Technology Learning Systems, Inc.) (the "Company") began business as a sole
proprietorship and was incorporated on March 1, 1989 in Colorado as an S
corporation. The Company is primarily engaged in the business of selling
educational computer hardware, software to schools and computer aided design
("CAD") software to businesses and providing installation and training services.
Training is done both in its own classrooms and at the customer's location. The
Company also acts as a sales representative for a company in California that
manufactures computerized classrooms. The Company sells its products in Montana,
Wyoming, Nevada, Arizona, Colorado, New Mexico, Utah and Idaho.
REVENUE RECOGNITION
The Company generates three types of revenues: product sales, training, and
sales commissions. Products are sold to two types of customers: schools and
commercial businesses. For computer labs and computerized ("smart") classrooms,
a sale is completed and revenue is recognized when the equipment is installed
and the customer has received initial familiarization needed to operate the
system. Formal in-depth training is an additional service and completion of the
sale is not dependent upon delivery of in-depth training. In the case of
commercial sales, for which installation and training is not required, revenue
is recognized at the time that products are delivered to the customer. Training
revenues are recognized when the training is provided. Sales commission revenues
are recognized when the manufacturer's systems are installed at the customer
location and collection is substantially assured.
The Company earns commissions based on sales that it generates for a company
in California. The Company earned commission revenue of $443,132 for the year
ended December 31, 1998, based on sales of computerized classrooms generated of
approximately $2,900,000.
As of December 31, 1998, the Company was owed approximately $97,000 from the
California company. However, at December 31, 1998, the Company was negotiating
the conversion of the receivable to a note, The Company has recorded the
commission revenue and the related receivable for the $97,000. However, the
Company has also recorded an allowance for doubtful accounts and bad debt
expense for the $97,000 because, at the time, the amount was uncollectable.
Subsequently, in August 1999, the $97,000 was collected and recorded as recovery
of bad debt in 1999.
DEPRECIATION
Property and equipment are recorded at cost. Major improvements are
capitalized, while repairs and maintenance, which do not improve or extend the
life of the respective assets, are expensed currently. All equipment is pledged
as collateral for a bank loan.
Depreciation is computed for equipment using the straight-line and
accelerated methods over the estimated useful lives of the assets with lives
ranging from three to five years.
INCOME TAXES
Through December 31, 1998, the Company has been taxed as an S Corporation
under the Internal Revenue Code and applicable state statutes. Under an S
Corporation election, the net income of the Company flows through to the
stockholders to be taxed at the individual level rather than the corporate
F-30
<PAGE>
N-GEN SOLUTIONS.COM, INC.
(A COLORADO CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
level. Accordingly, the corporation has no tax liability in the period
presented. Subsequent to December 31, 1998, the control of the Company changed
and the Company's tax status automatically changed to a C Corporation for
federal and state income tax purposes.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
STATEMENT OF CASH FLOWS
For the purposes of the statement of cash flows, the Company considers
short-term, highly liquid investments and savings instruments with maturities of
three months or less to be cash equivalents.
EARNINGS PER SHARE
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
became effective in the fourth quarter of 1997 and requires two presentations of
earnings per share--"basic" and "diluted." Basic earnings per share is computed
by dividing income available to common stockholders (the numerator) by the
weighted-average number of common shares (the denominator) for the period. The
computation of diluted earnings per share is similar to basic earnings per
share, except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potentially
dilutive common shares had been issued. There were no dilutive common shares.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130"), which establishes standards
for the reporting of comprehensive income. This pronouncement requires that all
items recognized under accounting standards as components of comprehensive
income, as defined in the pronouncement, be reported in a financial statement
that is displayed with the same prominence as other financial statements.
Comprehensive income includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. The Company
adopted SFAS No. 130 in 1998 and determined there is no impact on any of the
periods presented. There were no comprehensive income items.
SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
No. 131"), which amends the requirements for a public enterprise to report
financial and descriptive information about its reportable operating segments.
Operating segments, as defined in the pronouncement, are components of an
enterprise about which separate financial information is available and that is
evaluated regularly by the Company in deciding how to allocate resources and in
assessing performance. The financial information
F-31
<PAGE>
N-GEN SOLUTIONS.COM, INC.
(A COLORADO CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
is required to be reported on the basis that is used internally for evaluating
segment performance and deciding how to allocate resources to segments. The
Company adopted SFAS No. 131 in 1998.
