<PAGE> 1
AS SUBMITTED TO THE SECURITIES AND EXCHANGE COMMISSION
ON APRIL 3, 2000
REGISTRATION NO. 333-32494
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
FLONETWORK INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
ONTARIO, CANADA 573407 94-322947
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OF ORGANIZATION) CLASSIFICATION CODE) IDENTIFICATION NUMBER)
</TABLE>
260 KING STREET EAST
TORONTO, ONTARIO, CANADA
M5A 1K3
(416) 369-1100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
REGINA BRADY
FLONETWORK US, INC.
391 EAST PUTNAM AVENUE
COS COB, CONNECTICUT 06807-2501
(203) 552-6841
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C> <C> <C>
JOHN A. BURGESS, ESQ. CHRISTOPHER A. HEWAT, ESQ. KEVIN J. LAVIN, ESQ. JOHN STEVENS, ESQ.
HALE AND DORR LLP BLAKE, CASSELS & GRAYDON LLP BROBECK, PHLEGER & OSLER, HOSKIN & HARCOURT LLP
60 STATE STREET BOX 25, COMMERCE COURT WEST HARRISON LLP 1 FIRST CANADIAN PLACE
BOSTON, MASSACHUSETTS TORONTO, ONTARIO 701 PENNSYLVANIA AVE., NW TORONTO, ONTARIO
02109 CANADA M5L 1A9 SUITE 220 CANADA M5X 1B8
(617) 526-6000 (416) 863-2400 WASHINGTON, DC 20004 (416) 862-6666
(202) 220-6000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS
PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please 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 SUCH SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED APRIL 3, 2000
PROSPECTUS
3,750,000 SHARES
[FLONETWORK LOGO]
COMMON SHARES
This is an initial public offering of our common shares. We expect that the
public offering price of our common shares will be between $10.00 and $12.00 per
share.
We have applied to have our common shares approved for quotation and
trading on the Nasdaq National Market under the symbol "FNWK."
OUR BUSINESS INVOLVES SIGNIFICANT RISKS. THESE RISKS ARE DESCRIBED UNDER
THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 6.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
-------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to FloNetwork.................... $ $
</TABLE>
The underwriters may also purchase up to an additional 562,500 of common
shares from us to cover over-allotments.
The underwriters expect to deliver the shares against payment in New York,
New York on , 2000.
-------------------------
SG COWEN
PRUDENTIAL VOLPE TECHNOLOGY
A UNIT OF PRUDENTIAL SECURITIES
WILLIAM BLAIR & COMPANY
, 2000
<PAGE> 3
Description of inside front cover:
Centered at the top of the page is the heading "flonetwork," with the letters
"flo" in orange and the remaining letters in black. Under this heading is the
phrase "the future of direct marketing" in gray.
In the center of the page are four computer screen shots. Beneath the screen
shots is a stick figure sitting at a desk working at a computer. Below the stick
figure is the text "The clients identified in the screenshots above represent
our four largest clients based on number of e-mails deployed for the five months
ended December 31, 1999. Each accounted for between 2% and 17% of our total
revenue for the five months ended December 31, 1999." Coming from the rear of
the computer is a blue line with the words "Permission-based e-mail
communications" in white. Above the blue line are three images of envelopes.
Above the three envelopes are the words "Promotions & Discounts," "Newsletters"
and "Product Releases." Below the blue line are also three images of envelopes.
Below the three envelopes are the words "Advertising & Marketing," "Alerts &
Reminders" and "Market Research."
Description of two-page graphical foldout:
This two-page layout has a heading flush right in gray, reading "the future of
direct marketing." Beneath this heading is an orange line that runs
horizontally across the page. Beneath this line is the heading "flonetwork."
This heading is flush left, with the letters "flo" in orange and the remaining
letters in black.
Underneath these headings is a large box containing seven smaller boxes in a
horizontal line. Above these boxes is the heading "FloNetwork Technology &
Services" in orange. Each box contains an image and has text at the bottom. The
first box features a stick figure examining a poster of a rocket. The text at
the bottom of this box reads "(1) DESIGN." The second box features a stick
figure applying a blow torch to the base of a rocket. The text at the bottom
reads "(2) BUILD." The third box features a stick figure holding a remote
control and has a rocket taking off in the background. The text at the bottom
reads "TEST (3)." The fourth box features a stick figure standing behind a
podium and waving. The text at the bottom reads "(4) DEPLOY." The fifth box
depicts a stick figure looking at a radar screen. The text at the bottom reads
"(5) TRACK." The sixth box features a stick figure reading a data printout. The
text at the bottom reads "(6) REPORT." The seventh box features three stick
figures sitting at a table observing a fourth stick figure giving a
presentation. The text at the bottom reads "(7) ANALYZE." Underneath these boxes
is a series of connected images. From left to right, the images are as follows.
