As filed with the Securities and Exchange Commission on July 21, 2000
Registration No. 333-37932
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------------
CATALOG.COM, INC.
(Exact Name of Small Business Issuer in its Charter)
Oklahoma 7389 73-1490346
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification Number)
Incorporation or
Organization)
14000 Quail Springs Parkway, Suite 3600
Oklahoma City, Oklahoma 73134
(405) 753-9300
(Address and Telephone Number of Principal
Executive Offices and Principal Place of Business)
Robert W. Crull, President and Chief Executive Officer
Catalog.com, Inc.
14000 Quail Springs Parkway, Suite 3600
Oklahoma City, Oklahoma 73134
(405) 753-9300
(Name, Address and Telephone Number of Agent for Service)
----------------------------------
COPIES TO:
Douglas A. Branch, Esq. Neil W. Townsend, Esq.
Phillips McFall McCaffrey McVay & Murrah, P.C. Bingham Dana LLP
211 N. Robinson, Twelfth Floor 399 Park Avenue
Oklahoma City, Oklahoma 73102 New York, New York 10022-4689
(405) 235-4100 (212) 318-7700
--------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the commission, acting pursuant to Section 8(a), may
determine.
<PAGE>
THE INFORMATION IN THIS PRELIMINARY 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
PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES OR OUR
SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE
THE OFFER OR SALE WOULD NOT BE PERMITTED OR LEGAL.
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 21, 2000
PRELIMINARY PROSPECTUS
[LOGO]
CATALOG.COM, INC.
1,000,000 Shares of Common Stock
This is an initial public offering of 1,000,000 shares of Catalog.com, Inc.
common stock through Institutional Equity Corporation on a firm-commitment
basis. No public market currently exists for our shares. We anticipate that the
initial public offering price will be between $10.00 and $12.00 per share.
We have applied to list the common stock on the American Stock Exchange under
the symbol "CLG."
The underwriters named in this prospectus may purchase up to 150,000 additional
shares of our common stock at the initial public offering price less the
underwriting discount to cover over-allotments.
Investing in the shares involves a high degree of
risk.
See "Risk Factors" beginning on page 7.
Per Share Total
Initial Public Offering Price $ $
Underwriting Fees $ $
Proceeds, Before Expenses, to
Catalog.com, Inc. $ $
We estimate cash expenses, other than the underwriting discounts and commissions
set forth above, will be approximately $500,000 and will include a
non-accountable allowance to the managing underwriter equal to 1.5% of the gross
offering proceeds. We have also agreed to issue a warrant to the managing
underwriter, the terms of which are described under the heading "Underwriting."
Neither the SEC nor any state securities commission has approved or disapproved
these securities or determined whether this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
INSTITUTIONAL EQUITY CORPORATION
CAPITAL WEST SECURITIES, INC.
The date of this prospectus is _____________, 2000
<PAGE>
3
[graphic depicting the company's Internet Web site home page]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Page
Prospectus Summary ............................................................................................4
Risk Factors ..................................................................................................7
Use of Proceeds...............................................................................................14
Dividend Policy...............................................................................................16
Capitalization................................................................................................17
Dilution......................................................................................................18
Management's Discussion and Analysis of Financial Condition and Results of Operations.........................19
Business......................................................................................................23
Management....................................................................................................32
Transactions With Related Parties.............................................................................35
Principal Shareholders........................................................................................36
Description of Capital Stock..................................................................................38
Anti-takeover Effects of Provisions of the Certificate of Incorporation and Bylaws............................39
Shares Eligible for Future Sale...............................................................................41
Underwriting..................................................................................................42
Legal Matters.................................................................................................44
Experts.......................................................................................................44
Where You Can Get Additional Information......................................................................45
Index to Financial Statements.................................................................................46
</TABLE>
You should rely only on the information contained in this document. We have
not authorized anyone to provide you with information that is different. This
document may only be used where it is legal to sell these securities. The
information in this document may only be accurate on the date of this document.
Until ____________________, 2000 (25 days after the date of this
prospectus), all dealers that buy, sell or trade our common stock, whether or
not participating in this offering, may be required to deliver a prospectus.
This delivery requirement is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriter with respect to their unsold allotments or
subscriptions.
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and may not contain all of the information that you
should consider before investing in our common stock. You should read the entire
prospectus carefully, including the more detailed information and the financial
statements and the notes relating to those statements appearing elsewhere in
this prospectus.
CATALOG.COM, INC.
Our Business
Catalog.com, Inc., located on the Web at www.catalog.com, provides a
comprehensive suite of Web site hosting services for businesses and
organizations worldwide who want to outsource all or a portion of the
establishment and maintenance of their Internet Web sites. These services
include:
<TABLE>
<S> <C>
o Registration services for .com, .net and .org domain names that are
accredited by the Internet Corporation for Assigned Names and Numbers;
o Web site design and creation;
o Web site hosting and maintenance;
o Creation and hosting of catalog and auction sites using our proprietary Web-based electronic commerce
application;
o Integration of our customers' Web sites with their back-office computer
systems; and o Providing Internet access services.
</TABLE>
A representative customer for all of our services listed above is
Dollar Rent A Car Systems, Inc. located on the Web at www.dollar.com. We
register Dollar Rent A Car's new domain names, design and develop their Web
sites, host their Web sites in our data centers, maintain their supplier catalog
applications, work in tandem with the Dollar Rent A Car information technology
employees to integrate their Web sites with their back-office systems, and
provide Internet connection services through our network.
We specialize in helping companies develop business-to-business,
business-to-government and business-to-consumer marketplaces utilizing our
proprietary Web-based electronic commerce software system. This system allows us
to combine the catalog and auction items of multiple companies into specialized
vertical marketplaces for a specific industry or specific purchasing groups. Our
creative consulting services and proprietary software help businesses develop
marketplaces that specifically serve a particular industry or government
segment.
A representative marketplace utilizing our electronic commerce software
is a business-to-municipal government marketplace sponsored by The Innovation
Groups, Inc., a not for profit organization that has 450 municipal governments
as members. We sell our catalog application and Web hosting services to the
suppliers of these municipal governments. We then allow municipal governments to
access these suppliers' catalogs in a single marketplace.
As of July 15, 2000, we had over 7,500 customers and hosted over 5,000
Web sites for customers in all 50 states and over 50 foreign countries. We have
over 850 resellers and a distributor in Japan who resells our Web site hosting
services to over 500 Japanese companies.
Corporate Information
We incorporated in Oklahoma in February 1996 under the name Ethos
Communications Corp. and changed our name to Catalog.com, Inc., in April 1999.
Our executive offices are located at 14000 Quail Springs Parkway, Suite 3600,
Oklahoma City, Oklahoma 73134, telephone (405) 753-9300.
4
<PAGE>
THE OFFERING
Common Stock Offered........................1,000,000 shares
Common Stock Outstanding
Prior to this Offering.............4,192,530 shares
After this Offering................5,192,530 shares
Use of Proceeds............................We plan to use the proceeds from this
offering for capital expenditures
(primarily to purchase computer
servers and other hardware and to
build-out new and existing data
centers), to repay an existing loan,
to expand our sales staff and
increase advertising, and for
general corporate purposes,
principally working capital and
strategic acquisitions.
Proposed AMEX Symbol........................"CLG"
....Unless otherwise indicated, all of the information in this
prospectus is based on the following assumptions:
.........The 4,192,530 shares outstanding prior to this offering include (i)
the 3,398,332 shares outstanding at July 15, 2000 after giving effect to our
2-for-1 stock split; and (ii) the issuance of 794,198 shares of common stock
upon the conversion of all of our outstanding Series B preferred stock, both of
which will occur at the completion of this offering.
.........The 5,192,530 shares that will be outstanding after this offering is
based on the 4,192,530 shares outstanding prior to the offering, plus 1,000,000
shares of common stock to be sold by us in this offering.
<TABLE>
<S> <C>
.........The number of shares of common stock that will be outstanding after this offering does not include:
o 350,000 shares of common stock issuable upon the exercise of currently
outstanding stock options with a weighted average exercise price of
$3.55 per share;
o 145,752 shares of common stock issuable upon the exercise of
currently outstanding warrants with a weighted average exercise
price of $4.50 per share;
o 150,000 shares of common stock issuable pursuant to the underwriters' over-allotment option; and
o 100,000 shares of common stock issuable upon conversion of the warrants to be issued to the
representatives of the underwriters.
</TABLE>
THE INFORMATION ON OUR WEB SITE IS NOT PART OF THIS PROSPECTUS.
5
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
(in thousands, except share and per share data)
The following selected financial data should be read in conjunction with
our financial statements and the accompanying notes appearing elsewhere in this
prospectus. You should also read "Management's Discussion and Analysis of
Financial Condition and Results of Operations," contained later in this
prospectus. The Statements of Operations Data for the years ended December 31,
1998 and 1999 and the Balance Sheet Data as of December 31, 1998 and 1999 are
derived from the financial statements of Catalog.com that have been audited by
Arthur Andersen LLP, independent public accountants. The financial data for the
six-month periods ended June 30, 1999 and 2000 are derived from Catalog.'com's
internally-prepared financial statements and are unaudited. In management's
opinion, the unaudited financial statements include all adjustments which
Catalog.com considers necessary for a fair presentation of its financial
position and the results of its operations for these periods. The results of
operations for the six months ended June 30, 2000 are not necessarily indicative
of the results of operations to be expected for the full year.
<TABLE>
<CAPTION>
Year ended December 31, Six Months ended June 30 ,
---------------------- ---------------------------
1998 1999 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
(unaudited) (unaudited)
Statement of Operations Data:
Revenues $1,913 $2,838 $1,283 $1,820
Operating Costs and Expenses 1,872 3,769 1,457 2,326
------- ------ -------
Operating income (loss) 41 (931) (174) (506)
OTHER INCOME (EXPENSES)
Interest expense (86) (132) (73) (43)
Interest and other income 5 47 6 (39)
------- ------ ------- ------
Net income (loss) (40) (1,016) (241) (510)
Dividends on preferred stock (25) (85) (31) (31)
-------- ------- -------- ------
Net income (loss) applicable
to common stockholders $ (65) $(1,101) $ (272) $(541)
======== ======== ======== ======
Net income (loss) applicable to common stockholders per common share:
Basic $(0.02) $(0.37) $(0.10) $(0.16)
======= ======= ======= =======
Diluted $(0.02) $(0.37) $(0.10) $(0.16)
======= ======= ======= =======
Weighted average common shares outstanding:
Basic 3,424,974 2,970,890 2,637,134 3,395,777
========= =========
Diluted 3,424,974 2,970,890 2,637,134 3,395,777
========= =========
December 31, June 30, 2000
----------------------- --------------------------
1998 1999 Actual Pro Forma
---- ---- ------ ---------
Balance Sheet Data:
Cash $103 $1,651 $868 $ 9,579(1)
Working capital (deficit) (542) 1,086 253 9,111(2)
Total assets 1,809 3,906 3,421 11,676(3)
Notes payable and capital
lease obligations 1,488 816 699 10(4)
Total 'stockholders' equity
(deficit) (478) (972) (1,458) 11,059(5)
</TABLE>
------------------
(1) Reflects remaining proceeds at an initial public offering price of $11.00
per share, of approximately $8,712,000 after deducting offering costs of
approximately $1,600,000 and repayment of outstanding debt of
approximately $688,000.
(2) Reflects remaining proceeds of $8,712,000 and reduction of the current
portion of long-term debt of approximately $146,000.
(3) Reflects remaining proceeds of $8,712,000 less the elimination of other
assets of $261,000 previously capitalized relating to issuance costs on
the Series B preferred stock converted at the closing of this offering and
the elimination of $196,000 of deferred cost directly related to this
initial public offering.
(4) Reflects repayment of approximately $688,000 of outstanding debt.
(5) Reflects total proceeds of $11,000,000, at an initial public offering
price of $11.00, less offering costs of $1,600,000, repayment of
outstanding debt of $688,000 and elimination of $261,000 of Series B
preferred stock issuance costs and elimination of $196,000 of initial
public offering cost.
6
<PAGE>
RISK FACTORS
You should carefully consider the following risks before buying shares
of our common stock. If any of these risks actually materializes, our business,
financial condition or results of operations would likely suffer. In such event,
the trading price of our common stock could decline and you could lose all or
part of your investment.
Our business and prospects are difficult to evaluate because we only began
operations in 1995 and our business model is still evolving. We may not achieve
a significant rate of revenue growth and may not achieve or sustain
profitability, in which case we may not be able to raise additional capital and
our stock price may drop.
We began operations in 1995 as Dallas Internet, and have a limited
operating history. Accordingly, our business model is still evolving. The rapid
pace of change in the Internet industry requires us to continually anticipate
what customers want. The short market life of most Internet services requires
that we spend money on new products often before we have achieved sufficient
return on earlier products. Our limited operating history makes it difficult for
us to predict our future results and to evaluate the execution of our current
business model. Our ability to execute our plans and prospects must be
considered in light of the risks, expenses and difficulties encountered by
companies in the new and rapidly evolving Web site hosting and applications
hosting services markets, including:
o Undercapitalization;
o Cash shortages;
o The unproven nature of our business plan;
o The new and unproven nature of the market for our services;
o The need to make significant expenditures and incur significant expenses to
develop our business;
o Difficulties in managing growth; and
o Limited experience in providing some of the services we offer or plan to offer
If we are not successful in addressing these risks, we may not achieve a
significant rate of revenue growth and may not achieve or sustain profitability
in future quarterly or annual periods. Our failure to achieve profitability may
cause the price of our common stock to drop and limit our ability to raise
additional capital.
We had operating losses of approximately $1 million for the year ended December
31, 1999 and our accumulated deficit was $2.1 million as of that date. We expect
these losses to continue in the foreseeable future primarily because of
increased spending for marketing and corporate infrastructure planned for the
next several quarters.
We experienced operating losses in each year since we began operations.
As of December 31, 1999, we had an accumulated retained deficit of approximately
$2.1 million and a net loss of approximately $1.0 million for the year ended
December 31, 1999. We expect expense levels to increase in the next several
quarters, primarily as a result of increased marketing and expansion of our
corporate infrastructure. We plan to apply the proceeds from this offering to
pay for our capital expenditures, repay an existing loan, increase advertising
and expand our sales staff, and to fund ongoing losses.
We cannot be sure that we will ever become or remain profitable or that we will
generate positive cash flows from operations in the future. Our failure to
significantly increase our revenue would seriously harm our business and
operating results. If our revenue grows more slowly than we anticipate or if our
operating expenses increase more than we expect or cannot be reduced in the
event of lower revenue, we may not become profitable. Our failure to achieve
profitability may cause the price of our common stock to drop and limit our
ability to raise additional capital.
7
<PAGE>
Our quarterly and annual results may fluctuate which could adversely affect the
trading price of our common stock.
As our business develops and expands, we may experience significant
annual or quarterly fluctuations in our results of operations. We expect to
continue to experience significant fluctuations in our quarterly and annual
results of operations due to a variety of factors, many of which are outside our
control. These factors include:
o demand for and market acceptance of our services;
o introduction of products or services or enhancements by us and our
competitors;
o the mix of services we sell; o customer retention;
o the timing and success of our advertising and marketing efforts and service
introductions;
o the timing and magnitude of capital expenditures, including construction
costs relating to the expansion of operations;
o increased competition in the Web site hosting and applications hosting
markets;
o changes in our pricing policies and the pricing policies of our
competitors;
o gains or losses of key strategic relationships;
o regulatory changes;
o technological innovations; and o other general and industry-specific
economic factors.
In addition, a relatively large portion of our expenses are fixed in
the short-term, and therefore our results of operations are particularly
sensitive to fluctuations in revenues. Also, if we were unable to continue using
third-party products in our services offerings, our service development costs
could increase significantly.
Due to the above factors, we believe that comparing our operating
results from one quarter to the next may not be a good indicator of our future
performance. It is likely that many investors and securities analysts will make
investment decisions with regard to our common stock based on our quarterly
results. In some future quarters our operating results may be below the
expectations of investors and security analysts, if any follow our stock. In
this event, the price of our common stock will fall.
Our ability to increase operations and become profitable may be limited if the
Internet infrastructure does not continue to expand or if businesses or
consumers do not continue to use the Internet to purchase and sell goods and
services.
Our business and financial results depend on continued growth in the
use of the Internet by merchants for the sale of goods and services, and by
consumers for the purchase of goods and services. We cannot be certain that this
growth will continue or that it will continue in its present form. If Internet
usage declines or evolves away from the use of electronic catalogs or Web site
hosting, demand for our products and services will decline and our business will
suffer.
We may not be successful in protecting our intellectual property rights,
including the Catalog.com name, against claims by third parties, which could
harm our competitive position.
We rely on a combination of trademark, copyright and trade secret laws,
as well as technical measures to establish and protect our proprietary
technology, process and other intellectual property to the extent that such
protection is sought or secured at all. The Catalog.com service mark is
registered in the U.S. We cannot be sure that the steps we have taken to protect
our intellectual property rights will be adequate, or that we will be able to
protect our service marks or trademarks. We believe our future growth, if any,
will depend on our ability to continue to protect the intellectual property
rights associated with our business. Our inability to adequately protect the
name Catalog.com could cause us to lose customers or could make it more
difficult for Internet users to locate our Web site, which could harm our sales.
<PAGE>
If our competitors or others adopt product or service names similar to
Catalog.com or our other service marks or trademarks, it could impede our
ability to build brand identity and possibly leadto customer confusion. We may
in the future initiate claims or litigation against third parties for
infringement or misappropriation of our intellectual property rights, or to
determine the scope and validity of our proprietary rights or the proprietary
rights of competitors. Such claims could be costly and time consuming to
litigate, may distract management from the other tasks of operating the
business, and may result in our loss of significant rights and the loss of our
ability to operate our business.
In addition, we also rely on a variety of technologies we license from
third parties, including our database and Internet server software, which we use
in our Web site to perform key functions. We cannot assure you that these
third-party technology licenses will continue to be available to us on
commercially reasonable terms. Our loss or inability to maintain or obtain
upgrades to any of these technology licenses could result in delays in
completing our proprietary software enhancements and new developments until
equivalent technology could be identified, licensed or developed and integrated.
Any such delays would have a material adverse affect on our business, results of
operations and financial condition.
If we are not successful in developing new products and services that keep pace
with technology, our business will suffer.
To remain competitive, we must continue to enhance and improve our Web
hosting and electronic commerce software, systems and technology and the
underlying network infrastructure. The Internet and the electronic commerce
industry are characterized by rapid technological change, changes in user and
customer requirements and preferences, frequent new products and service
introductions embodying new technologies and new industry standards and
practices that could render our existing technology obsolete. Our success will
depend, in part, on our ability to 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 customers,
and respond to technological advances and emerging industry standards and
practices on a cost-effective and timely basis. If competitors introduce
products, services or technologies that gain greater market acceptance than our
products and services, or if new industry standards emerge which we do not adopt
in a timely manner, we could lose customers.
In developing our services we must make assumptions about the standards
that our customers, their customers and our competitors may adopt. If the
standards adopted are different from those that we may now or in the future
promote or support, or if we are unable for technical, legal, financial or other
reasons to adapt in a timely manner to changing market conditions, market
acceptance of our services may be significantly reduced or delayed and our
business may be seriously harmed.
Our network infrastructure depends on telecommunications network capacity and
pricing. Our operations will suffer and our financial condition will be harmed
if we are unable to obtain adequate Internet capacity (also known as
"bandwidth") from third-party suppliers at competitive prices.
Our success will depend upon the capacity (or bandwidth), scalability,
reliability and security of our network infrastructure, including the capacity
we lease from third-party telecommunications network suppliers. Our operating
results depend, in part, upon the pricing and availability of telecommunications
network capacity from a limited number of providers in a market. If we are not
able to maintain or increase our Internet bandwidth capacity as our customers'
usage increases, our customers will experience slow response time and may leave
us for our competitors who have better network capacity. In addition, our
business would suffer if our network suppliers increased the prices for their
services and we were unable to pass along any increased costs to our customers'.
Any failure on our part or the part of our third-party suppliers to achieve or
maintain high data transmission capacity, reliability or performance could
significantly reduce the demand for our services which would damage our
business.
<PAGE>
Our business will suffer if our third-party suppliers do not provide us with key
components of our network infrastructure on reasonable terms or at all.
We depend on other companies to supply key components of our network
infrastructure, principally Internet routers, computer servers and network
switching equipment. Any failure to obtain needed products or services in a
timely fashion or at an acceptable cost could adversely affect our business. In
the past we have experienced delays in adding capacity and this affects our
ability to sign up customers primarily due to the degradation of the speed of
our computer servers which host the Web sites for our customers. If our server
speed is slow, customers will leave and new customers may choose to obtain
services from our competitors.
We have no guaranteed supply arrangements with our vendors and do not carry
significant inventories. We cannot assure you that we will have the necessary
hardware or parts on hand or that our suppliers will be able to procure them in
a timely manner to deliver advanced hosting services. We have also experienced
delays in obtaining routers and network equipment which has affected our ability
to sell dedicated hosting services.
Our inability or failure to obtain the necessary hardware or parts on a
timely basis could result in sustained equipment failure and a loss of revenue
due to customer loss or claims for service credits under our service level
guarantees. In addition, the inability to obtain equipment or technical services
on terms acceptable to us would force us to spend time and money selecting and
obtaining new equipment, training our personnel to use different equipment and
deploying alternative components needed to integrate the new equipment, with the
result that our business could be adversely affected.
Our services must be compatible with products offered by our customers or we
could lose customers to competitors with more compatible services.
We believe that our ability to compete successfully also depends upon the
continued compatibility and interoperability of our proprietary electronic
commerce software services with products offered by various vendors and with the
back office systems of our customers. Enhanced or newly-developed third-party
products may not be compatible with our software, and our products may not
adequately address the needs of our customers. Although we currently intend to
support emerging standards, if industry standards are not established, or if we
are not able to conform to these new standards in a timely fashion, we will lose
customers.
Our rapid growth is placing a significant strain on our resources, and our
business will suffer if we fail to manage this growth properly.
We have grown rapidly by hiring new employees and by expanding our
offering of services. Our total number of employees grew from 13 in March 1999
to 30 in July 2000, and several members of our management team have only
recently joined us. This growth, and our anticipated future growth in
operations, has placed and will continue to place a significant strain on our
management, systems and resources.