NOTE 2--LEASE COMMITMENTS
As of December 31, 1998, the Company had entered into an operating lease
agreement for the rental of its current retail and office facility. The
agreement was signed in 1998 and requires base monthly rent payments varying
between $1,613 and $4,121 over a lease period of five years. Rent expense for
1998 was $40,788.
Required minimum rentals, on an annual basis, are as follows:
<TABLE>
<S> <C>
Year ending December 31,:
1999...................................................... $ 38,448
2000...................................................... 39,329
2001...................................................... 40,237
2002...................................................... 41,172
2003 and thereafter....................................... 13,073
--------
Total minimum lease payments................................ $172,259
========
</TABLE>
NOTE 3--STOCKHOLDER'S EQUITY
The common stock of the Company consists of 30,000,000 authorized shares of
no-par value stock, divided into 25,000,000 shares of common stock and 5,000,000
shares of preferred stock. At December 31, 1998 8,000,000 shares of common stock
were issued and outstanding. However, in 1999, 3,000,000 shares were returned by
the stockholder and cancelled. All references in these financial statements to
the number of shares outstanding have been adjusted for the returned 3,000,000
shares.
The holder of the common stock is entitled to one vote per share. As
disclosed in the statement of changes in stockholder's equity, the Company made
distributions periodically to the sole stockholder. The distributions consisted
of cash in 1998.
NOTE 4--CONCENTRATIONS
For the year ended December 31, 1998, none of the Company's revenues exceed
10% from any one customer.
The company is dependent upon a relatively few manufacturers of equipment to
supply product to sell. The Company relies upon renewable one-year distribution
contracts with these manufacturers. For the year ended December 31, 1998, the
Company's cost of sales was concentrated in a few suppliers (only those
exceeding 10% are presented) as follows:
<TABLE>
<CAPTION>
SUPPLIER PER CENT
-------- --------
<S> <C>
A.................................................. 30%
B.................................................. 16%
</TABLE>
F-32
<PAGE>
N-GEN SOLUTIONS.COM, INC.
(A COLORADO CORPORATION)
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--SEGMENT INFORMATION
The Company's operations consist of three segments: (1) sales of computer
software and hardware and commissions, and (2) computer training, (3) corporate
activities.
The Company has adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
(SFAS 131). The adoption of SFAS 131 requires the presentation of descriptive
information about reportable segments which is consistent with that made
available to the management of the Company to assess performance.
The sales segment derives its revenues from the sale of educational computer
hardware and software to schools and computer aided design ("CAD") software to
businesses and from commissions.
The training segment derives its revenues from providing computer classroom
and CAD computer training to individuals.
During all periods presented, there were no inter-segment revenues. The
accounting policies applied by each segment are the same as those used by the
Company in general.
Segment information consists of the following:
<TABLE>
<CAPTION>
SALES TRAINING CORPORATE TOTAL
---------- -------- --------- ----------
<S> <C> <C> <C> <C>
Year-ended December 31, 1998:
Revenues........................................ $5,555,564 $129,999 $ -- $5,685,563
Income(loss) from operations.................... $ 893,907 $ 31,937 $(637,459) $ 288,385
Depreciation and amortization................... $ 22,765 $ 2,938 $ 10,756 $ 36,459
Capital expenditures............................ $ 31,359 $ -- $ 14,233 $ 45,592
</TABLE>
In addition, $86,242 of equipment was acquired through a capital lease
during 1998.
NOTE 6--SUBSEQUENT EVENTS
CHANGE IN CONTROL OF THE COMPANY
On March 26, 1999 and effective January 1, 1999, AAE Education Corporation
purchased all of the outstanding common stock from the Company's then sole
stockholder for cash, notes payable and common stock in AAEE. As part of the
sale, AAEE agreed to distribute to the seller $200,000 of the retained earnings
as of January 1, 1999 at any time on or after closing. The agreement also
requires the Company to enter into a five-year employment contract with the
former sole stockholder at approximately $100,000 per year.
The effect on total stockholder's equity of the Company in 1999 prior to the
change in control is as follows:
<TABLE>
<S> <C>
Total equity, December 31, 1998............................. $ 503,861
Distribution to Sub-chapter S stockholder................... (200,000)
---------
Total equity, after distribution, effective January 1,
1999...................................................... $ 303,861
=========
</TABLE>
EMPLOYEE BENEFIT PLAN
Effective January 1, 1999, the Company adopted a defined contribution 401(k)
profit sharing plan for its employees.