The first image consists of two screen monitors featuring stick figures. The
first television monitor reads "E-marketing Services Consulting." The second
reads "Client Services & Support." The monitors are connected to an image of a
stick figure wearing a hat and carrying a pitchfork. Under this image is the
text "FloServer Farms." Connected to this image is an image of a stick figure
manipulating the controls of a machine. Under this image is the text "Database
Warehouse & Network." Connected to this image is an image of a flying stick
figure carrying an envelope. Above this image is the text "High Speed Internet
Connection." Originating from the large box are four images. The first image is
connected by an orange line to the right hand side of the large box. This image
consists of three computer screen shots tiled diagonally and a vertical list
reading "Trackable Behaviors," "View Message," "Click-Through," "Request Info,"
"Buy Product," "Pass-Along" and "Unsubscribe." Above this image is the heading
"Tracking & Reporting."
The second image is connected by an orange line to the lower right hand corner
of the large box. This image is of an envelope. Next to the image is the text
"Secure, Reliable, High-Volume E-mail Messaging."
The third image is connected by an orange line to the base of the large box.
This image is an orange cloud with the text "Internet" inside the cloud in
black.
The fourth image is connected to the third image by an orange line and sits to
the left of the third image. This image consists of a stick figure sitting at a
desk working on a computer. Above the image is the text "Direct Client Access
to FloNetwork Technology & Services through the Internet."
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 6
Use of Proceeds..................... 19
Dividend Policy..................... 19
Presentation of Financial
Information....................... 19
Exchange Rate Information........... 20
Forward-Looking Statements; Market
Data.............................. 20
Capitalization...................... 21
Dilution............................ 23
Selected Consolidated Financial
Data.............................. 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 26
Business............................ 35
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management.......................... 51
Principal Shareholders.............. 60
Related Transactions................ 63
Description of Share Capital........ 65
Shares Eligible for Future Sale..... 68
Income Tax Consequences............. 70
Underwriting........................ 75
Legal Matters....................... 77
Experts............................. 77
Where You Can Find More
Information....................... 77
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, COMMON SHARES ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED.
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF
THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY
SALE OF OUR COMMON SHARES.
------------------------
Until , 2000, which is 25 days after the date of this
prospectus, all dealers that buy, sell or trade our common shares, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the dealers' obligations to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
------------------------
flonetwork(TM) is our trademark. All other trademarks or trade names
referred to in this prospectus are the property of their respective owners.
i
<PAGE> 5
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 6
PROSPECTUS SUMMARY
The following is a summary of key aspects of this offering. You should
carefully read the more detailed information contained elsewhere in this
prospectus, including the consolidated financial statements and related notes.
Our business involves significant risks. You should carefully consider the
information under the heading "Risk Factors."
FLONETWORK INC.
We provide Internet direct marketing and communications services. Our
technology infrastructure, software and services enable businesses to market to
and communicate with their customers through personalized and targeted e-mail
messaging campaigns. Our clients access our technology and services, and retain
control of their e-mail campaigns, through the Internet. Our technology platform
is comprised of specialized hardware and software applications which we host for
clients who wish to outsource any or all aspects of e-mail messaging. We also
provide our clients with a full range of Internet direct marketing and
communications services, or e-marketing services, on an outsourced basis to
assist our clients in the development, execution and assessment of their e-mail
campaigns.
Currently, we manage all aspects of permission-based e-mail messaging
campaigns, including designing the campaigns, building and managing e-mail
address lists, testing and deploying the campaigns and tracking, reporting and
analyzing the results. Permission-based e-mail involves sending e-mails to
individuals who have given their prior consent by subscribing to receive e-mails
on specific topics. Our objective is to broaden our e-mail messaging services
and to develop other hosted direct marketing applications and services over the
Internet.
According to Forrester Research, total Internet marketing and advertising
expenditures in the United States will increase from $2.8 billion in 1999 to
$22.2 billion in 2004. We believe that a growing portion of these total
expenditures will be devoted to e-mail marketing because of the perceived cost
savings of e-mail marketing relative to traditional marketing methods and the
perceived effectiveness of e-mail marketing relative to other forms of Internet
marketing and Internet banner advertising. According to Forrester Research, the
market for e-mail marketing services will grow from $156.4 million in 1999 to
$4.8 billion in 2004. We believe that, as businesses rely more on e-mail
messaging to communicate with and market to existing and potential customers,
the costs and resources required to implement e-mail communication systems
in-house will lead many companies to seek an outsourced solution to their e-mail
messaging needs.
We have provided e-mail messaging services to over 100 clients since May
1998 when we began offering these services. To date, we have targeted clients in
the electronic publishing, or e-publishing, and electronic business, or
e-business, market segments because of their e-mail volume potential, the range
of e-mail services they require and their desire to outsource their e-mail
messaging needs. Our five largest clients based on volume of e-mails deployed in
the five months ended December 31, 1999 were CNET, barnesandnoble.com,
Continental Airlines, LowestFare.com and iPrint.com.