We expect to add additional key managerial and operating personnel in
the near future. To manage the expected growth of our operations and personnel,
we will be required to:
o Improve our financial and managerial controls, reporting systems and
procedures;
o Hire, train, retain, motivate and manage required personnel,
including senior management level personnel to fulfill our current
or future needs;
o Identify, manage and exploit existing and potential strategic relationships
and market opportunities; or
o Effectively manage and multiply relationships
with our customers, their customers, suppliers and other third parties.
If we are not able to manage our anticipated growth we may not be able
to execute on our business plan, which would curtail our growth and harm our
results of operations and financial condition.
Security breaches could harm our business, damage our reputation and expose us
to potential legal liabilities.
If hackers break into our servers they can delete files and remove
customer data. Although we maintain backup data, it may take us several days to
restore our customers Web sites and they may lose confidence in our services
and move to a competitor.
<PAGE>
Currently, a significant number of our customers' customers authorize us to
bill their credit cards to buy products and services. For Internet sales we rely
on encryption and authentication technology licensed from third parties to
protect the confidentiality of such information. Advances in computer
capabilities, new discoveries in the field of cryptography or other developments
may result in a compromise or breach of the technology used by us to protect
customer transaction data. A hacker who is able to circumvent our security
measures could misappropriate proprietary information or cause interruptions in
our operations. Our security measures may not prevent security breaches. Our
failure to prevent security breaches could harm our business, damage our
reputation and expose us to a risk of loss or litigation and possible liability
to our customers or to their customers whose credit card information is stolen.
Furthermore, despite the implementation of network security measures
our infrastructure is potentially vulnerable to computer break-ins and similar
disruptive problems caused by our customers or others. Computer viruses,
break-ins or other security problems could lead to misappropriation of
proprietary information and interruptions, delays or cessation in service to our
customers. Any computer break-in could affect consumer confidence in the
security of Catalog.com and could seriously damage our business. Moreover, until
more comprehensive security technologies are developed, the security and privacy
concerns of existing and potential customers may hinder the growth of the
Internet as a mass-market medium for the purchase and sale of goods and
services.
If our network system fails and our customers are not able to operate using our
services, our reputation could be damaged and we could lose existing customers
and be unable to attract new customers.
We must be able to operate our network around the clock without
interruption. Our operations, and the operations of our customers whose Web
sites are hosted on our system, depend upon our ability to protect our network
infrastructure, facilities, equipment and customer files against damage from
human error, fire, earthquakes, hurricanes, floods, power loss,
telecommunications failures, sabotage, intentional acts of vandalism and similar
events.
Despite precautions we have taken, and plan to take, we do not have a
formal disaster recovery plan and the occurrence of a disaster or other
unanticipated problems at our data centers could result in interruptions in our
services. Although we have attempted to provide backup systems, our network is
currently subject to various points of failure, and a problem with one of our
routers or switches could cause an interruption in our services to a portion of
our customers.
In the past we have experienced periodic interruptions in service
caused by equipment failures and network problems experienced by our third-party
telecommunications providers. In addition, failure of any of our
telecommunications providers to provide the data communications capacity we
require, as a result of human error, a natural disaster or other operational
disruption, could result in interruptions in our services. Any future
interruptions could:
o cause customers or end users to seek damages for losses incurred;
o require us to replace existing equipment or add redundant facilities;
o damage our reputation for reliable service;
o cause existing customers to cancel their contracts and move their business
to one of our competitors;
or
o make it more difficult for us to attract new customers.
Any of these results could damage our business.
If the regulation of domain names changes we may not be able to protect our
domain names, which could cause us to lose our competitive position and could
harm our financial condition.
<PAGE>
We hold rights to various Internet domain names, including
"catalog.com," "oklahoma.net," "mycatalog.com," "enotify.com" and "dallas.net."
Regulation of domain names is expected to change in the near future.
Furthermore, regulations governing domain names may not protect our trademarks
and similar proprietary rights. Other parties have domain names similar to ours,
and we may be unable to prevent third parties from acquiring additional domain
names that are similar to ours or that infringe upon or diminish the value of
our trademarks and other proprietary rights.
The Internet is subject to legal uncertainties and potential governmental
regulation that could cause us to incur significant costs or limit our ability
to continue to operate our business.
The application of existing laws to the Internet, particularly with
respect to property ownership, the payment of sales taxes, libel and personal
privacy, is uncertain and may take years to resolve. Because the Internet and
electronic commerce are becoming increasingly popular, various governments may
seek to adopt laws and regulations to control their use. These laws and
regulations could apply to privacy, pricing and the characteristics and quality
of products and services. The growth and development of electronic commerce may
also prompt calls for more stringent consumer protection laws. These laws may
impose additional burdens on companies conducting business over the Internet.
The adoption of any of these laws or regulations may reduce Internet usage,
which, in turn, could decrease the demand for our products or increase our
costs.
Due to the increasing use of the Internet and the burden it has placed
on the telecommunications infrastructure, domestic telephone carriers have
requested the Federal Communications Commission to regulate Internet service
providers and online service providers and impose access fees on those
providers. If the FCC grants these requests, the costs of communicating on the
Internet could increase substantially which could reduce Internet usage. Any
such request granted by the FCC could harm our business. In addition, U.S. and
foreign laws regulate our ability to use customer information and to develop,
buy and sell mailing lists. New restrictions in this area could limit our
ability to operate as planned and result in significant compliance costs.
The Web site hosting and Internet services markets are highly competitive, and
we may not be able to achieve increased operating margins or gain market share.
The Web site hosting and Internet services markets are new, rapidly
evolving and intensely competitive. We expect competition to intensify in the
future, particularly in the area of electronic sales to consumers. We currently
or potentially compete with a variety of companies. These competitors include:
o a significant number of Web site hosting service providers,
applications hosting providers, Internet service providers,
telecommunications companies, large information technology outsourcing
firms, and computer hardware suppliers;
o other companies with substantial customer bases in the computer and other
technical fields; and
o a number of companies that offer Web site hosting and Internet services to
consumers at no cost.
Our competitors may operate in one or more of these areas and include
companies such as AT&T Corp., Concentric Network Corporation, Interland, Inc.,
Data Return Corp., Dell Computer Corporation, Digex Corporation, EarthLink,
Inc., Exodus Communications, Inc., Gateway, Inc., Globix Corporation and
Navisite, Inc.
We cannot assure you that the types of companies listed above, and
others, will not compete directly with us by adopting a similar business model
or developing electronic commerce systems or acquiring such systems from other
service providers.
Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition and significantly
greater financial, marketing and other resources than we have. In addition,
larger, well-established and well-financed entities may acquire, invest in or
form joint ventures with online competitors as the use of the Internet and other
online services increases. New technologies and the expansion of existing
technologies could also increase competitive pressures. Increased competition
may result in reduced operating margins for us, as well as a loss of market
share. Further, as a strategic response to changes in the competitive
environment, we may from time-to-time make certain pricing, service or marketing
decisions or acquisitions that could have a material adverse effect on our
business, financial condition and results of operations. If we cannot compete
successfully against current and future competitors our business, financial
condition and results of operations will suffer.
If we lose our key employees or are unable to hire and retain qualified
employees our revenues and profits will not grow as expected.
Our business and financial results depend in part on the continued service
of our key personnel, especially Robert W. Crull, our President and Chief
Executive Officer, who is not a party to an employment agreement. We currently
carry key person life insurance on Mr. Crull in the amount of $1.3 million and
we are the beneficiary of this policy. The loss of the services of any of our
executive officers or the loss of the services of other key employees could harm
our business and financial results. Our business and financial results also
depend in part on our ability to attract, retain and motivate other highly
skilled employees. Competition for employees in our industry is intense, and we
have at times experienced difficulty in hiring and retaining highly skilled
employees with appropriate qualifications. We may not be able to retain our key
employees or attract, assimilate and retain other highly qualified management,
technical, sales and marketing personnel in the future, which could slow the
growth of our business or otherwise adversely affect our operations.
If we need additional capital in the future to operate our business and are not
able to secure funding on acceptable terms or at all, we may not be able to
continue to operate our business.
We require substantial working capital to fund our business and expect
to use a significant portion of the net proceeds of this offering to fund our
expected continuing operating losses. We currently believe that our existing
capital resources, combined with the net proceeds of this offering, will be
sufficient to meet our presently anticipated cash requirements for at least the
next 18-24 months. We may need to raise additional funds in the future to fund
our operations, to enhance and/or expand the range of services we offer or to
respond to competitive pressures and/or perceived opportunities. If additional
funds are raised through the issuance of equity securities, investors may
experience significant dilution. We cannot be sure that additional financing
will be available when needed or that, if available, such financing will be
available on terms acceptable to us and our shareholders. If such financing is
not available when required or is not available on acceptable terms, we may be
unable to expand our sales and marketing organization, develop new products and
product enhancements, take advantage of business opportunities or respond to
competitive pressures, any of which could slow the growth of our business,
prevent us from realizing anticipated revenues from our operations, or cause us
to cease doing business.
After the offering, directors, officers and their affiliates will
beneficially own 59.1% of our common stock and may control matters requiring
shareholder approval.
After this offering, our directors and their affiliates will
beneficially own, in the aggregate, 59.1% of our common stock assuming that (i)
none of such individuals or entities purchase shares of common stock in this
offering; and (ii) none of the outstanding options and warrants to purchase
595,752 shares of common stock are exercised (including the warrants to be
issued to representatives of the underwriters in this offering). Accordingly,
these shareholders will have the ability to control all matters requiring
shareholder approval, including the election of directors and approval of
significant corporate transactions, such as a sale of our business or assets.
This concentration of ownership may also delay, defer or prevent a change in our
control and may make some transactions more difficult or impossible to complete
without the support of these shareholders.
Burdensome government regulations affecting the Internet industry, if adopted,
could decrease our revenues and increase our costs.
As a provider of Internet access and related services, we are not
currently subject to direct regulation by the Federal Communications Commission.
However, several telecommunications carriers are seeking to have communications
over the Internet regulated by the FCC in the same manner as other more
traditional telecommunications services. Local telephone carriers have also
petitioned the FCC to regulate Internet access providers in a manner similar to
long distance telephone carriers and to impose access fees on such providers. In
addition, we operate our services throughout the U.S., and we cannot assure you
that regulatory authorities at the state level will not seek to regulate aspects
of our activities as telecommunications services. As a result, we could become
subject to FCC and state regulation as Internet services and telecommunications
services converge. Changes in the regulatory environment could decrease our
revenues and increase our costs.
We remain subject to numerous additional laws and regulations that
could affect our business. Because of the Internet's popularity and increasing
use, new laws and regulations with respect to the Internet are becoming more
prevalent. Such laws and regulations have covered, or may cover in the future,
issues such as:
o user privacy;
o pricing;
o intellectual property;
o federal, state and local taxation;
o distribution; and
o characteristics and quality of products and services.
<PAGE>
Legislation in these areas could dampen the growth in use of the
Internet generally and decrease the acceptance of the Internet as a
communications and commercial medium. It may take years to determine how
existing laws such as those governing intellectual property, privacy, libel and
taxation apply to the Internet. Any new legislation or regulation regarding the
Internet, or the application of existing laws and regulations to the Internet,
could harm us. Additionally, while we do not currently have operations outside
of the U.S., the international regulatory environment relating to the Internet
market could have an adverse effect on our business, especially if we should
expand operations internationally.
The growth of the Internet, coupled with publicity regarding Internet
fraud, may also lead to the enactment of more stringent consumer protection
laws. For example, numerous bills have been presented to Congress and various
state legislatures designed to address the prevalence of bulk email, commonly
called "spam", on the Internet. These laws may impose additional burdens on our
business. The enactment of any additional laws or regulations in this area may
impede the growth of the Internet, which could decrease our potential revenues
or otherwise cause our business to suffer.
If we experience problems related to the reliability and quality of our services
or delays in the introduction of new versions of, or enhancements to, our
services, we could experience increased subscriber cancellations, adverse
publicity and reduced sales of advertising and products.
Our services are very complex and are likely to contain a number of
undetected errors and defects, especially when new features or enhancements are
first released. For example, we are enhancing our electronic commerce software
and integrating it with our eNotify product. If these new features have material
errors or defects,the performance of such services could fail or be undesirable
to customers. In addition, we could incur ongoing redevelopment and maintenance
costs. Such costs, delays or dissatisfaction could negatively affect our
business.
Disruption of our services caused by unknown software defects could harm our
business and reputation.
Our service offerings depend on complex software, including our
proprietary software tools and software licensed from third parties. Complex
software often contains defects, particularly when first introduced or when new
versions are released. We may not discover software defects that affect our new
or current services or enhancements until after they are deployed. Although we
have not experienced any material software defects to date, it is possible that
defects may occur in the software. These defects could cause service
interruptions, which could damage our reputation or increase our service costs,
cause us to lose revenue, delay market acceptance or divert our development
resources.
Providing services to customers with critical Web sites and Web-based
applications could potentially expose us to lawsuits for customers' lost
profits or other damages.
Because our Web site hosting and applications hosting services are
critical to many of our customers' businesses, any significant interruption in
our services could result in lost profits or other indirect or consequential
damages to our customers. Although the standard terms and conditions of our
customer contracts disclaim our liability for any such damages, a customer could
still bring a lawsuit against us claiming lost profits or other consequential
damages as the result of a service interruption or other Web site or application
problems that the customer may ascribe to us. There can be no assurance a court
would enforce any limitations on our liability, and the outcome of any lawsuit
would depend on the specific facts of the case and legal and policy
considerations. We also believe we would have meritorious defenses to any such
claims, but there can be no assurance we would prevail. In such cases, we could
be liable for substantial damage awards. Such damage awards might exceed our
liability insurance by unknown but significant amounts, which would seriously
harm our business.
We may be accused of infringing the proprietary rights of others, which could
subject us to costly and time-consuming litigation.
In addition to the technologies we develop or have developed, we
license a variety of technologies from third parties and may license additional
technologies in the future. To date, we have not been notified that our services
infringe on the proprietary rights of any third parties, but third parties could
claim infringement by us with respect to current or future services. We expect
that participants in our markets will be increasingly subject to infringement
claims as the number of services and competitors in our industry segment grows.
Any such claim, whether meritorious or not, could be time-consuming, result in
costly litigation, cause service installation delays or require us to enter into
royalty or licensing agreements. These royalty or licensing agreements might not
be available on terms acceptable to us or at all. As a result, any such claim
could have a material adverse effect upon our business,
<PAGE>
results of operations and financial condition. In addition, third parties may
change the terms of their license agreements in ways that would prevent us from
using technologies licensed from them on commercially reasonable terms or that
would prevent us from using them at all. We may not be able to replace those
technologies with technologies that have the same features or functionality on
commercially reasonable terms or at all.
We could face liability for information disseminated through our network.
The law relating to the liability of online services companies for
information carried on or disseminated through their networks is currently
unsettled. Claims could be made against online services companies under both
U.S. and foreign law for defamation, negligence or copyright or trademark
infringement, or other theories based on the nature and content of the materials
disseminated through their networks. Several private lawsuits seeking to impose
such liability upon other entities are currently pending against other
companies. In addition, legislation has been proposed that imposes liability for
or prohibits the transmission of some types of information over the Internet.
Other countries may also enact legislation or take action that could impose
liability on us or cause us not to be able to operate in those countries. The
imposition upon us and other online services of potential liability for
information carried on or disseminated through our systems could require us to
implement measures to reduce our exposure to such liability, which may require
us to expend substantial resources, or to discontinue service offerings that
could expose us to such liability. The increased attention focused upon
liability issues as a result of these lawsuits and legislative proposals also
could affect the growth of Internet use.
Future sales of our common stock may depress our stock price.
If our shareholders sell substantial amounts of our common stock
(including shares issued upon the exercise of outstanding options) in the public
market following the offering, the market price of our common stock could fall.
Such sales also might make it more difficult for us to sell equity securities in
the future at a time and price that we deem appropriate. After the offering, we
will have 5,192,530 shares of common stock outstanding. Of these shares, the
1,000,000 shares being offered hereby may be freely traded. This leaves
4,192,530 shares eligible for sale in the public market as follows:
<TABLE>
<S> <C> <C>
Number of Shares Date of Availability for Public Sale
---------------- ------------------------------------
148,625 90 days after closing this offering
825,808 Upon expiration of the lock-up period
3,218,097 At various times after expiration of the lock-up period
</TABLE>
Our directors and officers and some of our shareholders who will own a
total of 3,819,496 shares of our common stock after the offering, have agreed,
subject to specified exceptions, that they will not sell, directly or
indirectly, any common stock without the prior written consent of Institutional
Equity Corporation for a period of 180 days from the date of this prospectus.
The above table assumes the effectiveness of such lock-up arrangements.
In addition, we intend to register for resale the 529,500 shares of
common stock reserved for issuance under the 1997 and 1999 Stock Option Plans.
We expect such registration to become effective immediately upon filing. As of
the date of this prospectus, options to purchase a total of 350,000 shares of
common stock are outstanding, of which options to purchase 96,750 shares will be
immediately exercisable upon the closing of this offering. Upon exercise, these
shares and shares subject to options granted after the date hereof will be
covered by that registration and will be eligible for resale in the public
market from time to time subject to vesting and the expiration of lock-up
agreements. These stock options have a weighted average exercise price of $3.55,
which is significantly below the assumed initial public offering of our common
stock. If the holders of these options exercise them and sell a significant
number of these shares the price of our common stock could decline.
The holders of 794,198 shares of common stock have the right, subject to
conditions, to include their shares in registration statements relating to our
securities. By exercising their registration rights and causing a large number
of shares to be registered and sold in the public market, these holders may
cause the price of the common stock to fall. In addition, any demand to include
such shares in our registration statements could impede our ability to raise
needed capital.
<PAGE>
We anticipate that our stock price will be highly volatile, and this volatility
may subject us to securities class action litigation.
Prior to the offering, there has been no public market for our common
stock. We cannot predict the extent to which investor interest in Catalog.com
will lead to the development of an active trading market or how liquid that
market might become. The market price of the common stock may decline below the
initial public offering price. The initial public offering price for the shares
will be determined by negotiations between us and the underwriters'
representatives and may not be indicative of prices that will prevail in the
trading market. The stock market has experienced extreme price and volume
fluctuations. The market prices of the securities of Internet-related companies
have been especially volatile. In the past, companies that have experienced
volatility in the market price of their stock have been the object of securities
class action litigation. If we were the object of securities class action
litigation, it could result in substantial costs and a diversion of our
management's attention and resources.
We will have broad discretion in using a substantial portion of the offering
proceeds and how we invest these proceeds may not yield a favorable return.
Our management can spend the proceeds from this offering in ways with
which the shareholders may not agree. Approximately one-third of the net
proceeds of this offering are not allocated for specific uses other than working
capital and general corporate purposes, which gives management broad discretion
on the use of these proceeds. Any proceeds not immediately spent will be
invested by management and may not yield a favorable return.
Provisions of our certificate of incorporation and bylaws, and our staggered
board of directors, could make it difficult for a third party to acquire control
of the company, even if the change in control would be beneficial to our
shareholders.
We have a staggered board of directors, and our bylaws prevent
shareholders from acting without a meeting and place restrictions on our
shareholders' ability to call a meeting. In addition, provisions of our
certificate of incorporation, our bylaws and Oklahoma law could also make it
more difficult for a third party to acquire us, even if doing so would be
beneficial to our shareholders. These provisions are more specifically described
under the heading "Description of Capital Stock".
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds we receive from the sale of the
1,000,000 shares, assuming an offering price of $11.00 and after deducting the
underwriting discount and offering expenses of approximately $1.6 million, will
be $9.4 million if the underwriters' over-allotment option is not exercised.
We currently intend to use the net proceeds of this offering
approximately as follows:
<TABLE>
<CAPTION>
Approximate
Approximate Percentage of
Use Dollar Amount Net Proceeds
-------------------------------
<S> <C> <C>
Capital expenditures including the purchase
of servers and other hardware, and the build-out
of new and existing data center facilities $ 3,400,000 36.2%
Repayment of outstanding note payable 700,000 7.4%
Expansion of sales and marketing efforts 2,000,000 21.3%
Working capital and general corporate purposes 3,300,000 35.1%
_________________________________
Total $ 9,400,000 100.0%
</TABLE>
We may use some of the proceeds for strategic investments and
acquisitions, although we have no current plans, agreements or commitments with
respect to any acquisition or investments of this type. Our management will have
significant flexibility in applying a substantial portion of the net proceeds of
the offering. Until we use such net proceeds, we intend to invest the net
proceeds in investment-grade interest-bearing instruments.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock.
We currently intend to retain future earnings, if any, to finance the operation
and expansion of our business and do not anticipate paying any cash dividends in
the foreseeable future.
<PAGE>
DILUTION
The difference between the public offering price per share of the
common stock and the as adjusted pro forma net tangible book value per share of
the common stock after this offering constitutes the dilution to investors in
this offering. Net tangible book value per share is determined by dividing the
net tangible book value (total assets less intangible assets and total
liabilities), by the number of outstanding shares of common stock.
The pro forma net tangible book value of our common stock as of June
30, 2000 after giving effect to the conversion of all outstanding preferred
stock into 794,198 shares of common stock, was $448,000, or approximately $.11
per share. Assuming we sell all 1,000,000 shares offered hereby at an assumed
initial public offering price of $11.00 per share, and after deducting
underwriting discounts and estimated offering expenses and applying the
estimated net proceeds therefrom, the pro forma net tangible book value of
Catalog.com as of June 30, 2000 would have been $9,848,000, or $1.90 per share
of common stock. This represents an immediate increase in pro forma net tangible
book value of $1.79 per share to existing shareholders and an immediate dilution
in pro forma net tangible book value of $9.10 per share to new investors. The
following table illustrates this per share dilution to new investors:
<TABLE>
<S> <C> <C>
Initial public offering price per share $11.00
Pro forma net tangible book value per share as of June 30, 2000 $ 0.11
Increase attributable to new investors $ 1.79
-----
Pro forma net tangible book value per share after offering $ 1.90
-----
Dilution in net tangible book value per share to new investors $ 9.10
=====
</TABLE>
This table excludes all options that will remain outstanding on
completion of this offering. At July 15, 2000, there were 350,000 shares of
common stock reserved for issuance upon exercise of outstanding options at a
weighted average exercise price of $3.55 per share. To the extent that these
options are exercised, there will be further dilution to new investors.