F-33
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
YOU SHOULD ONLY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, COMMON SHARES AND WARRANTS ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE
PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF
THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS
PROSPECTUS OR OF ANY SALE OF COMMON SHARES.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary.................... 3
The Offering.......................... 5
Selected Consolidated Financial
Data................................ 6
Risk Factors.......................... 7
Special Note Regarding Forward-Looking
Statements.......................... 23
How We Intend to Use the Proceeds from
the Offering........................ 23
Dividend Policy....................... 23
Dilution.............................. 24
Capitalization........................ 25
Management's Discussion and Analysis
or Plan of Operation................ 26
Business.............................. 34
Management............................ 45
Principal Shareholders................ 50
Certain Transactions and Related Party
Transactions........................ 51
Description of Securities............. 52
Shares Eligible for Future Sale....... 54
Transfer Agent and Registrar.......... 55
Reports to Security-Holders........... 55
Underwriting.......................... 56
Legal Proceedings..................... 59
Legal Matters......................... 59
Experts............................... 59
Where You Can Find More Information... 59
Index to Financial Statements......... F-1
</TABLE>
------------------------
UNTIL , 2000, ALL DEALERS SELLING COMMON SHARES OR WARRANTS
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
1,600,000 SHARES
1,600,000 WARRANTS
[LOGO]
COMMON STOCK
WARRANTS
---------------------
PROSPECTUS
---------------------
[LOGO]
7700 W. Camino Real
Boca Raton, Florida 33433
(561) 347-1200
Beverly Hills, California
Boca Raton Florida
Boston, Massachusetts
Buffalo, New York
Chicago, Illinois
Clearwater, Florida
Edison New Jersey
Eureka Springs, Arkansas
Fort Lauderdale, Florida
Hasbrouk Heights, New Jersey
La Jolla, California
New York, New York
Orlando, Florida
Rockville Centre, New York
Sarasota Florida
Tampa, Florida
, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Restated Certificate of Incorporation (the "Restated
Certificate") provides that the Company shall indemnify each person who is or
was a director, officer or employee of the Company to the fullest extent
permitted under Section 145 of the Delaware General Corporation Law.
Section 145 of the Delaware General Corporation Law empowers a Delaware
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 (other than an action
by or in the right of such corporation) by reason of the fact that such person
is or was a director, officer, employee or agent of such corporation, or is or
was serving at the request of such corporation as a director, officer, employee
or agent of another corporation or enterprise. A corporation may indemnify such
person against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person 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 proceeding, had no
reasonable cause to believe his conduct was unlawful. A corporation may, in
advance of the final disposition of any civil, criminal, administrative or
investigative action, suit or proceeding, pay the expenses (including attorneys'
fees) incurred by any officer or director in defending such action, provided
that the director or officer undertakes to repay such amount if it shall
ultimately be determined that he is not entitled to be indemnified by the
corporation.
A Delaware corporation may indemnify officers and directors in an action by
or in the right of the corporation to procure a judgment in its favor under the
same conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation.
Where an officer or director is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him
against the expenses (including attorneys' fees) which he actually and
reasonably incurred in connection therewith. The indemnification provided is not
deemed to be exclusive of any other rights to which an officer or director may
be entitled under any corporation's bylaw, agreement, vote or otherwise.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers, or persons
controlling the Company pursuant to the foregoing provisions, the Company has
been informed that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
of 1933, as amended, and is therefore unenforceable.
II-1
<PAGE>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimates of fees and expenses incurred or to be incurred in connection with
the issuance and distribution of securities being registered, all of which are
being paid exclusively by the Company, other than underwriting discounts and
commissions are as follows:
<TABLE>
<S> <C> <C>
Securities and Exchange Commission filing fee............... $ 5,845.49
National Association of Securities Dealers filing fee....... 2,000.00 *
Nasdaq and Exchange filing fees............................. 13,000.00 *
State Securities Laws (Blue Sky) fees and expenses.......... 35,000.00 *
Printing and mailing costs and fees......................... 40,000.00 *
Legal fees and costs........................................ 50,000.00 *
Accounting fees and costs................................... 20,000.00 *
Due diligence and travel.................................... 50,000.00 *
Transfer Agent fees......................................... 1,000.00 *
Miscellaneous expenses...................................... 33,154.51 *
-----------
TOTAL....................................................... $250,000.00 *
===========
</TABLE>
------------------------
* Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The Company was incorporated in July 1998 in the State of Delaware. The
Company has authorized capital of 30,000,000 shares consisting of 25,000,000
shares of common stock, $.0001 par value and 5,000,000 shares of Preferred
Stock, $.0001 par value. The Company has 5,940,000 shares of common stock issued
and outstanding and no shares of preferred stock issued and outstanding prior to
this offering. See "Principal Stockholders" and "Description of Securities."