The following table sets forth, as of July 15, 2000, the differences
between the total consideration and average price per share paid to us by
officers, directors and affiliates thereof in connection with the purchase of
common stock and the total consideration and the average price per share paid by
the new investors in this offering, before deducting expenses payable by us,
using the estimated public offering price of $11.00 per share.
<TABLE>
<CAPTION>
Average
Shares Purchased Total Consideration Price Per
Number Percent Amount Percent Share
<S> <C> <C> <C> <C> <C>
Officers, directors and
affiliates 3,069,356 75.4% $ 1,294,085 10.5% $ 0.42
New investors 1,000,000 24.6% $ 11,000,000 89.5% 11.00
--------- ----- ------------ -----
Total 4,069,356 100.0% $ 12,294,085 100.0%
========= ====== ============ ======
</TABLE>
If the underwriters' over-allotment option is exercised in full, the
number of shares held by new public investors will be increased to 1,150,000 or
approximately 21.5% of the total number of shares of our common stock
outstanding after this offering.
<PAGE>
CAPITALIZATION
The following table sets forth (1) the actual capitalization of
Catalog.com as of June 30, 2000; and (2) pro forma capitalization of Catalog.com
after giving effect to the sale of the 1,000,000 shares offered pursuant to this
prospectus at an assumed initial public offering price of $11.00 per share,
after deducting the underwriting discounts and estimated offering expenses
payable by us and the application of the net proceeds from the offering.
This information should be read in conjunction with the financial
statements and the notes relating to such statements appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
June 30, 2000
------------------------------
Actual Pro Forma
------- ---------
(in thousands except per share data)
<S> <C> <C>
Cash $ 868 $ 9,579 (1)
======== ========
Notes payable and capital lease obligations $ 698 $ 10 (2)
Series B preferred stock, $.01 par value; 800,000
shares authorized; 794,198 shares issued and
outstanding, actual; no shares issued and
outstanding on a pro forma basis 3,574 -- (3)
'Stockholders' equity (deficit)
Common stock, $.01 par value; 19,000,000
shares authorized; 3,398,332
shares issued and outstanding, actual;
5,192,530 shares issued and
outstanding on a pro forma basis 34 52 (4)
Additional paid-in capital 1,112 13,611 (5)
Retained deficit (2,604) (2,604)
--------- ---------
Total stockholders' equity (deficit) (1,458) 11,059
--------- --------
Total capitalization $ 2,814 $ 11,069
======== ========
</TABLE>
-------------------
(1) Reflects remaining proceeds at an initial public offering price of $11.00
per share, of approximately $8,712,000 after deducting offering costs of
approximately $1,600,000 and repayment of outstanding debt of
approximately $688,000.
(2) Reflects the repayment of approximately $688,000 of outstanding debt.
(3) Reflects conversion of the Series B preferred stock that will occur at
the completion of this offering.
(4) Reflects the issuance of 794,198 of common stock upon conversion of the
Series B preferred stock and the
issuance of the 1,000,000 shares of common stock in this offering.
(5) Reflects the additional paid-in capital on 1,000,000 common shares at an
initial public offering price of $11.00 per common share and the
conversion of the Series B preferred stock with a redemption value of
approximately $3,574,000.
The 5,192,530 shares of common stock issued and outstanding on a pro
forma basis reflect a 2-for-1 split and the issuance of 794,198 shares of
common stock upon conversion of all of our outstanding convertible preferred
stock which will occur at the closing of this offering, but do not include:
o 350,000 shares of common stock issuable upon the exercise of
outstanding stock options with a weighted average exercise price
of $3.55 per share as of July 15, 2000;
o 145,752 shares of common stock issuable upon the exercise of
currently outstanding warrants with a weighted average exercise
price of $4.50 per share;
o 150,000 shares of common stock issuable pursuant to the
over-allotment option; and
o 100,000 shares of common stock issuable upon the exercise
of the 'underwriters' warrants.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This prospectus contains forward-looking statements that involve risks
and uncertainties. We use words such as "believes," "anticipates," "plans,"
"expects," "future," "intends" and similar expressions. This prospectus also
contains forward-looking statements attributed to certain third parties relating
to their estimates regarding the growth of the Internet. Our actual results
could differ materially from those expressed or implied by such forward-looking
statements as a result of certain factors, including the risk factors described
above and elsewhere in this prospectus. We undertake no obligation to update
publicly any forward-looking statements for any reason, even if new information
becomes available or other events occur in the future.
General
We provide a broad range of advanced Web site hosting and Internet
services, including shared Web site hosting and catalog and auction hosting for
small and medium-sized businesses, dedicated hosting services for customers that
require a separate server dedicated specifically for their use,
business-to-business, business-to-government and business-to-consumer electronic
commerce solutions, and Internet access services including dialup and dedicated
access.
Our shared hosting services are available on both the Microsoft NT and
Sun Microsystems Solaris UNIX operating systems and are automated to permit our
customers to register or transfer their domain names and to automatically set up
their Web sites, email, and catalog and auction systems. We also provide
Linux-based dedicated servers to small and medium-sized businesses worldwide,
which permit our customers to establish and maintain their Internet operations
using our servers, data center facilities and technical support. We offer our
dedicated hosting customers a reasonable monthly fee that includes configuration
of the server, installation of the server in our data center facility, and
server maintenance and technical support. We also provide and support dedicated
hosting services based on Sun Microsystems Solaris, Microsoft Windows NT/2000,
and Red Hat Linux operating systems.
In addition, we have developed a proprietary Web-based catalog and
auction software system which allows us to combine catalog and auction items for
multiple vendors into a single shopping or buying directory. This allows us to
develop and host complex business-to-business, business-to-government and
business-to-consumer solutions for customers.
Results of Operations
In the text below, financial statement numbers have been rounded;
however, the percentage changes are based on our actual financial statements.
The following table sets forth percentage of revenue data for the years ended
December 31, 1998 and 1999, and the six-month periods ended June 30, 1999 and
2000.
<TABLE>
<CAPTION>
% of Revenues
Year Ended Six Months Ended
December 31, June 30,
1998 1999 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Communications and operations 31.0 23.8 24.1 21.9
Sales and marketing 7.2 18.6 15.2 17.2
General and administrative 39.3 69.8 55.7 69.2
Depreciation and amortization 20.4 20.6 18.6 19.4
Operating income (loss) 2.1 (32.8) (13.6) (27.7)
Other income (expense):
Interest and other income 0.3 1.7 0.4 2.1
Interest expense (4.5) (4.7) (5.7) (2.3)
Net income (loss) (2.1) (35.8) (18.9) (27.9)
</TABLE>
Six Months Ended June 30, 2000 Compared to the Six Months Ended June 30, 1999
Revenues
Our revenues increased $537,000 to $1,820,000 for the six-month period
ended June 30, 2000 from $1,283,000 for the six-month period ended June 30,
1999. The increase was primarily due to the overall increase in the number of
our customers, the addition of new customers that require more complex hosting
services, and customers generating higher average monthly hosting fees.
Communications and Operations
Our communications and operations costs increased $91,000 to $399,000,
or 21.9% of revenue, during the six-month period ended June 30, 2000 from
$308,000, or 24.1% of revenue, during the six-month period ended June 30, 1999.
The increase in communications and operations costs over the two periods was due
primarily to increases in our bandwidth connectivity to the Internet and
expenses under operating lease facilities on network equipment. Our bandwidth
expenses increased $30,000 to approximately $321,000 for the six-month period
ended June 30, 2000 from $291,000 for the six-month period ended June 30, 1999,
to support our increased business activities. Equipment operating lease expense
increased $34,000 in the six-months ended June 30, 2000 over the same period in
1999, as additional equipment was added to strengthen our infrastructure. We
expect our communications and operations costs to continue to increase in
conjunction with the growth of our business.
Sales and Marketing
Sales and marketing expenses increased $118,000 to $313,000, or 17.2%
of revenues, during the six-month period ended June 30, 2000 from $195,000, or
15.2% of revenues, in the six-month period ended June 30, 1999. The increase was
due primarily to an increase in marketing and sales personnel and related
expenses associated with efforts to increase sales and market exposure. Sales
and marketing personnel and related expenses increased $153,000 to $215,000, or
68.7% of sales and marketing expense, from $62,000 for the six-month period
ended June 30, 1999. We intend to significantly increase our sales and marketing
expenditures during the remainder of fiscal 2000.
General and Administrative
General and administrative expenses increased $545,000 to $1,260,000,
or 69.2% of revenue, during the six-month period ended June 30, 2000 from
$715,000, or 55.7% of revenue, for the six-month period ended June 30, 1999. The
increase is primarily due to increases in expenses related to consulting and
personnel to support our growth and expansion of office facilities to
accommodate our growth. Consulting and personnel related expenses increased
$402,000 to $882,000, or 70.0% of general and administrative expenses, for the
six-month period ended June 30, 2000 from $480,000 for the six-month period
ended June 30, 1999. Expenses related to office facilities increased $78,000 to
$144,000 for the six-month period ended June 30, 2000 from $66,000 for the
six-month period ended June 30, 1999.
Depreciation and Amortization
Depreciation and amortization increased $115,000 to $354,000 for the
six-month period ended June 30, 2000 from $239,000 for the six-month period
ended June 30, 1999. This increase was due primarily to depreciation on
additions to property and equipment purchased to sustain the growth of our
business, and amortization of internal use software and Web site development
costs. Depreciation expense was $89,000 greater in the six-month period ended
June 30, 2000 than in the same period ended June 30, 1999. Amortization expense
was $26,000 greater in the six-month period ended June 30, 2000 than in the same
period ended June 30, 1999.
<PAGE>
Other Income (Expense)
Other income (expense) consists primarily of interest income on our
cash balances and interest expense on our outstanding notes payable and capital
lease obligations. Interest earned on our cash and cash equivalents increased
$33,000 to $39,000 for the six-month period ended June 30, 2000 from $6,000 for
the six-month period ended June 30, 1999. This increase was due primarily to the
closing of a private placement of equity securities in September 1999, which
resulted in larger cash balances available for investment. During the six-month
periods ended June 30, 1999 and 2000, we incurred interest expense in the amount
of $73,000 and $43,000, respectively. This decrease was due to a reduction in
our overall debt levels.
Income Taxes
No provision for federal income taxes has been recorded as we have incurred
net operating losses since inception. As of December 31, 1999, we had
approximately $874,000 of federal net operating loss carryforwards available to
offset future taxable income. These carryforwards begin to expire in 2013. We
have recorded a valuation allowance for all of our net deferred tax assets for
all periods presented due to uncertainty that we will generate sufficient
taxable income during the carryforward period to realize the benefit of our net
deferred tax asset. In addition, after this offering, we may experience a change
in control under Section 382 of the Revenue Code, which would limit our use of
these net operating loss carryforwards.
Net Income (Loss)
Our net loss for the six-month period ended June 30, 2000 was $510,000
compared to a net loss for the six-month period ended June 30, 1999 of $241,000.
Our net loss for the six-month period ended June 30, 2000 was incurred primarily
as a result of a $91,000 increase in communications and operations costs, a
$118,000 increase in sales and marketing expenses, a $545,000 increase in
general and administrative expenses and a $115,000 increase in depreciation and
amortization expense from the six-month period ended June 30, 1999. These
increases were partially offset by an increase in revenue of approximately
$537,000 to $1,820,000 for the six-month period ended June 30, 2000 from
$1,283,000 for the six-month period ended June 30, 1999.
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Revenues
Our revenues for the year ended December 31, 1999 were approximately
$2.8 million compared to $1.9 million for the year ended December 31, 1998. The
increase in our revenues of $900,000, or 48.4%, in 1999 is primarily due to
growth in Web site hosting and the acquisition of the Web site hosting customers
of Network Wizards on July 31, 1998. The number of our customer accounts
increased from approximately 5,900 at December 31, 1998 to approximately 6,400
at December 31, 1999.
Communications and Operations
Our communications and operations costs increased $82,000 to $675,000,
or 23.8% of revenue, during fiscal 1999 from $593,000, or 31.0% of revenue,
during fiscal 1998. This increase in communications and operations costs was
primarily due to increases in bandwidth and expenses under operating lease
facilities on network equipment. Our bandwidth expenses increased $26,000 to
$602,000 for the year ended December 31, 1999 from $576,000 for the year ended
December 31, 1998 to support our increased business activities. Equipment
operating lease expense increased approximately $37,000 from the year ended
December 31, 1998 to the year ended December 31, 1999 as additional equipment
was added to strengthen our infrastructure. We expect our communications and
operations costs to continue to increase in conjunction with the growth of our
business.
Sales and Marketing
Sales and marketing expenses increased $392,000 to $529,000, or 18.6%
of revenues, during 1999 from $137,000, or 7.2% of revenues, during 1998. The
increase was due primarily to an increase in advertising costs incurred as the
result of an enhanced marketing campaign. Advertising costs increased $391,000
to $403,000, or 76.2% of sales and marketing expenses, from $12,000 for the year
ended December 31, 1998. We intend to significantly increase our sales and
marketing expenditures during the remainder of fiscal 2000.
General and Administrative
General and administrative expenses increased $1,227,000 to $1,980,000,
or 69.8% of revenue, during the year ended December 31, 1999 from $753,000, or
39.3% of revenue, for the year ended December 31, 1998. The increase is
primarily due to increases in personnel and related expenses, employee
recruiting fees and expansion of office facilities to accommodate our growth.
Personnel and related expenses increased $867,000 to $1,368,000, or 69.1% of
general and administrative expenses, for the year ended December 31, 1999 from
$501,000 for the year ended December 31, 1998. Expenses related to office
facilities increased $151,000 to $214,000 for the year ended December 31, 1999
from $63,000 for the year ended December 31, 1998.
Depreciation and Amortization
Depreciation and amortization increased $197,000 to $586,000, or 20.6%
of revenue, during the year ended December 31, 1999 from $389,000, or 20.4% of
revenue, during the year ended December 31, 1998. This increase was due
primarily to depreciation on additions of property and equipment purchased to
sustain the growth of our
<PAGE>
business, and amortization of intangibles recorded on the purchase of the
Network Wizards assets in July 1998. Depreciation expense was $56,000 greater in
fiscal 1999 than fiscal 1998. Amortization expense was $141,000 greater in
fiscal 1999 than fiscal 1998.
Other Income (Expense)
Other income (expense) consists primarily of interest income on our
cash balances and interest expense on our outstanding notes payable and capital
lease obligations. Interest earned on our cash and cash equivalents increased
$42,000 to $47,000 for the year ended December 31, 1999 from $5,000 for the year
ended December 31, 1998. This increase was primarily due to the closing of a
private placement of equity securities in September 1999, which resulted in
larger cash balances for investment. During the years ended December 31, 1998
and 1999, we incurred interest expense in the amount of $86,000 and $132,000,
respectively. The increase in 1999 is primarily due to the underlying debt
incurred in mid-1998.
Income Taxes
No provision for federal income taxes has been recorded as we have incurred
net operating losses since inception. As of December 31, 1999, we had
approximately $874,000 of federal net operating loss carryforwards available to
offset future taxable income. These carry-forwards begin to expire in 2013. We
have recorded a valuation allowance for all of our net deferred tax asset for
all periods presented due to uncertainty that we will generate sufficient
taxable income during the carryforward period to realize the benefit of our net
deferred tax asset. In addition, after this offering, we may experience a change
in control under Section 382 of the Revenue Code, which would limit our use of
these net operating loss carryforwards.
Net Loss
Our net loss increased $977,000 to approximately $1,017,000 during the
year ended December 31, 1999 from $40,000 during the year ended December 31,
1998. Our net loss increased primarily as a result of increased sales and
marketing expenses, and general and administrative expenses in 1999 from 1998.
This increase was partially offset by an increase in revenue of approximately
$900,000 to $2.8 million in 1999 from $1.9 million in 1998.
Liquidity and Capital Resources
We have historically financed our operations primarily through private
placements of equity and internally generated cash flows from operations. The
long term debt reflected on our December 31, 1999 balance sheet was incurred to
purchase the Catalog.com Internet services assets of Network Wizards on July 31,
1998.
At December 31, 1999 and June 30, 2000, we had cash totaling approximately
$1.7 million and $.9 million, respectively. The net change of $783,000 in the
six-month period ended June 30, 2000 was due to $9,000 used to fund operations,
$117,000 of principal payments to meet capital lease and debt obligations,
$196,000 used for costs related to this initial public offering and $465,000 of
investments in property and equipment including network infrastructure,
dedicated Web servers and internal use software and Web site development costs.
Total borrowings under our notes payable as of June 30, 2000 were
approximately $688,000. We intend to repay the amount of long term debt
outstanding with a portion of the proceeds of this offering.
We believe that our current cash balances, proceeds from this offering
and cash flows from operations will be sufficient to meet our working capital
and capital expenditure requirements for at least the next 24 months. However,
on a long-term basis, we may require additional external financing for working
capital and capital expenditures. If additional funds are raised through the
issuance of equity or convertible securities, the percentage ownership of our
shareholders will be reduced and our shareholders may experience additional
dilution. We anticipate that further expansion of our operations will cause us
to incur negative cash flows on a short-term basis, and therefore require us to
use our cash and other liquid resources to support our growth. Our operating and
investing activities on a long-term basis may require us to obtain additional
equity or debt financing. We have no present understandings, commitment or
agreements with respect to any acquisitions of other businesses, products,
services or technologies. However, we may evaluate potential acquisitions of
other businesses, products and technologies from time to time. In order to
consummate potential acquisitions, we may need additional equity or debt
financings in the future.
<PAGE>
BUSINESS
Overview
We provide a broad range of advanced Web site hosting and Internet
services including:
o Shared Web site hosting and catalog and auction hosting for small to
medium-sized businesses;
o Dedicated hosting services for customers that require a separate computer
server dedicated specifically
for their use;
o Business-to-business, business-to-government and business-to-consumer
electronic commerce solutions; and
o Internet access services including dialup and dedicated access.
For our shared hosting customers, i.e. customers who share the same
hardware and software systems, we have developed an automated system that allows
them to register or transfer their domain names and to automatically set up
their Web sites, email, and catalog and auction systems. Within minutes of
establishing a shared hosting account, our customers may begin building their
Web pages and adding their catalog and auction items to their Web site. Our
shared hosting services are available on both the Microsoft NT and Sun
Microsystems Solaris UNIX operating systems.
We have also developed specific expertise in providing Linux-based
dedicated servers to small and medium-sized businesses worldwide. Dedicated
hosting services enable businesses to establish and maintain their Internet
operations using our servers, data center facilities and technical support. We
offer our dedicated hosting customers a reasonable monthly fee that includes
configuration of the server, installation of the server in our data center
facility, and server maintenance and technical support. We also provide and
support dedicated hosting services based on Sun Microsystems Solaris, Microsoft
Windows NT/2000, and Red Hat Linux operating systems.
In addition, we have developed a proprietary Web-based catalog and
auction software system which allows us to combine catalog and auction items for
multiple vendors into a single shopping or buying directory. These directors are
referred to as "marketplaces." This allows us to develop and host complex
business-to-business, business-to-government and business-to-consumer
marketplaces for customers.
In the cities where we have operations, we also provide 56k dialup,
Integrated Services Digital Network, or ISDN, basic Internet connections,
Asymmetric Digital Subscriber Line, or ADSL, high speed Internet connections and
dedicated Internet access services.
Our service offerings are designed to allow our customers to rapidly
implement their online Internet operations. To this end, we offer our customers:
o The ability to register their domain names with the same company that
hosts their Web site thereby reducing the complexity of managing their
Internet presence.
o Automatic setup of their Web site and catalog system within 30 minutes of
the purchase of a Web site hosting plan. This process is completed with no
human intervention. Customers may purchase services 24 hours a day 7 days a
week from anywhere in the world.
o Month-to-month payment plans that allow our customers to avoid long-term
contracts and high set-up fees.
o Ongoing upgrades of server hardware, software and network bandwidth to
support the growth of our customer Internet operations.
o Self-management of their Web sites, email and Web-based catalog and auction
systems.
o Access to our robust network with backup connections at each data
centers.
o Access to Sun Microsystems servers with RAID disk file servers from
Network Appliance Corporation to protect against loss of data.
o Telephone and email access to our experienced technical support
personnel who solve customer problems using an advanced
Oracle-based Intranet support system.
o The use of both Unix and Microsoft NT operating system environments through
our shared hosting platform.
As of July 15, 2000 we had over 7,500 customers and hosted over 5,000 Web
sites for customers in all 50 states and over 50 foreign countries. We have over
850 resellers and a distributor in Japan who resells our Web site hosting
services to over 500 Japanese companies.
<PAGE>
Company History
We commenced operations in March 1995 when we began, through our
predecessor, an Internet service provider business in Dallas, Texas under the
trade name "Dallas Internet" (www.dallas.net). In February 1996, we incorporated
under the laws of the State of Oklahoma as "Ethos Communications Corp." for the
purpose of acquiring the assets of Dallas Internet. Also in that year we
expanded our services to Oklahoma City and Tulsa, Oklahoma (www.oklahoma.net)
under the name Ethos Internet Services, creating full coverage of North Texas
and Oklahoma.
In early 1997, we became one of the first companies to provide an
Internet-based catalog system. Our catalog system was unique in that all
functions, from adding new products to changing prices, were accomplished over
the Internet. Due to the proprietary nature of the catalog software engine, we
are able to fully integrate the software with the www.catalog.com Web site
hosting services thereby providing unique shopping functionality and ease of
use.
On July 31, 1998, we acquired the Catalog.com name and Web site hosting
assets of Network Wizards, for $1.2 million in cash. The acquisition included
approximately 1,900 Web site hosting subscribers along with the "Catalog.com"
name. These assets represented one of the first Web site hosting operations in
the United States. The acquisition not only increased our revenues, but also
provided us with a "branded" name for future marketing activities. To further
identify us with the expanded operations occasioned by this acquisition, we
changed our name to "Catalog.com, Inc." in April 1999.
The Industry
The Internet. The Internet continues to demonstrate significant growth.
One of the many reasons for the overall growth in Internet users has been the
rapid emergence of the Internet as a global business-to-business,
business-to-government and business-to-consumer commerce medium. Since the
commercialization of the Internet in the early 1990s, businesses have rapidly
established Web sites as a means to expand customer reach and improve
communications and operational efficiency. As businesses become more familiar
with the Internet as a communications and commerce platform, an increasing
number of businesses have begun to implement more complex and mission-critical
applications over the Internet. These applications include sales, customer
service, customer acquisition and retention programs, communication tools such
as email and messaging, and business-to-business, business-to-government and
business-to-consumer electronic commerce.
The increasing reliance on the Internet and the growing complexity and
functionality of Web sites has made the management and maintenance of Web sites
an increasingly complex task. As a result, many businesses, particularly small
and medium-sized businesses, have elected to outsource the implementation and
management of their Web sites. We believe outsourcing can provide a business
with a number of benefits including:
o Lower start-up and operating costs;
o Faster time to market;
o Greater security and reliability; and
o Less attention diverted from a company's core business activities.
Applications Hosting Market. Applications hosting enables software
applications to be deployed, managed, supported and upgraded from an
applications service provider's centrally-located servers, rather than on
individual desktop computers. Applications service providers typically rent
software applications over the Internet to customers for a monthly fee.
Advantages of applications hosting to customers include reduced upfront capital
expenditures, lower operating costs and faster applications implementation. Due
to these advantages, the applications hosting market is growing rapidly.
<PAGE>
Current Market Fragmentation. Both the Web and applications hosting markets
today are fragmented and consist primarily of the following types of providers:
o Small Web site hosting providers who do not have the capital,
resources and focus to develop and offer a broad selection of high
quality services and support at competitive prices;
o Large providers whose core service offerings tend to be geared
toward large businesses or only toward those businesses which seek
to implement or maintain the most complex types of Web sites;
o National and local Internet service providers or ISPs whose core
business focus centers around the provision of Internet
connectivity rather than hosting; and
o Web design and consulting firms whose core expertise is not hosting.
Market Opportunity. We believe that small and medium-sized businesses
are a large and rapidly growing segment of the market that have been underserved
by Web and applications hosting companies. Many small and medium-sized
businesses without internal technical resources dedicated to Internet services
have found that developing an Internet presence may be a complicated and
time-consuming task. Similarly, such small and medium-sized businesses have not
had access to the type and quality of Internet-based services that larger, more
sophisticated companies currently enjoy. We therefore believe that a significant
market opportunity exists for us to deliver a comprehensive and easy-to-use
suite of services designed to address the specific needs of the small and
medium-sized business customer.
<PAGE>
Strategy
Our strategy is to take advantage of the growth in Web site hosting and
electronic commerce and the outsourcing of hosting services combined with our
proprietary electronic commerce software to increase our revenue by providing a
broad range of hosting solutions serving small and medium-sized businesses
worldwide. To achieve our growth goals we plan to:
o Organize and focus our efforts along three product lines: shared hosting,
dedicated hosting and complex hosting.
o Leverage our proprietary electronic commerce and auction software
solutions to develop high value vertical solutions for select
business-to-business, business-to-government and business-to-consumer
markets.
o Identify strategic acquisition opportunities in both the shared hosting
and dedicated hosting markets that allow us to leverage our network
support and data center infrastructure to maintain a cost advantage.
o Develop a leadership position in dedicated Linux hosting services.
o Continue to expand our network of reseller and channel partners.
o Continue to take advantage of the Catalog.com brand which we believe
intuitively denotes electronic commerce.
According to the eMarketer"s "eBusiness Report" dated January 12, 2000,
electronically transacted sales worldwide will increase 1,164% from nearly $100
billion in 1999 to $1.24 trillion by 2003. Key findings of the "eBusiness
Report" include:
o The number of "active" purposeful Web sites in the world has more than
doubled to 850,000 in 1999 and will reach 2.3 million in 2002.
o Small businesses will make the greatest advances in electronic commerce
revenues over the next few years, growing from $14.3 billion in 1999 to
$177 billion by 2003.
o Medium and large businesses will continue to account for the majority
of electronic commerce revenues, increasing from $57.1 billion in 1999
to $477.3 billion by 2003.
While we believe this data report is reliable, it has not been independently
verified. We believe, however, that we are well-positioned with our
combination of Web site hosting and electronic commerce capabilities to take
advantage of the electronic commerce Web site hosting market opportunity.
<PAGE>
Product Strategy
Our product strategy consists of four key components:
o domain name registration;
o shared hosting services;
o dedicated hosting services; and
o complex hosting services.
Every company using Web site hosting services must register a domain
name. We have applied for and obtained accreditation from the International
Corporation for Assigned Names and Numbers to be a domain name registrar. This
allows us to provide ".com", ".net" and ".org" domain names to companies
worldwide and to potentially serve as the first contact for companies
establishing an initial Web presence.
Most small and medium-sized companies utilize shared hosting services.
We offer six shared hosting plans; three on the UNIX operating system and three
on the Microsoft NT platform, providing our customers with a complete range of
shared hosting services. These plans currently range from $24.95 per month to
$59.95 per month, making them affordable to most small-sized companies.
Dedicated hosting provides companies complete control of their hosting
platform. We use Cobalt Networks and their LINUX based server appliances as our
platform for dedicated hosting. We also offer dedicated Microsoft NT and Red Hat
Linux dedicated servers. Our dedicated hosting solutions currently range from
$199 per month to several thousand dollars depending on the customer's
requirements.
For customers requiring more sophisticated hosting solutions we offer
complex hosting services that include sophisticated solutions engineered
specifically for the customer.
To increase the number of our domain registrations, shared Web site
hosting and dedicated subscribers and increase our revenues, we intend to
aggressively advertise our hosting capability on the leading online hosting
directories. We are building an outside sales force to solicit additional
complex Web site hosting customers.
We currently have a number of retailers hosting their sites with
Catalog.com and several affiliates that pay for products purchased as a result
of being directed to their site from Catalog.com. We also have a network of over
1,000 Web designers ("resellers") that refer Web site hosting subscribers to us
in exchange for a portion of our monthly recurring fee calculated at:
o 20% of the retail sales price for the first 10 products, plus
o 40% of the retail sales price for 11 or more products.
We intend to expand our independent Web designer reseller channel by
advertising in trade journals read by Web designers, direct marketing to Web
designers via email and entering into strategic alliances with Web design firms.
Unified Messaging
We offer a free Web-based electronic event notification service known
as eNotify.com, located on the Web at www.enotify.com, which provides Web-based
email, email monitors/filters, a calendar/scheduler, a pager service and a
network monitoring tool. When a customer signs up to eNotify, a free email
account is automatically set up as well. Any email sent to that address can be
put in the inbox, forwarded to a customer's pager, forwarded to another email
address or any combination of the three. The email monitor has the ability to
create filters. If any incoming messages match the filters, a page will be sent
to the customer's pager.
The eNotify Calendar-Scheduler-Reminder Service is a highly effective,
free itinerary, event scheduler and calendar that permits user group level
security, thus allowing users to authorize associates, family or others to add,
modify and/or delete events depending on their defined level of authorization.
Any event in the calendar can be easily sent to an eNotify user by alpha pager,
PCS phone, email or fax. eNotify can send notification at the moment of an event
or at user-defined intervals, including multiple reminders up until the time of
the event.
In addition to the free eNotify service, we have developed the eNotify
Application Monitor. The eNotify Application Monitor is a subscription based
service. With this tool, a customer can monitor various Internet applications.
This service allows the user to monitor their Internet service or network
administrators to monitor routers, dial-in boxes and other equipment and all of
their user services 24 hours a day, seven days a week. eNotify will log all
service problems in a database, which allows the user to come back at a later
date and note when outages occurred. We are incorporating eNotify into our
Internet services package to enhance the level of service available to our
customers.
The eNotify software product is a key component used to develop our
business-to-business, business-to-government and business-to-consumer
marketplaces. It is used as the foundation application for providing customer
log in and account setup for members of a particular marketplace. The look and
feel is customized to conform to the requirements of the marketplace while
maintaining its functionality.
Network Infrastructure
We have four connections to the Internet. These include connections
with BBN Corporation, Cable & Wireless USA, Inc., Sprint and Savvis
Communications Corporation. These connections have the total physical capacity
for over 300 megabytes of Internet traffic. All but the BBN Corporation
connection are peering points utilizing Border Gateway Protocol to exchange full
Internet routes. By maintaining an internal network in Texas and Oklahoma, we
achieve some protection against failures from any one carrier.
We also maintain our own internet protocol address space with 64 Class
C addresses from the American Registry of Internet Numbers. Our network contains
the equivalent of 370 Class C addresses inclusive of address space utilized from
our peering points. We utilize our own domain name servers and are accredited as
a domain name registrar by the International Corporation for Assigned Names and
Numbers, also know as ICANN.
We further provide Web site hosting and online commerce services by
utilizing co-location racks at GTE's Genuity data center located in San Jose,
California (MAE-West) and AT&T co-location space in Dallas, Texas. Our primary
data center is located in downtown Oklahoma City, Oklahoma. We recently added an
additional 1,000 square feet of data center space at our headquarters located at
14000 Quail Springs Parkway in Oklahoma City. This space will be connected to
the downtown Oklahoma City space with a 10MB ethernet connection provided by Cox
Communications. We intend to build out at least 10,000 square feet of data
center space in 2001 and will connect such space to the other facilities
utilizing the Cox fiber ring in Oklahoma City.
We offer Internet access service through four Points of Presence,
commonly referred to as "POPs" in two states. Users located within local dialing
range of a Catalog.com POP connect to the POP through telephone lines provided
by the local telephone company. The POPs are connected to the Internet through
our four Internet connections.
Sales and Marketing
Currently, we market our Web site hosting and electronic commerce products
primarily through three channels:
o Internet based sales of domain name registration and Web hosting through our
Web site located at www.catalog.com;
o Reseller-based sales of Web hosting through our network of over 850
resellers that are primarily Web site developers and designers; and
o Direct sales for selling to selected business-to-business,
business-to-government and business-to-consumer business communities
or organizations.
We are in the process of establishing an outside sales force to target
businesses and organizations that have the desire to build an online
marketplace, and to contact additional trade organizations, regional banks and
other organizations with large memberships that would benefit from a
consolidated purchasing marketplace.
<PAGE>
Our domain name registration and Web hosting services can be purchased
24-hours a day from all over the world through an automated online order process
located at our Web site found at www.catalog.com. Our marketing strategy is to
offer a free basic Web site hosting plan with each domain registration. Because
we are an accredited registrar, we maintain the domain information for the .com,
.net and .org domain registrants. This gives us a broad customer base to sell
our other Web hosting services including Web site design and more advanced
hosting services. Potential customers are directed to our site by search engines
and advertising on sites dedicated to Web site hosting, such as
www.ispcheck.com.
We also advertise our free Web hosting with domain registration
services to small businesses over the radio and to individuals on Web sites
devoted to family genealogy research.
We also have over 850 resellers that are primarily Web site developers
and designers. These resellers receive a referral fee that ranges from 20% to
40% of the monthly fee actually charged to the customer. We communicate to
resellers through direct mail and newsletters relating to our new products and
services.
For dedicated server marketing, we send targeted email and regular mail
materials to Web site designers and systems integrators, and advertise on sites
dedicated to Web hosting. Selling upgraded services to existing customers also
generates sales for dedicated servers.
Strategic Relationships
We are a Microsoft Solution Provider that permits us early access to
Microsoft products and services. We are also a Cobalt True Blue Sapphire partner
which provides us the ability to purchase directly from Cobalt the server
appliances we utilize for our Linux dedicated hosting solution. Cobalt also
provides technical support to our dedicated server customers and marketing
assistance in the form of co-marketing dollars to be used to sell our dedicated
hosting solution.
Competition
The electronic commerce market is new, rapidly evolving and intensely
competitive. Because there are no substantial barriers to entry, we expect
competition from both existing competitors and new market entrants in the
future. We currently or potentially compete with a variety of companies. These
competitors include:
o a significant number of Web site hosting service providers,
applications hosting providers, Internet service providers,
telecommunications companies, large information technology outsourcing
firms, and computer hardware suppliers;
o other companies with substantial customer bases in the computer and other
technical fields; and
o a number of companies that offer Web site hosting and Internet services to
consumers at no cost.
Our competitors may operate in one or more of these areas and include
companies such as AT&T Corp., Concentric Network Corporation, Interland, Inc.,
Data Return Corp., Dell Computer Corporation, Digex Corporation, EarthLink,
Inc., Exodus Communications, Inc., Gateway, Inc., Globix Corporation, and
Navisite, Inc.
We cannot assure you that we can maintain a competitive position
against current or future competitors, particularly those with greater
financial, marketing, service, support, technical and other resources. Our
inability to maintain a competitive position within the market could have a
material adverse effect on our business, financial condition and results of
operations.
<PAGE>
We believe the principal competitive factors determining success in our
markets include:
o Technical expertise in developing advanced Web site hosting solutions;
o Internet system engineering and technical expertise;
o Quality of service, including speed, network capability, scalability,
reliability, security and functionality;
o Brand name recognition;
o Competitive pricing;
o Ability to maintain and expand distribution channels;
o Customer service and support;
o Broad geographic presence;
o A complete portfolio of services and products;
o Timing of introductions of new and enhanced services and products;
o Network security and reliability;
o Financial resources; and
o Conformity with industry standards.
As a developing company, we may lack the financial and other resources,
expertise or capabilities to capture increased market share in this environment
in the future.
Although it is impossible to quantify our relative competitive position
in our market, many of our competitors have substantially greater financial,
technical and marketing resources, larger customer bases, longer operating
histories, greater name recognition and more established relationships in the
industry than we have. As a result, many of these competitors may be able to
develop and expand their network infrastructures and service offerings more
rapidly, adapt to new or emerging technologies and changes in customer
requirements more quickly, take advantage of acquisitions, consolidation
opportunities and other opportunities more readily, devote greater resources to
the marketing and sale of their services and adopt more aggressive pricing
policies than we can. In addition, these competitors have entered and will
likely continue to enter into joint ventures or consortia to provide additional
services competitive with those provided by us.
As a strategic response to changes in the competitive environment, we
may from time to time make certain pricing, service or marketing decisions or
acquisitions that could result in reduced margins or otherwise have a material
adverse effect on our business, financial condition and results of operations.
New technologies and the expansion of existing technologies may increase the
competitive pressures. For example, applications that select specific titles
from a variety of Web sites may channel customers to online retailers that
compete with us. Companies that control access to transactions through a network
or Web browsers could also promote our competitors or charge us a substantial
fee for inclusion. In addition, vendors of information resources could provide
direct access online. There can be no assurance that we will be able to compete
successfully against current and future competitors, and competitive pressures
we face may have a material adverse effect on our business, financial condition
and results of operations.
Government Regulation
We are not currently subject to direct federal, state or local
government regulation, other than regulations applicable to businesses
generally. There is currently only a limited body of laws and regulations
directly applicable to businesses that provide access or commerce on the
Internet.
The "Digital Millennium Copyright Act" became effective in October 1998
and provides a limitation on liability of online service providers for copyright
infringement for transmitting, routing or providing connections, transient
storage, caching or storage at the direction of a user, if the service provider
had no knowledge or awareness that the transmitted or stored material was
infringing and meets other conditions specified in the Act. Since this law is
new and does not apply outside of the U.S., we are unsure of how it will be
applied to limit any liability we may face
<PAGE>
in the future for any possible copyright infringement or copyright-related
issues. This new law also requires service providers to follow "notice and
take-down" procedures and to meet other conditions to qualify to take advantage
of the limitation on liability.
We recently implemented these procedures and believe we meet the
conditions to qualify for the protection provided by the Digital Millennium
Copyright Act. Moreover, our customers are subject to an acceptable use policy
which prohibits them from transmitting, storing or distributing material on or
through any of our services which, in our sole judgment is:
o in violation of any U.S. local, state or federal law or regulation,
or infringes on the copyright of a third party;
fraudulent online marketing or sales practices; or
fraudulent customer information, including identification and payment
information.
Although this policy is designed to promote the security, reliability
and privacy of our systems and network, we cannot be certain that our policy
will accomplish this goal or effectively limit our liability.
Despite enactment of the Digital Millennium Copyright Act, the law
relating to the liability of online services companies and Internet access
providers for information carried on or disseminated through their networks
remains largely unsettled. It is possible claims could be made against online
services companies and Internet access providers under both U.S. and foreign law
for defamation, obscenity, negligence, copyright or trademark infringement, or
other theories based on the nature and content of the materials disseminated
through their networks. Several private lawsuits seeking to impose such
liability upon online services companies and Internet access providers are
currently pending.
Although sections of the Communications Decency Act of 1996 that
proposed to impose criminal penalties on anyone distributing indecent material
to minors over the Internet were held to be unconstitutional by the U.S. Supreme
Court, in October 1998, Congress passed the Child Online Privacy Protection Act,
which sought to make it illegal to communicate, for commercial purposes,
information that is harmful to minors. In February 1999, a U.S. District Court
judge issued a preliminary injunction against the enforcement of the Child
Online Protection Act on constitutional grounds. An appeal from the District
'Court's ruling is pending. While we cannot predict the ultimate outcomeof this
proceeding, even if the Child Online Protection Act is ruled unconstitutional,
similar laws may be proposed, adopted, or upheld in the future. The nature of
future legislation and the manner in which it may be interpreted and enforced
cannot be fully determined and, therefore, legislation similar to the
Communications Decency Act could subject us and/or our customers to potential
liability, which in turn could harm our business. The adoption of any of these
types of laws or regulations might decrease the growth of the Internet, which in
turn could decrease the demand for our services or increase our cost of doing
business or in some other manner harm our business.
A separate act known as The Children's Online Privacy Protection Act
of 1998, and the rules promulgated by the Federal Trade Commission implementing
the provisions of the act, regulate the collection, use or disclosure of
personally identifiable information from and about children on the Internet by
operators of Web sites or online services directed to children, and operators
of general audience Web sites who knowingly collect information from children.
The act and the FTC rules require the operators of such Web sites and online
services to:
o provide notice of its information collection, use, and disclosure practices,
o obtain parental consent prior to any collection, use or disclosure of
personal information
o collected from children,; provide an opportunity for parental review of
personal information collected from children and the right to prohibit
further use or maintenance of that information;
o not condition a 'child's participation in any online activity on disclosing
more personal information than is necessary;
o to establish and maintain reasonable procedures to protect the
confidentiality, security and integrity of personal
information collected from children.
<PAGE>
An operator will be deemed to be in compliance with the requirements of
the act and the FTC rules if the operator complies with any industry
self-regulatory guidelines approved by the FTC. The FTC is authorized to bring
enforcement actions and impose civil penalties for violations of the FTC rule.
We may operate Web sites that are directed to children on behalf of
some of our customers. The Children's Online Privacy Protection Act and the FTC
rules implementing it went into effect on April 21, 2000. We have not yet taken
affirmative steps to adopt or comply with any FTC-approved industry
self-regulatory guidelines.
In February 1995, the European Union adopted Directive 95/46/EC on the
protection of individuals with regard to the processing of personal data and on
the free movement of such data. Pursuant to this directive the 15 member
countries of the European Union were required to pass specific privacy
protection legislation by October 1998 regarding the collection and use of
personally identifiable information. One section of the directive requires
member states to ensure that personally identifiable information is only
transferred outside of the EU to countries with adequate privacy protection.
In response to the directive, the U.S. Department of Commerce has
proposed seven "Safe Harbor" principles designed to serve as guidelines for U.S.
companies. In light of the "Safe Harbor" principles, the EU announced in the
fall of 1998 that it would avoid disrupting the exchange of information with the
U.S. by allowing its member countries to transfer information to the U.S. so
long as it continues good faith negotiations with the EU. However, if an EU
member country determines that a Web site administered by a U.S. company has a
significant presence in the country and is in violation of the "Safe Harbor"
principles, it may nonetheless prosecute and sanction the U.S. company through
its regulatory agency for improper data collection. Most EU member countries,
including the United Kingdom, have enacted legislation consistent with the
directive that has forced some U.S. companies to take actions to comply with the
directive.
Although we currently provide services over the Internet in the United
Kingdom and other countries that are members of the EU, we have not taken
affirmative steps to comply with the "Safe Harbor" principles announced by the
U.S. Department of Commerce.
While there currently are relatively few laws or regulations directly
applicable to the Internet or to applications hosting providers, due to the
increasing popularity of the Internet and Web-based applications it is likely
that such laws and regulations may be adopted. These laws may cover a variety of
issues including, for example, user privacy and the pricing, characteristics and
quality of products and services. The adoption or modification of laws or
regulations relating to commerce over the Internet could substantially impair
the future growth of our business or expose us to unanticipated liabilities.
Moreover, the applicability of existing laws to the Internet and Internet
application service providers is uncertain. These existing laws could expose us
to substantial liability if they are found to be applicable to our business. For
example, we provide services over the Internet in many states in the U.S. and in
the United Kingdom, and we facilitate the activities of our customers in those
jurisdictions.
As a result, we may be required to qualify to do business, be subject
to taxation or be subject to other laws and regulations in these jurisdictions,
even if we do not have a physical presence or employees or property there. The
application of existing laws and regulations to the Internet or our business, or
the adoption of any new legislation or regulations applicable to the Internet or
our business, could materially adversely affect our financial condition and
operating results.
Intellectual Property
We rely on a combination of trademark, copyright and trade secret laws,
as well as technical measures to establish and protect our proprietary rights.
The Catalog.com trademark is registered in the U.S. We also have domain name
registrations for "catalog.com," "catalog.net," "mycatalog.com," "dallas.net,"
"ethos.net," "enotify.com," "oklahoma.net" and "oklahoma.com," each of which we
believe are material to our business. "Dallas Internet," "Ethos Internet,"
"eNotify," "eReceivables," and the Dallas Internet and Ethos Internet logos are
other trademarks of Catalog.com. We cannot assure you that we will be able to
adequately protect our service marks or trademarks. It is possible that our
competitors or others will adopt product or service names similar to ours or
other service marks or trademarks, thereby impeding our ability to build brand
identity and possibly leading to customer confusion. Our inability to protect
the name "Catalog.com" adequately could have a material adverse effect on our
business, results of operations and financial condition.