On July 14, 1998, the Company issued 2,170,000 shares of common stock (of
which 260,000 were returned and cancelled) to two persons, both officers and
directors (Robert D. Arnold and Michael V. Schranz) in a private transaction in
consideration of $2,170 in services rendered or $.001 per share. See "Principal
Stockholders."
On July 28, 1998, the Company issued 2,000,000 shares of common stock (of
which 420,000 were returned and cancelled) to one person, an officer and
director (David Clem) in a private transaction in consideration of $300,000 or
$.15 per share. See "Principal Shareholders."
On March 26, 1999, the Company issued 250,000 shares of common stock (90,000
of which were subsequently returned and cancelled) in a private transaction to
D. Gary Nelson in exchange for all of his shares owned in Lab Technologies.
On June 10, 1999, the Company issued 1,260,000 shares of its common stock to
Allan Short, Dean Myers, Robert Vaughan and Karen Kittler, officers, directors
and employees for services valued at $189,000 or $0.15 per share.
On December 17, 1999, the Company sold promissory notes which consisted of a
non-interest bearing note and 105,250 shares of common stock for $526,250 to
twenty-one "accredited investors" in a private placement transaction pursuant to
Regulation D and Rule 506 adopted thereunder. Each promissory note is payable at
closing of this offering or upon the one year anniversary of the notes,
whichever occurs first. Pursuant to the notes, the Company is obligated to pay
90% of the initial investment without interest and issue 105,250 shares to the
noteholders at closing of this public offering
II-2
<PAGE>
or on December 17, 2000 whichever occurs first. The shares have been valued at
$5.00 a share. The following is a list of the note and share holders, amount
invested and number of shares owned:
<TABLE>
<CAPTION>
NOTE COMMON
INVESTOR NAME AMOUNT SHARES
------------- -------- --------
<S> <C> <C>
Philip W. Clem........................................... $ 50,000 10,000
Hal W. Brown III......................................... 50,000 10,000
Axel E. Dahlberg......................................... 12,500 2,500
Michael Maldarescu....................................... 20,000 4,000
Patco A/C & Heating, Inc................................. 50,000 10,000
Timothy K. Shuckhart..................................... 12,500 2,500
Per Henning-Damm......................................... 25,000 5,000
Theo Vennaeien........................................... 50,000 10,000
William N. McLintock..................................... 12,500 2,500
Shawn E. Trevino......................................... 25,000 5,000
Philip Chavez............................................ 25,000 5,000
Ralph L. Hays Jr......................................... 12,500 2,500
Thomas H. Stick.......................................... 25,000 5,000
Michael D. Olsen......................................... 6,250 1,250
Steven M. Olsen.......................................... 25,000 5,000
Dean Sumer............................................... 12,500 2,500
Heinz Beer............................................... 25,000 5,000
Jose Ngsee Tlee.......................................... 25,000 5,000
Jack A. Metcalf.......................................... 25,000 5,000
Felipe L. Chu............................................ 25,000 5,000
David Campos............................................. 12,500 2,500
$526,250 105,250
======== =======
</TABLE>
On February 28, 2000, the Company issued 930,000 shares of its common stock
in a private transaction to twelve investors at $.50 per share for a total of
$465,000 pursuant to Regulation D and Rule 506 adopted thereunder. The following
is a list of the investors, the amount invested and shares owned:
<TABLE>
<CAPTION>
INVESTMENT COMMON
INVESTOR NAME AMOUNT SHARES
------------- ---------- --------
<S> <C> <C>
Sergio Ii Trani, Jr., M.D................................ $ 12,500 25,000
Ruben & Virginia Casabar................................. 12,500 25,000
Max Ulrich............................................... 6,250 12,500
Peter Mark Breunig....................................... 6,250 12,500
C & G Dinglasan.......................................... 25,000 50,000
Gualberto R. Dinglasan, M.D.............................. 25,000 50,000
Felipe L. Chu, M.D....................................... 12,500 25,000
Minh Niut Mach........................................... 55,000 110,000
Theo Vermaelen........................................... 25,000 50,000
Three Young Two Thousand LTEE............................ 250,000 500,000
Tomer Keter.............................................. 25,000 50,000
Longhal Chen............................................. 10,000 20,000
$465,000 930,000
======== =======
</TABLE>
All unregistered securities issued by the Company to date are deemed
"restricted securities" within the meaning of that term as defined in Rule 144
of the Securities Act of 1933, as amended ("Act") and
II-3
<PAGE>
have been issued pursuant to certain "private placement" exemptions under
Section 4(2) and Rule 506 of Regulation D of the Act, as promulgated by the
Securities and Exchange Commission, such that the sales of the securities were
to "accredited" investors, as that term is defined in Rule 501 of Regulation D
of the Act, and were transactions by an issuer not involving any public
offering. Such accredited investors had access to information on the Company
necessary to make an informed investment decision. Also, under terms of the
Underwriting Agreement or subscription agreement, the current stockholders of
n-Gen have agreed not to sell, transfer, assign or otherwise dispose of any
restricted securities of n-Gen for a period of 15 months following the date of
this Prospectus.