<PAGE>
Further, we cannot assure you that the steps we take will prevent
misappropriation of our technology or that agreements entered into for that
purpose will be enforceable. Notwithstanding the precautions we may take, it
might be possible for a third party to copy or otherwise obtain and use our
software or other proprietary information without authorization or to develop
similar software independently. Policing unauthorized use of our technology is
difficult, particularly because the global nature of the Internet makes it
difficult to control the ultimate destination or security of software or other
data transmitted. The laws of other countries may afford us little or no
effective protection of our intellectual property.
We also rely on a variety of technologies that we license from third
parties, including our database and Internet server software, which is used in
our Web site to perform key functions. We cannot assure you that these
third-party technology licenses will continue to be available to us on
commercially reasonable terms. Our loss or inability to maintain or obtain
upgrades to any of these technology licenses could result in delays in
completing our proprietary software enhancements and new developments until
equivalent technology could be identified, licensed or developed and integrated.
Any such delays would materially adversely affect our business, results of
operations and financial condition.
Employees
As of July 15, 2000, we had 29 full-time employees and one part-time
employee. We also utilize the services of contractors and consultants as needed.
None of our employees is represented by a labor union, and we believe employee
relations are good.
Facilities
Our principal offices are located in Plano, Texas and Oklahoma City,
Oklahoma and handle the majority of the administration and sales and marketing
functions. Our properties are as follows:
<TABLE>
<S> <C> <C> <C>
Location Purpose of Facility Area Occupied Owned or Leased
(Sq. Ft.)
Plano, TX Office 5,000 Leased
Oklahoma City, OK Office/Data Center 4,500 Leased
</TABLE>
The Plano lease expires March 31, 2005 and has monthly rental payments
of approximately $9,007; the Oklahoma City lease expires June 30, 2004 and has
monthly rental payments of $5,967.
Legal Proceedings
We are not a party to any material legal proceedings.
<PAGE>
MANAGEMENT
Directors and Executive Officers
Our directors and executive officers, and their ages and positions as
of July 15, 2000, are as follows:
Name Age Position
<TABLE>
<S> <C> <C>
Robert W. Crull 38 Chairman, President and Chief Executive Officer
David D. Gaither 41 Chief Financial Officer
D. Len Reeves 37 Vice President of Customer Service and General Manager
Bill C. Miller 38 Director
Rodric M. Phillips, Jr., M.D. 38 Director
David E. Rainbolt 44 Director
</TABLE>
Robert W. Crull has served as our Chairman, President and Chief Executive
Officer since 1995. Prior thereto, Mr. Crull was director of Oracle Learning
Architecture with Oracle Corporation from 1995 to 1996 where he was the
executive responsible for developing 'Oracle's online education Internet
offerings. Before that, he was with EDS Corp. and Perot Systems, Inc. Mr. Crull
earned a B.S. from Oklahoma State University in 1985. Mr. Crull is a class III
director whose term expires in 2003.
David D. Gaither has served as our Chief Financial Officer since June,
1999. From 1987 to 1999 he served in various capacities with LSB Industries,
Inc., most recently serving as Vice President Accounting. He received his B.S.
in Accounting from Oklahoma Christian University in 1981. Mr. Gaither is a
Certified Public Accountant.
D. Len Reeves has served as our Vice President of Customer Service and
General Manager since February 1995. Prior to joining Catalog.com, Mr. Reeves
worked as a technical recruiter and hospital physician liaison with Jackson &
Coker, a physician recruitment company. Mr. Reeves earned a B.A. in Business
Management/Marketing from Harding University.
Bill C. Miller has served as a director since our incorporation and as
Chief Technology Officer from inception until July 14, 2000. Mr. Miller
currently serves as one of our technical advisors. For the 12 years prior to
joining Catalog.com, Mr. Miller was with Rockwell International, Fidelity
Investments, Perot Systems, Inc. and Oracle Corporation. Mr. Miller earned an
M.S.E.E. from Southern Methodist University in 1988 and a B.S.E.E. from Oklahoma
State University in 1984. He holds several communications-related patents. Mr.
Miller is a class II director whose term expires in 2002.
Rodric M. Phillips Jr., M.D. has served as a director of Catalog.com since
1998. Dr. Phillips received his Doctorate in Medicine from the University of
Oklahoma College of Medicine in 1988. He completed his residency in anesthesia
in 1992, and has served as the Director of Anesthesia at Orthopedic Associates
since 1996 and Northwest Surgical Hospital in Oklahoma City since 1998. Dr.
Phillips is a class II director whose term expires in 2002.
David E. Rainbolt has served as a director of Catalog.com since April 2000.
He is currently President and Chief Executive Officer of BancFirst Corporation
(an affiliate of BancFirst Investment Corporation), a position he has held since
1992. Prior to 1992, Mr. Rainbolt served as Executive Vice President and Chief
Financial Officer for BancFirst. He has been a member of BancFirst's board of
directors since 1984 and is a member of the board of directors of ZymeTx, Inc.,
a publicly-held biotechnology company. Mr. Rainbolt earned a B.B.A. in Finance
from the University of Oklahoma in 1978 and an M.B.A. in Finance from Tulane
University in 1979. Mr. Rainbolt is a class I director whose term expires in
2001.
Key Employees
Samuel J. Fleitman has served as our Director of New Product
Development since April 1997, and has been working on Internet application
projects since 1992. Mr. Fleitman has worked to develop new products such as
eNotify and to automate back-office services that allow the company to be more
efficient. Prior to joining us Mr. Fleitman worked for Oracle Corporation
developing an Online Education Service from 1996 to 1997. From 1992 to 1996 he
worked for Texas A&M University administering online information services for
the entire University and developing interactive projects for various
departments. Mr. Fleitman earned a B.S. in Electronic Engineering Technology
from Texas A&M University in 1991.
<PAGE>
Directors' Terms
The board of directors is divided into three classes, each of whose
members will serve for a staggered three-year term. Upon the expiration of the
term of a class of directors, directors in such class will be elected for
three-year terms at the annual meeting of shareholders in the year in which such
term expires.
Board Committees
The audit committee of the board of directors reviews, acts on and reports
to the board of directors with respect to various auditing and accounting
matters, including the recommendation of our auditors, the scope of the annual
audits, fees to be paid to the auditors, the performance of our independent
auditors and the accounting practices of Catalog.com. Mr. Crull, Dr. Phillips
and Mr. Rainbolt are the members of the audit committee.
The compensation committee of the board of directors recommends, reviews
and oversees the salaries, benefits and stock option plans for our employees,
consultants, directors and other individuals compensated by Catalog.com. The
compensation committee also administers our compensation plans. Mr. Crull, Dr.
Phillips and Mr. Rainbolt are the members of the compensation committee.
Director Compensation
Following this offering we will pay each of our outside directors
$5,000 per year and $1,000 per meeting, and grant each director 10,000 stock
options for each three-year term of service which will vest over three years.
Executive Compensation
Summary Compensation Table
The following table sets forth the total compensation of our chief
executive officer and each other executive officer whose total salary and bonus
during the last three fiscal years exceeded $100,000 (each a named executive
officer, and collectively, the named executive officers).
<TABLE>
<S> <C> <C> <C>
Name and Principal Position Annual Compensation Long-Term Compensation
Securities Underlying
Year Salary Options
Robert W. Crull 1999 $ 180,000 40,000 (1)
Chief Executive Officer 1998 120,200 --
1997 91,500 --
Michael J. McKay (2) 1999 $ 165,000 91,500 (2)
President 1998 -- --
1997 -- --
Bill C. Miller(3) 1999 $ 156,700 40,000 (3)
Senior Vice President and 1998 99,200 --
Chief Technology Officer 1997 78,500 --
---------------
</TABLE>
(1) Vests at a rate of 25% per year on each of October 1, 2000, October 1, 2001,
October 1, 2002 and October 1, 2003.
(2) Mr. McKay's services as our President terminated on February 18, 2000
and his options expired unexercised on
June 18, 2000.
(3) Mr. Miller resigned as Senior Vice President effective July 14, 2000.
<PAGE>
Option Grants in Fiscal 1999
The following table sets forth certain information regarding options
granted to the named executive officers during the year ended December 31, 1999.
We have not granted any stock appreciation rights.
<TABLE>
<CAPTION>
Percent of Total
Number of Securities Options Granted Exercise
Underlying Options to Employees in Price Per Expiration
Name Granted (1) Fiscal 1999 Share Date
---- ----------- ----------- ----- ----
<S> <C> <C> <C> <C>
Robert W. Crull 40,000 10.5% $4.95 10/1/04
Michael J. McKay 51,500 13.5% $2.50 6/18/00(1)
40,000 10.5% $4.50 6/18/00(1)
Bill C. Miller 40,000 10.5% $4.50 10/1/09
---------------
(1) Mr. McKay's services as our President terminated on February 18, 2000. His options expired June 18, 2000.
</TABLE>
Aggregated Option Exercises in the Year Ended December 31, 1999
And Year-end Option Values
The following table sets forth certain information concerning the
number and value of unexercised options held by each of the Named Executive
Officers at December 31, 1999. None of the Named Executive Officers exercised
options during the year ended December 31, 1999.
The "Value of Unexercised In-the-Money Options" at December 31, 1999 is
based on a value of $10.00 per share of our common stock, which is the minimum
initial offering price, less the per share exercise price multiplied by the
number of shares issued upon the exercise of the options.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at December 31, 1999 at December 31, 1999
---------------------------- --------------------
<S> <C> <C> <C> <C>
Name Vested Unvested Vested Unvested
Robert W. Crull -- 40,000 -- $202,000
Michael J. McKay -- 91,500 -- 606,250
Bill C. Miller -- 40,000 -- 220,000
Stock Option Plans
</TABLE>
1997 Stock Option Plan. Under the 1997 stock option plan our employees
and directors are eligible to receive awards of stock options. The 1997 stock
option plan provides for grants of "incentive stock options" meeting the
requirements of Section 422 of the Internal Revenue Code of 1986, as amended,
and "non-qualified stock options."
Under the 1997 stock option plan 200,000 shares of common stock are
reserved for issuance (subject to anti-dilution and similar adjustments).
Incentive stock options for 139,500 shares have been granted or exercised under
the 1997 stock option plan as of July 15, 2000.
1999 Stock Option Plan. We have also established the 1999 stock option
plan, pursuant to which our employees and directors are eligible to receive
awards of stock options. The 1999 stock option plan provides for grants of
"incentive stock options" meeting the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended, and "non-qualified stock options."
Under the 1999 stock option plan, 340,000 shares of common stock are
reserved for issuance (subject to anti-dilution and similar adjustments).
Incentive stock options for 21,000 shares have been granted or exercised under
the 1999 stock option plan as of July 15, 2000.
<PAGE>
Employment Agreements
We have not entered into employment agreements with our executive
officers, and the employment of such persons may be terminated at any time at
the discretion of our board of directors. All of our employees have executed
confidentiality agreements with us.
TRANSACTIONS WITH RELATED PARTIES
On July 23, 1999, Catalog.com and eight lenders entered into a bridge
loan agreement under which we issued bridge notes in the principal amount of
$1,400,000 with an interest rate of 7.0% per annum. In August 1999, all
outstanding bridge notes were converted into 311,114 shares of Series B
preferred stock at a price of $4.50 per share. Rodric M. Phillips, Jr., M.D.,
one of our directors, held $150,000 in principal amount of bridge notes, which
converted into 33,334 shares of Series B preferred stock.
In February 1996, BancFirst Investment Corp. purchased 1,600,000 shares
of common stock for an aggregate purchase price of approximately $468,000 or
$0.2925 per share. In July 1998, in connection with a $300,000 subordinated debt
financing provided by BancFirst, an affiliate of BancFirst Investment Corp., we
issued 675,255 shares of Series A preferred stock in exchange for the 1,600,000
shares of common stock held by BancFirst Investment Corp.. We redeemed the
Series A preferred stock on July 29, 1999 in consideration of the payment of
approximately $468,000 plus a mandatory dividend of approximately $28,000 and
the issuance to BancFirst Investment Corp. of 627,022 shares of common stock. As
a part of the redemption of the Series A preferred stock, we repaid a loan from
BancFirst in the amount of $300,000. David E. Rainbolt, one of our directors, is
also a BancFirst Investment Corp. director. On July 31, 1998 we also borrowed
$1,000,000 under a U.S. Small Business Administration loan through BancFirst. As
of June 30, 2000, total borrowings under this loan were approximately $688,000.
We intend to repay the balance of this loan with proceeds of this offering.
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of July 15, 2000, certain
information with respect to the beneficial ownership of our equity securities by
o each person known by us to beneficially own more than (or own the right
to eventually convert to more than) 5% of all equity securities
outstanding;
o each of our directors;
o each of our executive officers; and
o all of our directors and executive officers as a group.
Except as otherwise indicated, and subject to applicable community
property laws, the persons named in the table below have sole voting and
investment power with respect to all shares of common stock held by them.
Beneficial ownership is determined in accordance with the rules and regulations
of the SEC. Shares of common stock subject to options currently exercisable or
exercisable on or before October __, 2000, are deemed outstanding for purposes
of computing the percentage of ownership of each person holding such options and
for all officers and directors as a group, but are not deemed outstanding in
computing the percentage of any other person.
Applicable percentage ownership in the following table is based on
4,192,530 shares of common stock outstanding as of July 15, 2000, which gives
effect to the 2-for-1 stock split and is adjusted to reflect the conversion of
all outstanding shares of preferred stock upon the closing of this offering.
To the extent that any shares are issued upon exercise of options,
warrants or other rights to acquire our capital stock that are presently
outstanding or granted in the future or reserved for future issuance under our
stock option plans, there will be further dilution to new public investors.
The numbers shown in the table below assume no exercise by the
underwriters of their over-allotment option. We have granted the underwriters an
option to purchase up to 150,000 shares to cover over-allotments, if any.
<PAGE>
<TABLE>
<CAPTION>
Name and Address Amount and Nature of Before After
Title of Class of Beneficial Owner Beneficial Ownership Offering Offering
-------------- ------------------- -------------------- -------- --------
<S> <C> <C> <C> <C>
Common Robert W. Crull 1,800,000 (1) 42.9% 34.7 %
14000 Quail Springs Parkway,
Suite 3600
Oklahoma City, OK 73134
Common Bill C. Miller 402,000 (2) 9.6% 7.7 %
6404 International Parkway, Suite 2200
Plano, TX 75093
Common Michael J. McKay -- (3) -- --
5414 Edlen Drive
Dallas, Texas 75220
Common BancFirst Investment Corp.(4) 627,022 15.0% 12.1 %
101 N. Broadway, Suite 460
Oklahoma City, OK 73102
Common Schloss Brothers, LP(5) 240,000 5.7% 4.6 %
29 E. Maryland St.
Indianapolis, IN 46205
Common Rodric M. Phillips, Jr., M.D. 233,334 (6) 5.6% 4.5 %
14000 Quail Springs Parkway, Suite 3600
Oklahoma City, OK 73134
Common David E. Rainbolt 627,022 (7) 15.0% 12.1 %
101 N. Broadway Ave.
Oklahoma City, OK 73126
Common Richmont Opportunity Fund, L.P. (8) 250,044 (8) 6.0% 4.8 %
16251 Dallas Parkway, 7th Fl.
Addison, TX 75001
Common Jerral W. Jones Family
Limited Partnership (9) 244,444 (9) 5.8% 4.7 %
One Cowboy Parkway
Irving, TX 75063
All Directors and Officers as
a Group (7 persons) 3,062,356 73.0% 59.0 %
---------------
(1) Excludes options to purchase 40,000 shares that become exercisable over a
period of four years from October 1, 2000.
(2) Includes 2,000 shares held by Bill C. Miller as custodian for Jordan Marie Powell and Cameron Blaine
Powell. Excludes options to purchase 40,000 shares that become exercisable over a period of four years from
October 1, 2000. Mr. Miller resigned as Senior Vice President effective July 14, 2000.
(3) Mr. McKay's services as the President of Catalog.com terminated on February 18, 2000.
(4) BancFirst Investment Corp. is a subsidiary of BancFirst Corporation, a publicly-held company. David E.
Rainbolt, one of our directors, is an affiliate of BancFirst Investment Corp.
(5) Robert Schloss is the general partner of Schloss Brothers, L.P.
(6) Excludes options to purchase 6,000 shares that become exercisable over a
period of four years from October 1, 2000.
(7) Includes 627,022 shares beneficially owned by BancFirst Investment Corp.. Mr. Rainbolt disclaims
beneficial ownership of the shares held by BancFirst Investment Corp. except to the extent of his pecuniary
interest therein.
(8) Richmont Opportunity Partners, L.P. is comprised of a group of private investors, none of whom are
affiliated with Catalog.com. Includes 42,268 shares beneficially owned by Richmont Opportunity Partners,
Ltd., 5,600 shares beneficially owned by Richmont Asia-Pacific Limited and 22,222 shares of common stock
subject to warrants held by Richmont Opportunity Management Partners, L.P.
(9) Jerral W. Jones and members of his family, none of who are affiliated with Catalog.com, beneficially own
the Jerral W. Jones Family Limited Partnership and Pro Silver Star, Ltd. Includes 22,222 shares of common
stock subject to warrants held by Pro Silver Star, Ltd.
</TABLE>
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our certificate of incorporation authorizes the issuance of 19,000,000
shares of common stock, par value $.01 per share, and 2,000,000 shares of
preferred stock, par value $.01 per share, the rights and preferences of which
may be established from time to time by our board of directors. Immediately
prior to this offering 3,398,332 shares of common stock and 794,198 shares of
preferred stock were issued and outstanding, and 96,750 shares were subject to
currently exercisable options and 145,752 shares were subject to currently
exercisable warrants. Upon completion of this offering, 5,192,530 shares of
common stock and no shares of preferred stock will be outstanding. As of July
15, 2000, we had 20 holders of common stock and 21 holders of preferred stock.
The following description of our capital stock does not purport to be
complete. It is qualified in its entirety by reference to our certificate of
incorporation and bylaws filed as exhibits to the registration statement of
which this prospectus forms a part, and by the applicable provisions of the
Oklahoma General Corporation Act.
Common Stock
Holders of common stock are entitled to one vote per share on all
matters to be voted on by shareholders. Subject to any preference granted to
holders of any outstanding preferred stock, holders of common stock are entitled
to receive such dividends, if any, as may be declared by the board of directors
out of funds legally available for the payment of such dividends. Holders of
common stock have no cumulative voting, redemption or conversion rights. All of
the outstanding shares of common stock are fully paid and nonassessable.
Preferred Stock
Our certificate of incorporation authorizes the board of directors,
from time to time, to issue shares of preferred stock in one or more series.
They may establish the number of shares to be included in any such series, and
may fix the designations, powers, preferences and rights (including voting
rights) of the shares of each such series and any qualifications, limitations or
restrictions on preferred shares. No shareholder authorization is required for
the issuance of these shares of preferred stock unless imposed by then
applicable law. Shares of preferred stock may be issued for any general
corporate purposes, including acquisitions. The board of directors may issue one
or more series of preferred stock with rights more favorable with regard to
voting, dividends and liquidation than the rights of holders of common stock.
Issuance of a series of preferred stock also could be used for the purpose of
preventing a hostile takeover of Catalog.com, even if the takeover is considered
to be desirable by the holders of common stock. Issuance of a series of
preferred stock could otherwise adversely affect the voting power of the holders
of common stock, and could serve to perpetuate the board of directors' control
of Catalog.com.
No shares of preferred stock will be outstanding after giving effect to
the conversion of all outstanding shares of our preferred stock into common
stock at the closing of this offering and we currently have no plans that would
result in the issuance of any shares of preferred stock.
Registration Rights
Upon completion of this offering the holders of approximately 1,533,972
shares of common stock, and rights to acquire common stock, will be entitled to
rights with respect to the registration of those shares under the Securities
Act. Following the closing of this offering, if we propose to register any
additional securities under the Securities Act, we must notify these holders who
will be entitled to have their shares of common stock included in the
registration. In addition, holders of 50% or more of such shares have the right
to require us, on up to two separate occasions, to file a registration statement
with respect to such shares. We are required to use our best efforts to
effect this registration. These registration rights are subject to the right of
the underwriters of an offering to limit the number of shares included in such
registration. Further, these holders may require us to file an unlimited number
of additional registration statements under the Securities Act on Form S-3 at
our expense.
<PAGE>
Stock Options
At July 15, 2000 we had 350,000 shares of common stock subject to
outstanding options under the 1997 and 1999 stock option plans. Immediately
after the completion of the offering, we intend to file registration statements
on Form S-8 under the Securities Act to register all of the shares of common
stock issued or reserved for future issuance under our 1997 and 1999 stock
option plans. After the effective dates of these registration statements, shares
purchased upon exercise of the options granted under such plans will be
available for resale in the public market. Most of these stock options are
subject to a four year vesting schedule, and the weighted average exercise price
of such options is $3.55.
Warrants
At May 22, 2000 we had outstanding currently exercisable warrants to
purchase 145,752 shares of our common stock at an exercise price of $4.50 per
share, which expire as follows:
Shares Subject Expiration
to Warrants Date
-------------- ----------
5,000 8/2/02
8,000 4/12/04
68,308 12/1/05
44,444 8/25/06
20,000 9/8/06
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION
AND BYLAWS
Provisions of our certificate of incorporation and bylaws that will be
in effect upon the closing of the offering and are summarized in the following
paragraphs, may be deemed to have an anti-takeover effect and may delay, defer
or prevent a tender offer or takeover attempt that a shareholder might consider
in its best interest, including those attempts that might result in a premium
over the market price for the shares held by shareholders.
Board Composition. Our certificate of incorporation and bylaws that
will be effective upon the completion of this offering provide that our Board
will be divided into three classes with each class serving staggered three-year
terms. Mr. Rainbolt will be a member of the first class, whose term expires at
the 2001 annual meeting of shareholders, Mr. Miller and Dr. Phillips will serve
as members of the second class whose term expires at the 2002 annual meeting of
shareholders, and Mr. Crull will serve as a member of the third class whose term
expires at the 2003 annual meeting of shareholders. Any additional directorships
resulting from an increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class will consist of
one-third of the directors. This staggered classification of the Board may have
the effect of delaying or preventing changes in control or management.
Board of Directors Vacancies. Our certificate of incorporation
authorizes the board of directors to fill vacant directorships or increase the
size of the board of directors. This may deter a shareholder from removing
incumbent directors and simultaneously gaining control of the board of directors
by filling the vacancies created by such removal with its own nominees.
Shareholder Action; Special Meetings of Shareholders. The certificate
of incorporation further provides that (i) shareholders may not take action by
written consent, but only at duly called annual or special meetings of
shareholders; and (ii) special meetings of shareholders may be called only by
the Chairman of the board of directors or a majority of the board of directors.
Advance Notice Requirements for Shareholder Proposals and Director
Nomination. The bylaws provide that shareholders seeking to bring business
before an annual meeting of shareholders, or to nominate candidates for election
as directors at an annual meeting of shareholders, must provide timely notice
thereof in writing. To be timely, a shareholder's notice must be delivered to
or mailed and received at our principal executive offices not less than 120 days
nor more than 150 days prior to the first anniversary of the date of the notice
of annual meeting provided with respect to the previous year's annual meeting
of shareholders. If no annual meeting of shareholders was held in the previous
year or the date of the annual meeting of shareholders has been changed to be
more than 30 calendar days earlier than or 60 calendar days after such
anniversary, notice by the shareholder must be received not more than 90 days
nor later than the later of (1) 60 days prior to the annual meeting of
shareholders, or (2) the close of business on the 10th day following the date on
which notice of the date of the meeting is given to shareholders or made public,
whichever first occurs.
<PAGE>
The bylaws also include requirements as to the form and content of a
shareholder's notice. These provisions may preclude shareholders from bringing
matters before an annual meeting of shareholders or from making nominations for
directors at an annual meeting of shareholders.
Authorized but Unissued Shares. The authorized but unissued shares of
common stock and preferred stock are available for future issuance without
shareholder approval, subject to certain limitations imposed by the American
Stock Exchange. These additional shares may be used for a variety of corporate
purposes, including future public offerings to raise additional capital,
corporate acquisitions and employee benefit plans. The existence of authorized
but unissued and unreserved common stock and preferred stock could render more
difficult or discourage an attempt to obtain control of Catalog.com by means of
a proxy contest, tender offer, merger or otherwise.
The Oklahoma General Corporation Act provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or bylaws,
unless a corporation's certificate of incorporation or bylaws, as the case may
be, requires a greater percentage.
Limitation of Liability and Indemnification Matters
Our bylaws include certain provisions whereby our officers and
directors are to be indemnified against certain liabilities. Our certificate of
incorporation also limits, to the fullest extent permitted by Oklahoma law, a
director's liability for monetary damages for breach of fiduciary duty,
including gross negligence. Under Oklahoma law, however, a director's liability
cannot be limited for:
o breach of the director's duty of loyalty;
o acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
o the unlawful payment of a dividend or unlawful stock purchase
redemption; or any transaction from which the director derives an
improper personal benefit.
Oklahoma law does not eliminate a director's duty of care and this
provision has no effect on the availability of equitable remedies such as
injunction or rescission based upon a director's breach of the duty of care.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant 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 Act, and is,
therefore, unenforceable
There is currently no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the certificate of incorporation, and we are not
aware of any threatened litigation or proceeding that may result in a claim for
such indemnification.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is UMB Bank, N.A.
American Stock Exchange Listing
We have applied to list the common stock on the American Stock Exchange
under the symbol "CLG."
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock,
and we cannot predict the effect, if any, that sales of our common stock or the
availability of common stock for sale will have on its market price.
Nevertheless, sales of substantial amounts of our common stock in the public
market, or the perception that such sales could occur, could negatively affect
the market price of the common stock and impair our ability to raise capital
through the sale of our equity securities in the future.
Upon the closing of the offering, we will have an aggregate of
5,192,530 shares of common stock outstanding, assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options or
conversion of outstanding warrants. Of the outstanding shares, all of the
1,000,000 shares sold in this offering will be freely tradable, except that any
shares held by "affiliates" of Catalog.com, as that term is defined in Rule 144
under the Securities Act, may only be sold in compliance with the limitations
described below. Of the remaining 4,192,530 shares of common stock 1,683,720
will be deemed "restricted securities" as defined under Rule 144 and 2,508,810
shares are eligible for sale without restriction or further registration under
Rule 144(k), unless they are held by "affiliates" of Catalog.com or subject to a
"lock-up" agreement as summarized below. Restricted securities may be sold in
the public market only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 promulgated under the Securities
Act, which rules are summarized below. Subject to the lock-up agreements
described below and the provisions of Rules 144, 144(k) and 701, additional
shares will be available for sale in the public market as follows:
o Upon the filing of a registration statement to register for resale
shares of common stock issuable upon the exercise of options
granted under the 1997 and 1999 stock option plans;
o At various times after 90 days from the date of this prospectus;
o After 180 days from the date of this prospectus (subject, in some cases to
volume limitations); and
o At various times after 180 days from the date of this prospectus.
In general, under Rule 144, as currently in effect, a person (or
persons whose shares are required to be aggregated), including an affiliate, who
has beneficially owned shares for at least one year is entitled to sell, within
any three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of:
o 1% of the then-outstanding shares of common stock (approximately 52,000
shares immediately after the offering); or
o the average weekly trading volume in the common stock during the
four calendar weeks preceding the date on which notice of such
sale is filed, subject to restrictions.
In addition, a person who is not deemed to have been our affiliate at
any time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years would be entitled to sell such
shares under Rule 144(k) without regard to the requirements described above. To
the extent that shares were acquired from an affiliate of Catalog.com, such
person's holding period for the purpose of effecting a sale under Rule 144
commences on the date of transfer from the affiliate.
As of the date of this prospectus, options to purchase a total of
350,000 shares of common stock are outstanding, of which 96,750 are currently
exercisable. We intend to file a Form S-8 registration statement under the
Securities Act shortly after the date of this prospectus to register all shares
of common stock issuable under the 1997 and 1999 stock option plans. Such
registration statement will automatically become effective upon filing.
Accordingly, shares covered by that registration statement will thereupon be
eligible for sale in the public markets, unless such options are subject to
vesting restrictions or the contractual restrictions described above.
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions stated in an underwriting
agreement dated the date of this prospectus, each underwriter named below has
severally agreed to purchase and we have agreed to sell to such underwriters,
the number of shares indicated below:
<TABLE>
<S> <C>
Name Number of Shares
Institutional Equity Corporation.............................
Capital West Securities, Inc.................................
----------------
Total..................................................
================
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters to purchase the shares included in this offering are subject to
approval of certain legal matters by counsel and to other conditions described
in the underwriting agreement. The underwriters are obligated to purchase all
the shares (other than those covered by the over-allotment option described
below) if they purchase any of the shares.
Public Offering Price and Dealers Concession
The underwriters, for whom Institutional Equity Corporation and Capital
West Securities, Inc. are acting as representatives, propose to offer some of
the shares directly to the public at the public offering price set forth on the
cover page of this prospectus and some of the shares to certain dealers, who are
members of the National Association of Securities Dealers, Inc., at the public
offering price less a concession not in excess of $ ___ per share. The
underwriters may allow, and such dealers may reallow, a concession not in excess
of $ ___ per share on sales to certain other dealers. After the initial public
offering, the public offering price, concessions and reallowances may change. No
such change will alter the amount of proceeds to be received by us as set forth
on the cover page of this prospectus. The representatives have advised us that
the underwriters do not intend to confirm any sales to any accounts over which
they exercise discretionary authority.
Over-allotment Option
We have granted to the underwriters an option, exercisable for 45 days
from the date of this prospectus, to purchase up to 150,000 additional shares of
common stock from us on the same terms as set forth in this prospectus with
respect to the 1,000,000 shares offered hereby. The underwriters may exercise
such option solely for the purpose of covering over-allotments, if any, in
connection with this offering. To the extent such option is exercised, each
underwriter will be obligated, subject to the conditions described in the
underwriting agreement, to purchase a number of additional shares approximately
proportionate to such underwriter's initial purchase commitment.
<PAGE>
'Underwriters' Compensation
The following table shows the underwriting discounts and commissions we
will pay to the underwriters in connection with this offering. We have agreed to
pay the underwriters a commission of 10% of the per share offering price for
shares sold to the public, and 7% of the per share offering price for shares
sold to friends and family of our existing shareholders. The underwriters have
allocated up to 100,000 shares to be sold by us in the offering to friends and
family of our existing shareholders. These amounts are shown assuming both no
exercise and full exercise of the underwriters' over-allotment option to
purchase additional shares of common stock.
<TABLE>
<S> <C> <C> <C>
Total
------------------------------------
Without With
Per Share (1) Over-allotment Over-allotment
</TABLE>
Underwriting fees paid by us
Expenses payable by us
Deemed compensation paid by us
Total
----------
(1) Based on a per share commission of 10% of the offering price with respect to
900,000 shares and 7% of the offering price with respect to 100,000 shares.
Indemnification of Underwriters
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, or to
contribute to payments the underwriters may be required to make in respect of
any of those liabilities.
Representatives' Warrants
Upon completion of this offering, we will sell to the representatives,
for there own accounts, warrants covering an aggregate of up to 100,000 shares
of common stock exercisable at a price of _____(115% of the offering price) per
share. The representatives will pay a price of $0.001 per warrant. The
representatives may exercise these warrants as to all or any lesser number of
the underlying shares of common stock commencing on the first anniversary of the
date of this offering until the fifth anniversary of the date of this offering.
The terms of these warrants require us to register the common stock for which
these warrants are exercisable within one year of the date of this prospectus.
These warrants are not transferable by the warrant holders other than to
officers and partners of the representatives. The exercise price of these
warrants and the number of shares of common stock for which these warrants are
exercisable are subject to adjustment to protect the warrant holders against
dilution in certain events described in the warrants.
Lock-up Agreements
In connection with this offering, our existing officers and directors
and some of our shareholders, who will own a total of 3,741,718 shares of common
stock after the offering, have entered into lock-up agreement pursuant to which
they have agreed not to offer or sell any shares of common stock for a period of
180 days after the date of this prospectus without the prior written consent of
Institutional Equity Corporation, which may, in its sole discretion, at any time
and without notice, waive any of the terms of these lock-up agreements.
Institutional Equity Corporation currently has no intention to allow any shares
of the common stock to be sold or otherwise offered by Catalog.com prior to the
expiration of the 180 day lock-up period, although it may decide to do so in
light of the purpose for which any such shares are requested to be sold or
otherwise offered, prevailing market conditions and any other factor which
Institutional Equity Corporation, in its sole discretion, may deem to be
relevant. Following the lock-up period, these shares will not be eligible for
sale in the public market without registration under the Securities Act unless
such sale meets the conditions and restrictions of Rule 144. None of the shares
sold in the offering to friends and family of our existing shareholders will be
subject to lock-up agreements.
<PAGE>
In addition, we have agreed that for a period of 180 days after the
date of this prospectus, we will not sell or offer to sell or otherwise dispose
of any shares of common stock without the prior written consent of Institutional
Equity Corporation, except that we may issue, and grant options to purchase,
shares of common stock under our stock option plans.
Determining the Offering Price
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for the shares was
determined by negotiations among us and the underwriters' representatives.
Among the factors considered in determining the initial public offering price
were our record of operations, current financial condition, future prospects and
markets, the economic conditions in and future prospects for the industry in
which we compete, our management, and currently prevailing general conditions in
the equity securities markets, including current market valuations of publicly
traded companies considered comparable to us. We cannot assure you that the
prices at which the shares will sell in the public market after this offering
will not be lower than the price at which they are sold by the underwriters or
that an active trading market in the common stock will develop and continue
after this offering.
Stabilization and other Transactions
In connection with the offering, Institutional Equity Corporation, on
behalf of the underwriters, may over-allot, or engage in syndicate covering
transactions, stabilizing transactions and penalty bids. Over-allotment involves
syndicate sales of common stock in excess of the number of shares to be
purchased by the underwriters in the offering, which creates a syndicate short
position. Syndicate covering transactions involve purchases of the common stock
in the open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of certain bids or
purchases of common stock made for the purpose of preventing or retarding a
decline in the market price of the common stock while the offering is in
progress. Penalty bids permit the underwriters to reclaim a selling concession
from a syndicate member when Institutional Equity Corporation, in covering
syndicate short positions or making stabilizing purchases, repurchases shares
originally sold by that syndicate member. These activities may cause the price
of the common stock to be higher than the price that otherwise would exist in
the open market in the absence of such transactions. These transactions may be
effected on the American Stock Exchange. None of the transactions described in
this paragraph is required, and, if they are undertaken, they may be
discontinued at any time.
Advisory Director
We have agreed that upon the conclusion of this offering we will
appoint to our board of directors one non-voting advisory director selected by
the underwriters' representatives.
LEGAL MATTERS
Phillips McFall McCaffrey McVay & Murrah, P.C., Oklahoma City,
Oklahoma, which holds 23,810 shares of our common stock, will pass upon the
validity of the common stock in the offering for Catalog.com. Douglas A. Branch,
a shareholder and director of that firm, serves as our Secretary. Bingham Dana,
LLP, New York, New York, is representing the underwriters in connection with
this offering.
EXPERTS
The financial statements as of December 31, 1998 and 1999 and for each
of the two years in the period ended December 31, 1999 included in this
prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
<PAGE>
WHERE YOU CAN GET ADDITIONAL INFORMATION
We filed with the SEC a registration statement on Form SB-2 (including
the exhibits, schedules and amendments to the registration statement) under the
Securities Act with respect to the shares of common stock to be sold in the
offering. This prospectus does not contain all the information set forth in the
registration statement. For further information with respect to Catalog.com and
the shares of common stock to be sold in the offering, reference is made to the
registration statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract, agreement or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference.
You may read and copy all or any portion of the registration statement
or any other information Catalog.com files at the SEC's public reference room
at 450 Fifth Street, N.W., Washington, D.C. 20549. You can request copies of
these documents, upon payment of a duplicating fee, by writing to the SEC.
Please call the SEC at 1-800-SEC-0330 for further information on the operation
of the public reference rooms. Our SEC filings, including the registration
statement, are also available to you on the SEC's Web site
(http://www.sec.gov).
As a result of the offering, we will become subject to the information
and reporting requirements of the Securities Exchange Act of 1934, as amended,
and will file periodic reports, proxy statements and other information with the
SEC. Upon approval of the common stock for listing on the American Stock
Exchange such reports, proxy and information statements and other information
may also be inspected at the American Stock Exchange offices located at 86
Trinity Place, New York, New York 10006-1872. We intend to furnish our
shareholders with annual reports containing audited financial statements and
make available quarterly reports for the first three quarters of each year
containing unaudited interim financial information.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Page
Catalog.com, Inc.
Report of independent public accountants...............................................................F-1
Balance sheets as of December 31, 1999 and June 30, 2000 (unaudited)...................................F-2
Statements of operations for the years ended December 31, 1998, 1999 and
six-months ended June 30, 2000 and 1999 (unaudited)...............................................F-4
Statement of 'stockholders' deficit for the years ended December 31, 1997, 1998,
1999 and six-months ended June 30, 2000 (unaudited)...............................................F-5
Statements of cash flows for the years ended December 31, 1998, 1999 and
six-months ended June 30, 2000 and 1999 (unaudited)................................................F-6
Notes to financial statements..........................................................................F-7
Network Wizards
Report of independent public accountants..............................................................F-16
Statement of operations for the period from January 1, 1998 to July 30, 1998..........................F-17
Statement of cash flows for the period from January 1, 1998 to July 30, 1998..........................F-18
Notes to financial statements.........................................................................F-19
</TABLE>
<PAGE>
Report of Independent Public Accountants
To the Board of Directors of
Catalog.com, Inc.:
After the 2 for 1 split of the common and Series B preferred stock discussed in
Note 11 to Catalog.com's financial statements is effected, we expect to be in a
position to render the following audit report.
ARTHUR ANDERSEN LLP
Oklahoma City, Oklahoma,
February 18, 2000
We have audited the accompanying balance sheet of Catalog.com, Inc. (formerly
Ethos Communications Corp.) (an Oklahoma corporation) as of December 31, 1999,
and the related statements of operations, stockholders' deficit and cash flows
for each of the two years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Catalog.com, Inc. as of
December 31, 1999, and the results of its operations and cash flows for each of
the two years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States.
F-1
<PAGE>
CATALOG.COM, INC.
BALANCE SHEETS
<TABLE>
<S> <C> <C>
December 31, June 30,
ASSETS 1999 2000
------ -------- ------
(Unaudited)
CURRENT ASSETS:
Cash $ 1,650,994 $ 867,513
Accounts receivable, net of allowance for doubtful accounts of $2,437 119,251 126,681
Prepaids and other 5,754 21,586
------------ ------------
Total current assets 1,775,999 1,015,780
------------ ------------
PROPERTY AND EQUIPMENT:
Computer equipment 882,850 1,166,571
Furniture and fixtures 110,381 143,845
Capital lease equipment 319,604 319,604
Leasehold improvements 12,102 70,938
------------ ------------
1,324,937 1,700,958
Less- Accumulated depreciation (779,417) (963,889)
------------ ------------
Net property and equipment 545,520 737,069
------------ ------------
OTHER ASSETS:
Customer list, net of accumulated amortization of $234,309 921,312 844,597
Software development costs, net of accumulated amortization of $239,916 189,873 193,957
Domain names, net of accumulated amortization of $8,274 126,726 109,803
Preferred stock issuance costs, net of amortization of $20,891 292,459 261,069
Deferred offering costs - 195,812
Other 53,773 62,912
------------ ------------
Total other assets 1,584,143 1,668,150
------------ ------------
Total assets $ 3,905,662 $ 3,420,999
============ ============
</TABLE>
F-2
<PAGE>
CATALOG.COM, INC.
BALANCE SHEETS
<TABLE>
<S> <C> <C>
December 31, June 30,
LIABILITIES AND STOCKHOLDERS' DEFICIT 1999 2000
------------------------------------- -------- ------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable $ 159,963 $ 222,522
Deferred revenue 318,496 375,592
Other accrued liabilities 9,424 8,416
Current maturities of long-term debt 142,708 146,006
Current maturities of capital lease obligations 59,578 10,345
------------ ------------
Total current liabilities 690,169 762,881
------------ ------------
OBLIGATIONS DUE AFTER ONE YEAR:
Long-term debt 613,471 542,328
COMMITMENTS (Notes 4 and 5)
SERIES B PREFERRED, $.01 par value; 800,000 shares authorized, 794,198 shares issued
and outstanding 3,573,891 3,573,891
STOCKHOLDERS' DEFICIT:
Common stock, $.01 par value; 19 million shares authorized, 3,395,332 shares
issued and outstanding 33,953 33,983
Series A preferred stock, $.01 par value; 1 million shares authorized, no
shares issued and outstanding - -
Additional paid-in capital 1,056,924 1,111,894
Retained deficit (2,062,746) (2,603,978)
------------ ------------
Total stockholders' deficit (971,869) (1,458,101)
------------ ------------
Total liabilities and stockholders' deficit $ 3,905,662 $ 3,420,999
============ ============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-3
<PAGE>
CATALOG.COM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
Six Months Ended
Year Ended December 31, June 30,
<S> <C> <C> <C> <C>
1998 1999 1999 2000
------- -------- ------- ------
(Unaudited)
INTERNET AND ONLINE SERVICE REVENUES $ 1,912,744 $ 2,837,683 $ 1,283,003 $ 1,820,377
OPERATING COSTS AND EXPENSES:
Communications and operations 592,834 674,864 308,889 399,505
Sales and marketing 136,511 528,742 194,521 312,807
General and administrative 752,562 1,980,213 714,614 1,260,186
Depreciation and amortization 389,135 585,832 238,506 353,764
----------- ------------ ----------- -----------
Total operating costs and expenses 1,871,042 3,769,651 1,456,530 2,326,262
----------- ------------ ----------- -----------
Operating income (loss) 41,702 (931,968) (173,527) (505,885)
----------- ------------ ----------- -----------
OTHER (INCOME) AND EXPENSES:
Interest expense 86,441 132,179 73,520 42,532
Interest and other income (5,061) (47,385) (5,623) (38,575)
----------- ------------ ----------- -----------
Total other expenses (income) 81,380 84,794 67,897 3,957
----------- ------------ ----------- -----------
NET INCOME (LOSS) (39,678) (1,016,762) (241,424) (509,842)
dividends on preferred stock (25,432) (84,573) (30,518) (31,390)
----------- ------------ ----------- -----------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS
$ (65,110) $(1,101,335) $ (271,942) $ (541,232)
=========== =========== =========== ===========
BASIC NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS
PER COMMON SHARE $ (0.02) $ (0.37) $ (0.10) $ (0.16)
========== ============ ========== ==========
DILUTED NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS
PER COMMON SHARE $ (0.02) $ (0.37) $ (0.10) $ (0.16)
========== ============ ========== ==========
BASIC WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
3,424,974 2,970,890 2,637,134 3,395,777
=========== ============ =========== ===========
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
3,424,974 2,970,890 2,637,134 3,395,777
=========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
CATALOG.COM, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
Series A Additional Total
Preferred Stock Common Stock Paid-in Retained Stockholders'
---------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Shares Amount Shares Amount Capital Deficit Deficit
--------- ---------- ---------- ---------- ----------- ----------- ---------
BALANCE, DECEMBER 31, 1997 - $ - 4,108,810 $ 41,088 $ 477,204 $(524,301) $ (6,009)
Exchange of common stock
for redeemable
convertible Series
A preferred stock 675,255 433,085 (1,600,000) (16,000) (452,000) (372,000) (406,915)
Dividend on Series A
preferred stock - - - - - (25,432) (25,432)
Net loss - - - - - (39,678) (39,678)
---------- ---------- ----------- ---------- ---------- ---------- ----------
BALANCE, DECEMBER 31, 1998 675,255 433,085 2,508,810 25,088 25,204 (961,411) (478,034)
Common stock issued - - 259,500 2,595 604,905 - 607,500
Dividends on Series A
preferred stock - - - - - (63,682) (63,682)
Redemption of Series A
preferred stock (675,255) (433,085) 627,022 6,270 426,815 - -
Dividend on Series B
preferred stock - - - - - (20,891) (20,891)
Net loss - - - - - (1,016,762) (1,016,762)
-------- ---------- ----------- ---------- ------------ -----------------------
BALANCE, DECEMBER 31, 1999 - - 3,395,332 33,953 1,056,924 (2,062,746) (971,869)
Common stock issued (unaudited) - - 3,000 30 2,970 - 3,000
Warrants issued (unaudited) - - - - 52,000 - 52,000
Dividend on Series B preferred
stock (unaudited)
- - - - - (31,390) (31,390)
Net loss (unaudited) - - - - - (509,842) (509,842)
---------- ---------- ----------- ---------- ------------------------- ----------
BALANCE, JUNE 30,
2000 (unaudited) - $ - 3,398,332 $ 33,983 $ 1,111,894 $(2,603,978) $(1,458,101)
========= ========== =========== ========== ======================= =============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-5
<PAGE>
CATALOG.COM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
Six Months Ended
Year Ended December 31, June 30,
1998 1999 1999 2000
-------- -------- -------- ------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (39,678) $ (1,016,762) $ (241,424) $ (509,842)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operations-
Depreciation and amortization 389,135 585,832 238,506 353,764
Non-cash compensation - warrants - - - 52,000
Changes in current assets and liabilities-
Increase in accounts receivable (14,879) (76,447) (47,226) (7,430)
(Increase) decrease in prepaids and other (1,337) 2,500 (30,650) (15,832)
Increase in accounts payable 38,249 70,400 155,562 62,221
Increase (decrease) in deferred revenue 77,194 46,785 38,860 57,096
Increase (decrease) in other accrued 222 4,030 (345) (669)
------------ ------------ ------------ ------------
liabilities
Net cash provided by (used in) operating
activities 448,906 (383,662) 113,283 (8,692)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (52,290) (515,139) (321,892) (376,020)
Acquisition of web hosting assets (1,180,000) - - -
Acquisition of domain names (10,000) (125,000) - -
Non-compete agreement (10,000) - - -
Trademark registration - (6,751) - (888)
Software development costs (166,917) (107,436) (48,960) (73,889)
Other non-current assets - (14,010) - (14,100)
------------ ------------ ------------ ------------
Net cash used in investing activities (1,419,207) (768,336) (370,852) (464,897)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of short-term debt - 1,400,000 - -
Repayment of note payable - shareholder (9,195) (40,583) (40,583) -
Repayment of long-term debt (90,332) (568,351) (72,000) (67,848)
Proceeds from issuance of long-term debt 1,274,062 44,964 - -
Payments of capital lease obligations (113,474) (108,357) (52,170) (49,232)
Proceeds from issuance of common stock - 607,500 607,500 3,000
Proceeds from issuance of preferred stock - 1,860,541 - -
Deferred offering costs - - (43,941) (195,812)
Redemption of Series A preferred stock - (467,952) - -
Series A preferred stock dividends - (28,077) - -
------------ ------------ ------------ --------
Net cash provided by (used in) financing
activities 1,061,061 2,699,685 398,806 (309,892)
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 90,760 1,547,687 141,237 (783,481)
CASH, beginning of period 12,547 103,307 103,307 1,650,994
------------ ------------ ------------ ------------
CASH, end of period $ 103,307 $ 1,650,994 $ 244,544 $ 867,513
============ ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 81,646 $ 132,041 $ 73,721 $ 42,871
Income taxes paid $ - $ - $ - $ -
NON-CASH FINANCING ACTIVITIES:
Series A preferred stock dividend $ 25,432 $ 35,605 $ 30,518 $ -
Series B preferred stock dividend $ - $ 20,891 $ - $ 31,390
Conversion of short-term debt to Series B preferred
stock $ - $ 1,400,000 $ - $ -
The accompanying notes are an integral part of these
financial statements.