Reference is also made hereby to "Dilution," "Principal Stockholders,"
"Certain Transactions" and "Description of Securities" in the Prospectus for
more information with respect to the previous issuance and sale of the Company's
securities.
All of the aforesaid securities have been appropriately marked with a
restricted legend and are "restricted securities," as defined in Rule 144 of the
rules and regulations of the Securities and Exchange Commission. All of the
aforesaid securities were issued for investment purposes only and not with a
view to redistribution, absent registration. All of the aforesaid persons have
been fully informed and advised concerning the Registrant, its business,
financial and other matters. Transactions by the Registrant involving the sales
of these securities set forth above were issued pursuant to the "private
placement" exemptions under the Securities Act of 1933, as amended, as
transactions by an issuer not involving any public offering. The Registrant has
been informed that each person is able to bear the economic risk of his
investment and is aware that the securities were not registered under the
Securities Act of 1933, as amended, and cannot be re-offered or re-sold until
they have been so registered or until the availability of an exemption
therefrom. The transfer agent and registrar of the Registrant will be instructed
to mark "stop transfer" on its ledgers to assure that these securities will not
be transferred absent registration or until the availability of an exemption
therefrom is determined.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
--------------------- -----------
<C> <S>
1.1 Form of Underwriting Agreement(1)
1.2 Form of Participating Dealer Agreement(1)
3.1 Certificate of Incorporation dated July 13, 1998(1)
3.2 Bylaws(1)
3.3 Amendment to Certificate of Incorporation dated January 19,
2000(1)
4.1 Form of Underwriter's Warrant Agreement(1)
4.2 Warrant Agreement between the Company and Corporate Stock
Transfer, Inc.(2)
4.3 Form of Specimen Stock Certificate(2)
4.4 Form of Specimen Warrant Certificate(2)
5.0 Form of Opinion of Berenbaum, Weinshienk & Eason, P.C.(4)
10.1 Distribution and Fulfillment Agreement with Ingram
Entertainment dated November 29, 1999(1)
10.2 Supplier Agreement with e-NITED dated February 8, 2000(1)
10.3 Website Development Agreement with The August Group, Inc.
dated February 24, 2000(1)
10.4 Content Agreement--Tech Notes I & II with Ingram Micro dated
September 2, 1997(1)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
--------------------- -----------
<C> <S>
10.5 Discreet Authorized Educational Reseller Agreement dated
December 1, 1999(1)