F-6
</TABLE>
<PAGE>
CATALOG.COM, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION:
-------------
Catalog.com, Inc. (the "Company"), formerly Ethos Communications Corp., based in
Oklahoma City, Oklahoma, was incorporated in Oklahoma on February 28, 1996, and
provides Internet services including an online catalog search engine
(Catalog.com), Internet access, web hosting and Internet application
development. The Company conducts its business within one industry segment with
web hosting customers in all 50 states and 50 foreign countries. Internet access
services are provided in the Dallas/Ft. Worth, Texas, Oklahoma City and Tulsa,
Oklahoma markets.
The Company is the successor to the operations of Washita Communications, LLC
("Washita"). Washita was owned by the current majority stockholders of
Catalog.com. Effective February 29, 1996, the assets and liabilities of Washita
and $468,000 from BancFirst Investment Corporation, were exchanged for common
stock in the Company. On July 31, 1998, the Company purchased certain fixed
assets, accounts receivable, web hosting assets and electronic commerce assets
from a sole proprietor for $1.2 million ("Network Wizards Assets"). Included in
these assets were the rights to the domain name "Catalog.com." Upon completion
of this purchase, the Company began doing business as Catalog.com. Effective
April 14, 1999, the Company changed its name to Catalog.com, Inc.
The Company's future success is dependent on continued growth in the use of the
Internet and on its ability to retain existing customers while continuing to
attract new customers. The market for Internet services is characterized by
rapidly changing technology, standards, services and products. The Company's
success will depend, in part, on its ability to market its services effectively,
retain its customer base, and to continue to develop its technical
infrastructure and solutions.
All per share amounts for the Company's common stock and Series B preferred
stock have been retroactively adjusted to reflect the Company's stock split,
discussed in Note 11.
2. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES:
---------------------------------------------------------
Interim Financial Statements
The interim financial statements as of June 30, 2000, and for the six-month
periods ended June 30, 1999 and 2000, are unaudited, and certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been omitted. In the opinion of management, all adjustments, consisting of
normal recurring adjustments, necessary to fairly present the financial
position, results of operations and cash flows with respect to the interim
financial statements have been included.
Property and Equipment
Property and equipment are recorded at cost. Major additions and improvements
are capitalized at cost, while maintenance and repairs which do not extend the
useful lives of the respective assets are expensed. When assets are sold or
retired, cost and accumulated depreciation are removed from the respective
accounts. Any gains or losses resulting from disposal are included in other
income. Depreciation is provided over the assets' estimated useful lives using
the straight-line method of depreciation. The estimated useful lives of assets
are as follows:
Years
Computer equipment 3
Furniture and fixtures 5
Leasehold improvements 5-6
Depreciation of property and equipment was approximately $229,500 and $284,000
for the years ended December 31, 1998 and 1999, respectively.
Software Development Costs
The Company's online service is comprised of various features which
contribute to the overall functionality of the Catalog.com website. The Company
capitalizes costs incurred in the development of software used in the sale of
its services. Capitalized costs include direct labor and related overhead for
software produced by the Company and the cost of software purchased from third
parties. Research and development costs are expensed as incurred until
technological feasibility of the software has been established. Once
technological feasibility has been established, such costs are capitalized until
the software is available for its intended use. Software development costs are
amortized using the straight-line method over a maximum of three years or the
expected life of the product, whichever is less. Accumulated amortization of
$239,916 is deducted from software development costs on the accompanying balance
sheet at December 31, 1999. Amortization expense relating to software
development costs totaled approximately $85,000 and $119,000 during 1998 and
1999, respectively.
Effective January 1, 1998, the Company adopted Statement of Position 98-1 ("SOP
98-1"), "Accounting for the Cost of Computer Software Developed or Obtained for
Internal Use." SOP 98-1 provides guidance over accounting for computer software
developed or obtained for internal use including the requirement to capitalize
specified costs and amortization of such costs. The Company's adoption of SOP
98-1 did not have a material effect on the Company's capitalization policy,
operations or financial position.
Customer List
Customer list capitalized cost relates to the portion of the total
purchase price of the Network Wizards Assets purchased in 1998 allocated to the
customer base acquired in the acquisition. Customer list is being amortized on a
straight-line basis over a 7-year period. Amortization expense of the customer
list during 1998 and 1999 totaled approximately $69,200 and $165,100,
respectively.
Domain Names
Domain names capitalized cost consist of the purchase price paid by the Company
to acquire rights to domain names such as "catalog.net," "mycatalog.com" and
"catalog.com." Domain names are amortized on a straight-line basis over a 7-year
period. Amortization expense for domain names during 1998 and 1999 totaled
approximately $600 and $7,700, respectively.
Other Assets
Other assets consist primarily of trademark rights, deferred charges, and
deposits. The trademark rights are net of accumulated amortization of $2,126,
and are being amortized over 15 years. Deferred charges relate to costs incurred
in connection with the Company's borrowing under the United States Small
Business Administration loan. These costs are being amortized over the life of
the loan and are shown net of accumulated amortization of $5,244 in the
accompanying balance sheet. Deposits represent security deposits on the
Company's leased facilities.
Revenue Recognition
Internet access and web hosting services, subscription and usage fees are earned
over the period services are provided which is generally one month to one year.
Service fees are billed in advance and are recognized over the period the
service is provided. Billings in advance of revenues being earned are recorded
as deferred revenue in the accompanying balance sheets.
No one customer accounted for 10% or more of net revenues during 1998 or 1999.
Advertising Costs
Advertising costs are charged to operations when incurred. Advertising
expense during 1998 and 1999 totaled approximately $12,800 and $335,000,
respectively.
Income Taxes
Deferred income taxes are provided to reflect the future tax consequences of
differences between the tax bases of assets and liabilities and their reported
amounts in the financial statements. Deferred income tax assets and liabilities
are computed using the currently enacted tax laws and rates that apply to the
periods in which they are expected to affect taxable income. Income tax expense
is the current tax payable or refundable for the period plus or minus the net
change in the deferred tax assets and liabilities.
Deferred taxes are classified as current or noncurrent, depending on the
classification of the assets and liabilities to which they relate. Deferred
taxes arising from temporary differences that are not related to an asset or
liability are classified as current or noncurrent depending on the period in
which the temporary differences are expected to be used. A valuation allowance
is established when it is more likely than not that some portion or all of the
deferred tax assets will not be realized.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, trade
receivables, trade payables, capital lease obligations and bank debt. The
carrying value of cash, trade receivables and trade payables are considered to
be representative of their respective fair values, due to the short maturity of
these instruments. The fair value of capital lease obligations and bank debt
approximates its carrying value based on the borrowing rates currently available
to the Company for leases and bank loans with similar terms and maturities.
Concentration and Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and trade receivables. Concentration of
credit risk with respect to trade receivables is limited as the outstanding
total represents a large number of customers with individually small balances.
The Company does not require collateral or other security against trade
receivable balances; however, it does maintain reserves for potential credit
losses and such losses have been within management's expectations.
Loss Per Common Share
The Company computes basic and diluted loss per common share in accordance with
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share." SFAS 128 requires the Company to report both basic loss per share, which
is based on the weighted average number of common shares outstanding, and
diluted loss per share, which is based on the weighted average number of common
shares outstanding and all potentially dilutive common stock equivalents
outstanding. Diluted loss per common share has been omitted because the impact
of stock options, warrants and convertible preferred stock on the Company's loss
per common share is anti-dilutive.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
Comprehensive Loss
In 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive Income."
Net loss for the periods ended December 31, 1998 and 1999, are the same as
comprehensive loss defined pursuant to SFAS No. 130.
Business Segments
The Company operates in one business segment pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information."
Recently Issued Accounting Pronouncements
In December 1999, the U.S. Securities and Exchange Commission ("SEC")
released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" (SAB101), which clarifies the SEC's views on revenue recognition.
The Company believes its existing revenue recognition policies and procedures
are in compliance with SAB101 and therefore, SAB101's adoption will have no
material impact on the Company's financial condition, results of operations or
cash flows.
3. LONG-TERM DEBT:
---------------
The Company's long-term debt at December 31, 1999, consists of the following:
Line of credit agreement (a) $ -
Promissory note with a stockholder (b) -
SBA loan with a bank (c) 714,497
Term loan with a bank (d) -
Note payable (e) 41,682
-----------
Total long-term debt 756,179
Less- Current maturities (142,708)
-----------
Long-term debt $ 613,471
===========
(a) In October 1996, the Company entered into a revolving line of credit
agreement with a bank which is an affiliate of a stockholder of the
Company. Under the revolving line of credit, the Company could borrow up
to $100,000. Borrowings bear interest at a rate of 2% over the prime rate
of larger commercial banks. The outstanding principal plus all accrued
interest as of April 30, 1997, was due in 24 monthly payments beginning
May 30, 1997, and continuing on the 30th day of each month until maturity
on April 30, 1999. Borrowings under this agreement were secured by all
furniture, fixtures, equipment, software, inventory and accounts of the
Company. During 1999, the outstanding balance was paid in full and the
line expired.
(b) In February 1996, the Company borrowed $64,000 under an unsecured
promissory note, bearing no interest, with a stockholder of the Company.
The bank, its affiliate, and the Company share a common director.
Principal payments of $3,556 were due monthly with the remaining balance
due at maturity on December 1, 1997. On December 1, 1997, the note was
amended to provide for 10% interest until paid in full with no stated
maturity date or mandatory principal payments. During 1999, the
outstanding balance was paid in full as a condition of the redemption of
the Series A Preferred Stock issued to the bank's affiliate in 1998 (see
Note 7).
(c) On July 31, 1998, the Company borrowed $1,000,000 under a United States
Small Business Administration loan through a bank which is an affiliate of a
stockholder of the Company. The note bears interest at a rate equal to Wall
Street Journal prime plus 2.5% adjusted quarterly (10.75% at December 31, 1999).
Principal and interest payments of $17,123 are due monthly until maturity on
July 31, 2005. The note is secured by all assets of the Company and a personal
guarantee of the Chief Executive Officer of the Company. During December 1999,
the Company made an additional principal payment of $132,733 on the outstanding
balance.
(d) On July 28, 1998, the Company borrowed $300,000 under a note payable to a
bank which is an affiliate of a stockholder. The note bears interest at a
10% fixed rate with interest payments due monthly. Four principal payments
of $60,000 were due annually beginning July 28, 1999, with a fixed
principal and interest payment of $60,500 due at maturity on July 28, 2003.
The note is secured by a personal guarantee of the Chief Executive Officer
of the Company. During 1999, the outstanding balance was paid in full.
(e) In August 1999, the Company borrowed $44,965 under two unsecured notes
payable with a finance company. The notes bear interest at a 10.26% fixed
rate with interest and principal payments of $953 due monthly until
maturity on July 31, 2004.
On July 23, 1999, the Company borrowed $1,400,000 under a bridge loan agreement
with eight individuals (the "Bridge Loans"). The Bridge Loans bore interest at a
fixed rate of 7.0% with interest payments due on the last day of the year. A
director of the Company held $150,000 of these Bridge Loans. All principal, plus
any accrued interest, was due on the earlier of a Qualified Private Placement or
July 23, 2000. The Bridge Loans were convertible to preferred stock at a price
per preferred share equal to $4.50, as adjusted for the stock split, upon the
closing of any qualified private placement offering provided that the Company
was in compliance with the terms of the loan agreement. Proceeds from the Bridge
Loans were used to fund the required cash component of the Series A preferred
stock redemption, pay all Mandatory and Accrued Dividends and pay off the
$300,000 of outstanding indebtedness and accrued interest under the Company's
term loan described in (d). On August 25, 1999, the Bridge Notes were converted
into 311,114 shares of Series B preferred stock.
The annual maturities of long-term debt at December 31, 1999, are as follows:
2000 $ 142,708
2001 158,787
2002 176,679
2003 196,587
2004 and thereafter 81,418
-----------
Total $ 756,179
===========
4. CAPITAL LEASE OBLIGATIONS:
--------------------------
The Company leases computer equipment under three capital leases each
expiring in 2000. The assets and liabilities under these capital leases are
recorded at the lower of the present value of the minimum lease payments or the
fair value of the assets. The assets are depreciated over the lower of their
related lease terms or their estimated useful lives.
Minimum future lease payments under capital leases as of December 31,
1999, are:
2000 $ 60,871
Less- Amount representing interest (1,293)
-----------
Present value of net minimum lease payment $ 59,578
===========
Interest rates on capitalized leases vary from 7.05% to 7.31% and are
imputed based on the lower of the Company's incremental borrowing rate at the
inception of each lease or the lessor's implicit rate of return.
5. COMMITMENTS:
------------
The Company has operating leases on facilities and certain equipment. At
December 31, 1999, lease rental commitments under noncancelable leases with
original terms in excess of one year are as follows:
2000 $ 246,308
2001 214,182
2002 188,429
2003 182,029
2004 143,883
2005 and thereafter 27,020
------------
Total $ 1,001,851
============
6. INCOME TAXES:
-------------
The differences between the provision for income taxes at the expected Federal
statutory rates and the provision for income taxes recorded in the statements of
operations are summarized as follows:
Year Ended December 31,
1998 1999
------- ------
Federal income tax provision (benefit)
at statutory rates $ (13,490) $ (345,699)
State income taxes, net of Federal
income tax benefit (1,591) (40,670)
Nondeductible expenses 3,142 2,366
Tax exempt interest - (15,831)
Change in valuation alLowance 11,939 399,834
----------- -----------
Provision for income taxes $ - $ -
=========== =======
The significant components of the Company's deferred tax assets and liabilities
as of December 31, 1999, are as follows:
Deferred tax assets:
Deferred revenue $ 121,028
Depreciation 55,912
Amortization of intangibles 44,852
Net operating losses 332,263
Other 3,766
-----------
Gross deferred tax assets 557,821
-----------
Deferred tax liabilities:
Other 261
-----------
Less- Valuation allowance (557,560)
-----------
Total deferred tax assets $ -
=======
A valuation allowance has been established due to the uncertainty of realizing
certain loss carryforwards and other deferred tax assets. The establishment of
the valuation allowance has not resulted in a current or deferred income tax
provision or benefit. The valuation allowance was established in 1996 and
increased in 1998 and 1999 because of temporary differences that increased the
recorded deferred tax assets.
For income tax purposes, the Company has net operating loss carryforwards of
approximately $874,000 which begin to expire in year 2013.
7. STOCKHOLDERS' DEFICIT AND PREFERRED STOCK:
------------------------------------------
Upon its incorporation, the Company was authorized to issue up to 40,000 shares
of common stock and 10,000 shares of preferred stock, both classes with a par
value of $1.00. On May 22, 1997, the Company's Board of Directors increased the
total authorized number of shares to 20 million shares consisting of 19 million
shares of common stock and 1 million shares of preferred stock. In addition, the
par value on both classes of stock was changed to $.01 per share.
On May 28, 1997, the Company effected a 200 for 1 stock split of the Company's
$.01 par value common stock. As a result of the split, 3,980,000 additional
shares were issued, and additional paid-in capital was reduced by $20,000,
offset by an increase in common stock at par.
On July 23, 1998, the Board of Directors designated 675,255 shares of the
Company's $.01 par value preferred stock as Series A Redeemable Convertible
Preferred Stock ("Series A Preferred"). Cumulative dividends on the Series A
Preferred were to be declared annually and paid out of funds legally available
at the rate per annum of $.0208 per share ("Mandatory Dividends". In addition,
the holders of Series A Preferred Stock were to be entitled to receive, out of
funds legally available, annual dividends at the rate per annum of $.0208 per
share, when, as and if declared by the Board of Directors (the "Elective
Dividend"). Unpaid Mandatory and Elective Dividends were to accrue from day to
day, whether or not earned or declared, and were to be cumulative.
The Holder of the Series A Preferred Stock had the right at its option at any
time prior to the issuance by the Company of a redemption notice or an initial
public offering ("IPO") notice to convert all, but not less than all, of such
shares of Series A Preferred into an equal number of fully paid and
nonassessable shares of common stock.
The Company had the right at any time to redeem all, but not less than all, of
the issued and outstanding shares of Series A Preferred Stock by paying $467,952
cash ($.693 per share) plus all unpaid dividends, whether or not declared,
computed to such redemption date and issuing to the holders of Series A
Preferred a certain number of shares of common stock. The number of common
shares required to be issued upon redemption by the Company was as follows:
Number of
Redemption Date Common Shares
On or before July 31, 1999 627,022
August 1, 1999 through July 31, 2000 835,966
August 1, 2000 through July 31, 2001 1,074,870
After July 31, 2001 1,350,510
On July 28, 1998, the Company entered into a Share Exchange Agreement with a
stockholder whereby the Company exchanged 675,255 shares of Series A Preferred
for 1,600,000 shares of common stock held by the stockholder. The stockholder is
an affiliate of the Company's bank lender. As a result of the exchange, the
Series A Preferred was valued at $1.24 per share with the cash redemption
feature of $406,915. During 1998 and 1999, the Company recorded dividends of
$25,432 and $35,605, respectively, associated with the cash redemption feature
of the Series A preferred stock.
On April 2, 1999, the Company issued 252,000 shares of common stock, $.01 par
value for $630,000.
On April 12, 1999, the Company's Board of Directors increased the total
authorized number of shares of the Company to 21 million shares consisting of 19
million shares of common stock and 2 million shares of preferred stock.
On July 28, 1999, the Company redeemed and cancelled all outstanding shares of
the Series A Preferred at a total redemption price of $467,952 in cash plus the
issuance of 627,022 shares of common stock as provided for by the preferred
stock redemption features. The 627,022 shares of common stock were recorded at
$433,085, the carrying value of the preferred stock at the date of redemption.
In addition, the Company declared and paid cash dividends totaling $28,077 and
as part of the redemption, the Company repaid the $300,000 loan from the bank
affiliated with the Series A Preferred stockholder.
On August 25, 1999, the Board of Directors designated 800,000 shares of the
Company's $.01 par value preferred stock as Series B Convertible Preferred Stock
("Series B Preferred"). Dividends upon the Series B Preferred Stock shall be
paid out of funds legally available annually beginning on August 1, 2001, at the
rate per annum of $.27 per share ("Mandatory Dividend" and collectively the
"Mandatory Dividends"). In addition, commencing on August 1, 2001, the holders
of Series B Preferred shall be entitled to receive, out of funds legally
available additional annual dividends at the rate per annum of $.27 per share,
when, as and if declared by the Board of Directors. All dividends accrue from
day to day, whether or not earned or declared and are cumulative from August 1,
2001.
The holders of the Series B Preferred have the right, at their option at any
time, to convert any such shares of Series B Preferred into such number of
shares of common stock as is obtained by multiplying the number of shares of
Series B Preferred so to be converted by the conversion price of $4.50 per
share, as adjusted for the 2 for 1 stock split. On July 31, 2004, the Company
must redeem any outstanding shares of the Series B Preferred at a redemption
price of $4.50 per share.
On August 25, 1999, the Company entered into a Share Exchange Agreement with the
bridge loan holders whereby the Company converted the $1.4 million of bridge
loans into 311,114 shares of Series B Preferred Stock. During 1999, the Company
also issued 483,084 shares of Series B Preferred for $1,860,541, net of issuance
costs of $313,350. The Series B Preferred are recorded at their redemption value
with the issuance cost reflected in other assets on the accompanying December
31, 1999 balance sheet. The preferred stock issuance costs are being amortized
over a 5-year period as a preferred stock dividend.
As of December 31, 1999, the Company had outstanding warrants to purchase 25,000
and 112,752 shares of the Company's common stock and Series B preferred stock,
respectively, each at a price of $4.50 per share. These warrants were issued at
various dates from August through October of 1999, are exercisable upon issuance
and expire at various dates through 2006.
8. PURCHASE OF WEB HOSTING ASSETS:
-------------------------------
On July 31, 1998, the Company acquired substantially all of the assets of a web
hosting business operated by a sole proprietor for $1.2 million ("Lottor
Assets"). The acquisition was accounted for using the purchase method, with the
purchase price allocated to assets and liabilities acquired based on their
respective fair values at the date of acquisition and, accordingly, the
accompanying statements of operations do not include any revenues or expenses
related to the acquisition prior to the acquisition date. Of the total purchase
price, approximately $10,000 was allocated to non-compete agreement,
approximately $10,000 was allocated to domain name, and the remainder was
allocated to customer list. Following are the Company's unaudited pro forma
results for 1998 assuming the acquisition occurred on January 1, 1998 (in
thousands):
Pro forma:
Net revenues $ 2,206
Net loss $ (221)
Net loss applicable to common stockholders $ (246)
Basic net loss applicable to common
stockholders per common
share $ (.07)
These unaudited pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of the results of
operations, which would have actually resulted had the purchase occurred on the
date indicated, or which may result in the future.
9. EMPLOYEE BENEFIT PLAN:
----------------------
Effective January 1, 1998, the Company adopted a 401(k) Profit Sharing Plan and
Trust (the "401(k) Plan"). Contributions to the 401(k) Plan are made at the
discretion of the Company. Any contributions are allocated to the participants'
individual accounts based on the ratio of the participant's compensation to
total participant compensation. Employees become eligible for participation in
the 401(k) Plan upon employment with the Company and attaining the age of 21.
Employees can make contributions to the 401(k) Plan up to 12% of their
compensation. Upon a discretionary contribution by the Company, participants
will vest in the Company contribution at a rate of 20% for each full year of
continuous service beginning in year two of employment. Amounts forfeited are
allocated annually to the remaining participants in the same manner as the
Company's contribution. During 1998 and 1999, the Company made no discretionary
contributions to the 401(k) Plan.
10. STOCK BASED COMPENSATION:
-------------------------
On May 22, 1997, the Company's Board of Directors approved The Ethos
Communication Corp., subsequently renamed Catalog.com, 1997 Stock Option Plan
(the "1997 Plan") and set aside 200,000 shares of common stock to be reserved
for issuance under the plan.
The Company accounts for this plan under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with FASB Statement No. 123, the Company's net income
and loss per common share would have been reduced to the following pro forma
amounts (in thousands of dollars):
1998 1999
-------- ------
Net loss applicable to common stockholders:
As reported $ (65,110) $ (1,101,335)
=========== ============
Pro forma $ (105,135) $ (1,524,973)
=========== ============
Basic net loss applicable to common
stockholders per common share:
As reported $ (0.02) $ (0.37)
========== =============
Pro forma $ (0.03) $ (0.51)
========== =============
Diluted net loss per common share has been omitted because the impact of common
stock equivalents is anti-dilutive.
On June 4, 1997, 132,000 options were granted with an exercise price of $1.00
per share. The exercise price was based upon the fair market value of a share of
common stock at the date the option is granted. The options vest 25% per year
beginning on the first anniversary of the date the options were granted such
that options are fully vested four years from the date of the grant.
Participants may exercise 100% of vested options in any given year. Each option
may be exercised during a period of ten years from the date of the grant of the
option.
In March 1999, 7,500 vested stock options were exercised at $1.00 per share by
an employee of the Company. In April and June 1999, an additional 29,000 and
61,500 stock options, respectively, were granted under the 1997 plan with a
$2.50 per share exercise price. Of the stock options granted under the 1997
plan, 3,000 and 25,500 were subsequently forfeited in 1998 and 1999,
respectively. No compensation expense was recognized for the grants.
Effective October 1, 1999, the Company's Board of Directors approved the
Catalog.com 1999 Stock Option Plan (the "1999 Plan") and set aside 340,000
shares of common stock to be reserved for issuance under the plan.
In October 1999, 255,000 stock options were granted under the 1999 Plan with a
$4.50 per share exercise price and 40,000 with a $4.95 per share exercise price.
None of these options have been exercised or forfeited as of December 31, 1999,
and no compensation expense was recognized for the grants. The options vest 25%
per year beginning on the first anniversary of the date the options were granted
such that options are fully vested four years from the date of the grant.
11. SUBSEQUENT EVENT:
-----------------
The Company is in the process of filing a form SB-2 registration statement to
issue 1,000,000 shares of common stock to the public. Upon the registration
becoming effective, a 2-for-1 stock split of both the common stock and the
Series B Preferred stock will occur and the Series B Preferred will be converted
to 794,198 shares of common stock. Per-share and share amounts relating to both
common stock and Series B Preferred stock in the accompanying financial
statements have been adjusted for the split. Offering costs incurred in
connection with the offering are recorded as deferred offering costs on the
accompanying unaudited June 30, 2000, balance sheet until the offering is
completed. Upon completion of the offering, the deferred offering costs will be
netted against the proceeds received from the offering, within the stockholders'
deficit section of the balance sheet. If the offering is unsuccessful, the
deferred offering costs will be expensed.
<PAGE>
Report of Independent Public Accountants
To Network Wizards:
We have audited the accompanying statements of operations and cash flows of
Network Wizards ("Network Wizards") a sole proprietorship for the period from
January 1, 1998, through July 30, 1998. These financial statements are the
responsibility of Network Wizards' management. Our responsibility is to express
an opinion on these statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. 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 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 operations and cash flows of Network Wizards for the
period from January 1, 1998, through July 30, 1998, in conformity with
accounting principles generally accepted in the United States.
Oklahoma City, Oklahoma,
May 22, 2000
<PAGE>
NETWORK WIZARDS
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM JANUARY 1, 1998, THROUGH JULY 30, 1998
REVENUES $ 304,873
OPERATING COSTS AND EXPENSES:
Communications and operations 27,662
General and administrative 318,299
Depreciation 17,859
-----------
Total operating costs and expenses 363,820
---------
NET LOSS $ (58,947)
===========
The accompanying notes are an integral part of this
financial statement.
<PAGE>
NETWORK WIZARDS
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1998, THROUGH JULY 30, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (58,947)
Adjustments to reconcile net loss to net cash used in operations-
Depreciation 17,859
Changes in current assets and liabilities-
Increase in accounts receivable (209)
Increase in accounts payable 25,858
Increase in deferred revenue 630
-------------
Net cash used in operating activities (14,809)
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,046)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES -
---------
NET DECREASE IN CASH (18,855)
CASH, beginning of period 27,611
-------------
CASH, end of period $ 8,756
=============
</TABLE>
The accompanying notes are an integral part of this
financial statement.
F-20
<PAGE>
NETWORK WIZARDS
NOTES TO THE FINANCIAL STATEMENTS FOR THE
PERIOD FROM JANUARY 1, 1998, THROUGH JULY 30, 1998
1. BASIS OF PRESENTATION:
----------------------
Mark Lotter, an individual doing business as "Network Wizards," is a sole
proprietor that began operations in Menlo Park California in 1994. Network
Wizards (the "Company") primarily provides web site hosting, consultation
services and some custom construction of hardware components.
The Company's web hosting customers are located primarily throughout the United
States and Japan. On July 31, 1998, all web hosting assets, including the rights
to the Catalog.com domain name and the customer list of the Company, were sold
to Ethos Communications Corp. for $1,200,000. Revenues associated with the web
hosting assets totaled approximately $294,000 for the period of January 1, 1998,
through July 30, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES:
---------------------------------------------------------
Property and Equipment
Property and equipment are recorded at cost. Major additions and improvements
are capitalized at cost, while maintenance and repairs which do not extend the
useful lives of the respective assets are expensed. When assets are sold or
retired, cost and accumulated depreciation are removed from the respective
accounts. Any gains or losses resulting from disposal are included in other
income. Depreciation is provided over the assets' estimated useful lives using
the straight-line method of depreciation. The estimated useful lives of assets
are as follows:
Years
Computer equipment 3
Furniture and fixtures 3
Revenue Recognition
Internet access and web hosting services encompass subscription and usage fees
earned over the period services are provided which is generally one month to one
year. Service fees are billed in advance and are recognized over the period the
service is provided. Billings in advance of revenues being earned are deferred
and recognized as revenue when earned.
For the period ended July 30, 1998, one customer accounted for approximately 35
percent of revenues.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, trade receivables
and trade payables. The carrying value of cash, trade receivables and trade
payables are considered to be representative of their respective fair values,
due to the short maturity of these instruments.
Concentration and Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and trade receivables. Concentration of
credit risk with respect to trade receivables is limited as the outstanding
total represents a large number of customers with individually small balances.
The Company does not require collateral or other security against trade
receivable balances; however, it does maintain reserves for potential credit
losses and such losses have been within management's expectations.
Use of Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires Network Wizards to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Business Segments
The Company operates in one business segment pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information."
Income Taxes
No provision for income taxes is provided in the accompanying financial
statements as income taxes, if any, are payable by the individual taxpayer under
the Internal Revenue Code.
3. ALLOCATED COSTS:
----------------
Included in general and administrative expenses for the period ended July 30,
1998, is approximately $13,000 of costs associated with the use of the
proprietor's home for conducting business. Also included in the allocated amount
is depreciation for the home, home mortgage interest, real estate taxes and
indirect utilities. Costs are allocated based upon the percentage of the home
utilized in the conduct of business (35.41% during the period ended July 30,
1998).
4. PROPRIETOR COMPENSATION:
------------------------
The accompanying statement of operations for the period ended July 30, 1998,
includes approximately $217,000 of compensation to the sole proprietor which is
included in general and administrative expense.
<PAGE>
CATALOG.COM, INC.
1,000,000 Shares
of
Common Stock
---------------------------
PROSPECTUS
---------------------------
Institutional Equity Corporation
1-877-467-7891
Capital West Securities, Inc.
1-877-664-6644
<PAGE>
II-5
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the estimated costs and expenses, other
than the underwriting discounts and commissions, payable by Catalog.com in
connection with the sale of the common stock being registered. All of the
amounts shown are estimates, except the registration fee, and assume exercise of
the underwriters' over-allotment option.
SEC registration fee ........................$ 4,008
NASD filing fees............................. 1,880
American Stock Exchange listing fee.......... 20,000
Printing and engraving expenses.............. 75,000
Legal fees................................... 100,000
Accounting fees and expenses................. 75,000
Blue Sky fees and expenses................... 10,000
Transfer Agent and Registrar fee............. 6,000
Miscellaneous expenses....................... 58,112
---------
TOTAL EXPENSES..............................$ 350,000
==========
Item 14. Indemnification of Officers and Directors
The General Corporation Act of the State of Oklahoma grants every
corporation the power 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 the corporation, by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
The Oklahoma statute also grants every corporation the power to
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending, or completed action or suit by or in the right of
the corporation to procure a judgment in its favor by reason of the fact that he
is or was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses, including attorneys' fees, actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believe to be in or
not opposed to the best interests of the corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the corporation unless and only to
the extent that the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper.
The Oklahoma statute provides that to the extent that a present or
former director or officer of a corporation has been successful on the merits or
otherwise in defense of any action, suit, or proceeding referred to in the
statute, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses, including attorneys' fees, actually incurred by
him in connection therewith.
Article VII of the Registrant's bylaws provides that the Registrant
shall indemnify to the full extent permitted under the General Corporation Act
of the State of Oklahoma any director, officer, employee, or agent of the
Registrant.
Article IX of the Registrant's certificate of incorporation exculpates
the directors of the Registrant from and against certain liabilities. Article IX
provides that a director of the Registrant shall have no personal liability to
the Registrant or its shareholders for monetary damages for breach of fiduciary
duty as a director, except for liability (a) for any breach of the director's
duty of loyalty to the Registrant or its stockholders, (b) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (c) for acts or omissions specified in Section 1053 of the General
Corporation Act of the State of Oklahoma regarding the unlawful payment of
dividends and the unlawful purchase or redemption of the Registrant's stock, and
(d) for any transaction from which the director derived an improper personal
benefit.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the certificate of incorporation. Catalog.com is not
aware of any threatened litigation or proceeding that may result in a claim for
such indemnification.
Item 15. Recent Sales of Unregistered Securities
During the last three years we have issued unregistered securities to a
limited number of persons, as described below (all of which have been adjusted
to reflect the 2-for-1 split for all common stock approved by the board of
directors on May 17, 2000). None of these transactions involved any
underwriters, underwriting discounts or any public offering. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof, and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. As described in more
detail, below, all recipients had adequate access, through their relationships
with us, to information about us:
(1) Since inception through July 15, 2000 (the most recent practicable
date) we granted stock options to acquire an aggregate of 489,000 shares of our
common stock at prices ranging from $1.00 to $4.95 to employees and directors
pursuant to our 1997 and 1999 stock option plans. These shares were issued in
reliance in Section 4(2) and rule 701 of the Securities Act of 1933.
(2) On June 18, 1997, August 29, 1997, and on September 3, 1997, we sold an
aggregate 85,000 shares of common stock to seven non-accredited investors who
were acquaintances of our President, two of our officers, and our President's
brother and father, for an aggregate $85,000. These shares were issued in
reliance on Section 4(2) of the Securities Act of 1933 and Regulation D
promulgated thereunder. Each of these investors represented to us in writing
that he or she was financially sophisticated and such investors received a
private placement memorandum that included our financial statements.
(3)On October 30, 1997, we issued 23,810 shares of common stock to
Phillips McFall McCaffrey McVay & Murrah, P.C., our legal counsel and an
accredited investor, in consideration for legal services. These shares were
issued in reliance on Section 4(2) of the Securities Act of 1933. Phillips
McFall had access to all of our corporate and financial information by virtue of
its status as our legal counsel.
(4) On July 28, 1998 we issued 675,255 shares of Series A preferred stock
to BancFirst Investment Corp., an accredited investor, in exchange for 1,600,000
shares of common stock held by BancFirst Investment Corp. pursuant to the terms
of a Share Exchange Agreement between us and BancFirst Investment Corp.. These
shares were issued in reliance on Section 4(2) of the Securities Act of 1933.
BancFirst Investment Corp. had access to all of our corporate and financial
information by virtue of his status as an affiliate of our lender.
(5) On March 15, 1999, we issued 7,500 shares of common stock to a former
employee upon the exercise of certain stock options at an exercise price per
share of $1.00 held by such former employee. These shares were issued in
reliance on Section 4(2) of the Securities Act of 1933. The former employee was
a sophisticated investor and had access to all of our corporate and financial
information by virtue of his status as a key employee.
(6) On April 2, 1999, we issued 240,000 shares of common stock to Schloss
Brothers, L.P., an accredited investor, for an aggregate of $600,000. These
shares were issued in reliance on Section 4(2) of the Securities Act of 1933 and
Regulation D promulgated thereunder. Schloss Brothers had access to all of our
corporate and financial information pursuant to the terms of a stock purchase
agreement dated April 1, 1999.
(7) On May 28, 1999, we issued 12,000 shares of common stock to Santa Fe
Capital Group (NM), Inc., an accredited investor, for an aggregate of $30,000
upon exercise of a warrant issued to Santa Fe Capital Group in connection with
the private placement of shares closed April 1, 1999. These shares were issued
in reliance on Section 4(2) of the Securities Act of 1933. Santa Fe had access
to all our corporate and financial information by virtue of its relationship to
Schloss Brothers.
(8) On July 28, 1999, we issued 627,022 shares of common stock to BancFirst
Investment Corp., an accredited investor, in exchange for the redemption of all
outstanding shares of Series A preferred stock at a redemption price of
approximately $468,000. These shares were issued in reliance on Section 4(2) of
the Securities Act of 1933. BancFirst had access to all of our corporate and
financial information by virtue of its status as an affiliate of our lender.
(9) On August 25, 1999 and September 11, 1999, we issued an aggregate of
794,198 shares of Series B preferred stock to 21 accredited investors for an
aggregate offering price of $3,573,879. These shares were issued in reliance on
Section 4(2) of the Securities Act of 1933 and Regulation D promulgated
thereunder. These investors received a private placement memorandum that
included our financial statements.
(10) On August 2, 1999 we issued warrants to purchase 5,000 shares of common
stock at an exercise price of $4.50 per share to Net Me Up, a sophisticated
investor. These warrants were issued in reliance on Section 4(2) of the
Securities Act of 1933.On August 25, 1999 we issued warrants to purchase 22,222
shares of Series B preferred stock at an exercise price of $4.50 per share to
Richmont Opportunity Management Partners L.P., an accredited investor. These
warrants were issued in reliance on Section 4(2) of the Securities Act of 1933.
(11) On September 8, 1999 we issued warrants to purchase 20,000 shares of
common stock at an exercise price of $4.50 per share to Interactive Applications
Group, Inc. These warrants were issued in reliance on Section 4(2) of the
Securities Act of 1933.
(12) On September 10, 1999 we issued warrants to purchase 22,222 shares of
Series B preferred stock at an exercise price of $4.50 per share to Pro Silver
Star, Ltd., an accredited investor. These warrants were issued in reliance on
Section 4(2) of the Securities Act of 1933.
(13) On December 1, 1999 we issued warrants to purchase 68,308 shares of
Series B preferred stock at an exercise price of $4.50 per share and paid
$284,433 in cash to cover fees and out-of-pocket expenses, to Southwest
Securities, Inc., an accredited investor, in connection with the execution of an
amendment to a letter agreement dated February 24, 1999. These warrants were
issued in reliance on Section 4(2) of the Securities Act of 1933.
(14) On April 12, 2000 we issued warrants to purchase 8,000 shares of common
stock at an exercise price of $4.50 per share to The Towler Group L.L.C., a
sophisticated investor. These warrants were issued in reliance on Section 4(2)
of the Securities Act of 1933.
(15) On June 4, 2000 we issued 3,000 shares of common stock to a former
employee upon the exercise of stock options held by such employee at an exercise
price per share of $1.00. These shares were issued in reliance on Section 4(2)
of the Securities Act of 1933. The former employee was a sophisticated investor
and had access to our corporate and financial information by virtue of his
status as one of our key employees.
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement(1).
3.1 Amended and Restated Certificate of Incorporation (2).
3.2 Amended and Restated Bylaws (2).
4.1 Specimen common stock certificate (2).
4.2 See Exhibits 3.1, and 3.2 for provisions defining the rights of holders of common
stock of the registrant.
4.3 Form of Warrant between us and the underwriters (1).
4.4 1999 Stock Option Plan (2).
4.5 1997 Stock Option Plan (2).
5.1 Opinion of Phillips McFall McCaffrey McVay & Murrah, P.C., as the legality of the securities being
registered (1).
10.1 Amended and Restated Registration Rights Agreement (2).
10.2 Amended and Restated Shareholder Agreement (2).
10.3 Loan Agreement dated July 31, 1998 between us and the U.S. Small Business Administration (2).
10.4 Asset Purchase Agreement dated July 9, 1998 between us and Mark K. Lotter (2).
10.5 Noncompetition Agreement dated July 31, 1998 between us and Mark K. Lotter (2).
10.6 Form of Lock-up Agreement (1).
10.7 Lease Agreement dated January 7, 1999 by and between us and CB Parkway Business Center, Ltd. (2)
10.8 First Amendment to Lease Agreement dated July 31, 1999 by and between us and CB Parkway Business Center
II, Ltd. (2).
10.9 Office Lease dated July 1999 by and between us and TMK Income Properties, L.P. (2).
23.1 Consent of Phillips McFall McCaffrey McVay & Murrah, P.C. (2).
23.2 Consent of Arthur Andersen LLP (1).
24.1 Powers of Attorney (2).
27.1 Financial Data Schedule (2).
------------------------
</TABLE>
(1) Filed electronically herewith.
(2) Previously filed.
(b) Financial Statement Schedules. Schedules not listed above have been omitted
because the information required to be set forth therein is not applicable or is
shown in the financial statements or notes thereto.
Item 17. Undertakings
The undersigned registrant hereby undertakes to provide to the
Underwriter at the closing specified in the Underwriting Agreement, certificates
in such denominations and registered in such names as required by the
Underwriter to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 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 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 of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424 (b)(1) or (4),
or 497(h) under the Securities Act of 1933, shall be deemed to be part of
this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable ground to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this amendment to the
registration statement to be signed on its behalf by the undersigned, in the
City of Oklahoma City, Oklahoma, State of Oklahoma on this 21 day of July,
2000.
CATALOG.COM, INC.
By: /s/ Robert W. Crull___________________
------------------------------------------
Robert W. Crull
President and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dated stated:
<TABLE>
<S> <C> <C>
Signature Title Date
/s/ Robert W. Crull President, Chief Executive July 21, 2000
-----------------------------------
Robert W. Crull Officer, Director
/s/ David D. Gaither Chief Financial Officer July 21, 2000
-----------------------------------
David D. Gaither
/s/ D. Len Reeves* Vice President of Customer July 21, 2000
-----------------------------------
D. Len Reeves Service and General Manager
/s/ Bill C. Miller* July 21, 2000
-----------------------------------
Bill C. Miller Director
/s/ Rodric M. Phillips, Jr., M.D.* Director July 21, 2000
--------------------------------
Rodric M. Phillips, Jr., M.D.
/s/ David E. Rainbolt* Director July 21, 2000
-----------------------------------
David E. Rainbolt
*By: /s/ Robert W. Crull
--------------------------------------
Attorney-in-Fact
----------------------------------
</TABLE>