10.6 Authorized Dealer Agreement with SMART Technologies Inc.
dated December 24, 1996(1)
10.7 Distribution Agreement with Robotel Electronique dated
April 6, 1994(1)
10.8 Reseller Agreement with Healthkit Company dated May 19,
1999(1)
10.9 EduTECH Dealer Agreement dated January 1, 1995(1)
10.10 Interior Concepts letter dated March 9, 1999(1)
10.11 intelitek Educational Dealer Agreement dated August 1,
1997(1)
10.12 Employment Agreement, Dean C. Myers, dated February 2000(1)
10.13 Employment Agreement, Gary D. Nelson, dated March 26,
1999(1)
10.14 Lease Agreement dated July 13, 1999(1)
10.15 Master Equipment Lease Agreement with Lease Capital
Corporation dated December 21, 1998(1)
10.16 Autodesk Authorized Reseller Agreement(1)
10.17 Financial Advisory Agreement(1)
10.18 Merger and Acquisition Agreement(1)
24.1 Consent of Berenbaum, Weinshienk & Eason, P.C. is contained
on page II-8 of the Registration Statement(1)
24.2 Consent of Gordon, Hughes & Banks, LLP(1)
24.3 Consent of Gordon, Hughes & Banks, LLP(2)
24.4 Consent of Gordon, Hughes & Banks, LLP(3)
24.5 Consent of Gordon, Hughes & Banks, LLP(4)
24.6 Consent of Gordon, Hughes & Banks, LLP
27.1 Financial Data Schedule(1)
27.2 Financial Data Schedule(2)
27.3 Financial Data Schedule(3)
27.4 Financial Data Schedule(4)
27.5 Financial Data Schedule
</TABLE>
------------------------
(1) Filed as an Exhibit of the same number to the Registrant's Registration
Statement on Form SB-2 (No. 333-33416), and incorporated herein by
reference.
(2) Filed as an Exhibit of the same number to the Registrant's Amendment No. 1
to Registration Statement on Form SB-2 (No. 333-33416), and incorporated
herein by reference.
(3) Filed as an Exhibit of the same number to the Registrant's Amendment No. 2
to Registration Statement on Form SB-2 (No. 333-33416), and incorporated
herein by reference.
(4) Filed as an Exhibit of the same number to the Registrant's Amendment No. 3
to Registration Statement on Form SB-2 (No. 333-33416), and incorporated
herein by reference.
II-5
<PAGE>
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes the following to provide to
participating broker-dealers, at the closing, certificates in such denominations
and registered in such names as required by the participating broker-dealers, to
permit prompt delivery to each purchaser
The undersigned Registrant also undertakes
(1) To file, during any period in which it offers or sales are being made, a
post-effective amendment to this registration statement:
(i) Include any prospectus required by section 10(a)(3) of the Securities
Act of 1933;
(ii) To reflect in the prospectus any facts or event arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed by the registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
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 Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
This Registration Statement consists of the following:
<TABLE>
<C> <S>
1. Facing page.
2. Cross-Reference Sheet.
3. Prospectus.
4. Complete text of Items 24-28 in Part Two of Registration
Statement.
5. Exhibits.
6. Signature page.
7. Consents of:
Berenbaum, Weinshienk & Eason, P.C.
Gordon, Hughes & Banks, LLP
</TABLE>
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Denver, State of Colorado on October 4, 2000.
<TABLE>
<S> <C> <C>
N-GEN SOLUTIONS.COM, INC.
By: /s/ ROBERT D. ARNOLD
-----------------------------------------
Robert D. Arnold
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ROBERT D. ARNOLD Chairman of the Board, Chief
-------------------------------------- Executive Officer and Director October 4, 2000
Robert D. Arnold
/s/ MICHAEL V. SCHRANZ Treasurer, Secretary, Chief
-------------------------------------- Financial Officer, Principal October 4, 2000
Michael V. Schranz Accounting Officer and Director
/s/ GARY D. NELSON President and Director
-------------------------------------- October 4, 2000
Gary D. Nelson
/s/ DEAN C. MYERS Vice President and Director
-------------------------------------- October 4, 2000
Dean C. Myers
/s/ ROBERT C. VAUGHAN Vice President and Director
-------------------------------------- October 4, 2000
Robert C. Vaughan
/s/ DAVID CLEM Director
-------------------------------------- October 4, 2000
David Clem
/s/ ALLAN R. SHORT Director
-------------------------------------- October 4, 2000
Allan R. Short
/s/ STEPHEN K. SMITH Director
-------------------------------------- October 4, 2000
Stephen K. Smith
</TABLE>
II-7
<PAGE>
CONSENT OF COUNSEL
The consent of Berenbaum, Weinshienk & Eason, P.C., 370 Seventeenth Street,
Suite 2600, Denver, Colorado 80202-5626, to the use of their name in this Form
SB-2 Registration Statement, and related Prospectus, as amended, of n-Gen
Solutions.Com, Inc. is contained in his opinion filed as Exhibit 5.0 hereto.
October 4, 2000
II-8
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 1, 2000 accompanying the financial
statements of n-Gen Solutions.com, Inc. contained in the registration statement
and prospectus. We have also issued our report dated February 1, 2000
accompanying the financial statements of n-Gen Solution.com, Inc. (a Colorado
corporation) contained in the registration statement and prospectus. We consent
to the use of the aforementioned reports in the registration statement and
prospectus, and to the use of our name as it appears under the caption
"Experts."
GORDON, HUGHES & BANKS, LLP
Denver, Colorado
October 4, 2000
II-9
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 4, 2000
REGISTRATION NO. 333-33416
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------------------------
EXHIBITS
TO
FORM SB-2/A3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1993
------------------------
N-GEN SOLUTIONS.COM, INC.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
N-GEN SOLUTIONS.COM, INC.
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
----------- ----------- -------------
<C> <S> <C>
1.1 Form of Underwriting Agreement(1)
1.2 Form of Participating Dealer Agreement(1)
3.1 Certificate of Incorporation dated July 13, 1998(1)
3.2 Bylaws(1)
3.3 Amendment to Certificate of Incorporation dated January 19,
2000(1)
4.1 Form of Underwriter's Warrant Agreement(1)
4.2 Warrant Agreement between the Company and Corporate Stock
Transfer, Inc. (2)
4.3 Form of Specimen Stock Certificate(2)
4.4 Form of Specimen Warrant Certificate(2)
5.0 Form of Opinion of Berenbaum, Weinshienk & Eason, P.C. (4)
10.1 Distribution and Fulfillment Agreement with Ingram
Entertainment dated November 29, 1999(1)
10.2 Supplier Agreement with e-NITED dated February 8, 2000(1)
10.3 Website Development Agreement with The August Group, Inc.
dated February 24, 2000(1)
10.4 Content Agreement--Tech Notes I & II with Ingram Micro dated
September 2, 1997(1)
10.5 Discreet Authorized Educational Reseller Agreement dated
December 1, 1999(1)
10.6 Authorized Dealer Agreement with SMART Technologies Inc.
dated December 24, 1996(1)
10.7 Distribution Agreement with Robotel Electronique dated April
6, 1994(1)
10.8 Reseller Agreement with Healthkit Company dated May 19,
1999(1)
10.9 EduTECH Dealer Agreement dated January 1, 1995(1)
10.10 Interior Concepts letter dated March 9, 1999(1)
10.11 intelitek Educational Dealer Agreement dated August 1,
1997(1)
10.12 Employment Agreement, Dean C. Myers, dated February 2000(1)
10.13 Employment Agreement, Gary D. Nelson, dated March 26,
1999(1)
10.14 Lease Agreement dated July 13, 1999(1)
10.15 Master Equipment Lease Agreement with Lease Capital
Corporation dated December 21, 1998(1)
10.16 Autodesk Authorized Reseller Agreement(1)
10.17 Financial Advisory Agreement(1)
10.18 Merger and Acquisition Agreement(1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGE
----------- ----------- -------------
<C> <S> <C>
24.1 Consent of Berenbaum, Weinshienk & Eason, P.C. is contained
on page II-8 of the Registration Statement(1)
24.2 Consent of Gordon, Hughes & Banks, LLP(1)
24.3 Consent of Gordon, Hughes & Banks, LLP(2)
24.4 Consent of Gordon, Hughes & Banks, LLP(3)
24.5 Consent of Gordon, Hughes & Banks, LLP(4)
24.6 Consent of Gordon, Hughes & Banks, LLP
27.1 Financial Data Schedule(1)
27.2 Financial Data Schedule(2)
27.3 Financial Data Schedule(3)
27.4 Financial Data Schedule(4)
27.5 Financial Data Schedule
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(1) Filed as an Exhibit of the same number to the Registrant's Registration
Statement on Form SB-2 (No. 333-33416), and incorporated herein by
reference.
(2) Filed as an Exhibit of the same number to the Registrant's Amendment No. 1
to Registration Statement on Form SB-2 (No. 333-33416), and incorporated
herein by reference.
(3) Filed as an Exhibit of the same number to the Registrant's Amendment No. 2
to Registration Statement on Form SB-2 (No. 333-33416), and incorporated
herein by reference.
(4) Filed as an Exhibit of the same number to the Registrant's Amendment No. 3
to Registration Statement on Form SB-2 (No. 333-33416), and incorporated
herein by reference.