Our e-mail messaging services provide our clients with the following
benefits:
Lower Cost of Ownership and Quicker Time to Market. By outsourcing their
e-mail messaging functions to us, our clients eliminate the need to lease, buy
and continually upgrade bandwidth, hardware and software, and recruit and retain
systems engineers and skilled personnel to run and monitor their e-mail
messaging systems and campaigns. This also reduces the time it takes our clients
to begin their e-mail campaign deployment.
Reliable and Scalable High Volume Deployment. We have developed a network
of specialized servers and software, which have been engineered to handle high
volumes of personalized and trackable
1
<PAGE> 7
e-mail messages. This network has been designed to be reliable and secure and
easily-scaled to handle large volumes of e-mail messages.
Web-based Client Control. Our clients have access to our technology
infrastructure, software and services through the Internet, seven days a week,
24 hours a day, giving them control over their e-mail messaging campaigns by
enabling them to organize their campaigns, compose messages, personalize
messages, choose the time and pace of delivery, perform test campaigns and
evaluate reports while the campaign is being executed.
Personalization and Targeting. Our services enable our clients to
personalize messages to the needs and interests of particular recipients. Our
tracking capabilities enable us to collect data on customer behavior and
response rates and create a database of customer value information. This assists
our clients in more effectively targeting their audiences and evaluating the
effectiveness of their campaigns.
Instantaneous Reporting. Our continuously updated Internet-based reports
enable our clients to quickly evaluate the effectiveness of a campaign and to
make immediate adjustments to the campaign during execution. These reports
provide transactional and response statistics which allow our clients to
identify their most active customers and prospects.
We were incorporated in Toronto, Ontario in August 1993 under the name
Media Synergy Inc. and in November 1999 changed our name to FloNetwork Inc. Our
initial business involved the development, sale and licensing of multimedia
consumer software products. In 1998, we began developing and selling e-mail
messaging software applications and services. In January 1999, we discontinued
the development, sale and licensing of our multimedia consumer software products
and adopted a business strategy to offer e-mail messaging services over a hosted
technology platform. Our decision to shift our business focus to e-mail
messaging services was based on the size of the potential market for e-mail
messaging services, as well as our belief that we could more quickly and easily
scale our business in the e-mail messaging services market as compared to the
multimedia consumer software products market. Since we shifted our focus to the
e-mail messaging services business, our percentage of revenue derived from
e-mail messaging has increased from 42.1% of our total revenue for the five
month period ended December 31, 1998, to 99.8% for the five month period ended
December 31, 1999.
We operate in a highly competitive market. We have recently adopted our new
business model and have a limited operating history based on that model. We have
a history of losses including losses of approximately $2.1 million for the year
ended July 31, 1999 and $2.1 million for the five month period ended December
31, 1999, and, as of December 31, 1999, had an accumulated deficit of
approximately $6.0 million. During the five months ended December 31, 1999, our
two largest customers accounted for 27.3% of our revenue. Our executive officers
and directors and their respective affiliates will own approximately 52.5% of
our common shares after this offering.
Our executive offices are located at 260 King Street East, Toronto,
Ontario, Canada, M5A 1K3, and our telephone number at that location is (416)
369-1100. Our web site address is www.flonetwork.com. Information contained on
our web site is not a part of this prospectus.
2
<PAGE> 8
THE OFFERING
Common shares offered by
FloNetwork......................... 3,750,000 shares
Common shares to be outstanding
after this offering................ 16,648,977 shares
Use of proceeds.................... For general corporate purposes, including
sales and marketing expansion, research
and development activities, capital
expenditures and working capital and
possible acquisitions. See "Use of
Proceeds."
Ownership of common shares by our
executive officers and directors
and their respective affiliates
after this offering.............. 52.5%
Proposed Nasdaq National Market
symbol............................. FNWK
The number of common shares to be outstanding after this offering is based
on the number of common shares outstanding as of December 31, 1999, which was
12,898,977, after giving effect to:
- the conversion upon the consummation of this offering of our outstanding
class A preferred shares, class B preferred shares, class C preferred
shares and class D preferred shares into an aggregate of 5,011,134 common
shares (assuming an initial public offering price of $11.00 per share);
- the issuance of 800,000 common shares concurrent with the consummation of
this offering upon the exercise of warrants outstanding as of December
31, 1999, at a weighted-average exercise price of approximately $0.85 per
share;
- the issuance of 874,870 common shares concurrent with the consummation of
this offering upon the exercise of an option pursuant to an Option
Agreement held by CNET, Inc. dated September 15, 1999 at a price of
approximately $6.23 per share (assuming an initial public offering price
of $11.00 per share); and
- a 1-for-5 reverse split of our common shares to be effected prior to the
consummation of this offering.
The number of common shares to be outstanding after this offering does not
include 1,723,302 common shares issuable upon the exercise of options
outstanding as of December 31, 1999 at a weighted-average exercise price of
approximately $1.54 per share, and an additional 1,427,336 common shares
available for issuance under our share incentive plan and employee share
purchase plan.
------------------------
ASSUMPTIONS THAT APPLY TO THIS PROSPECTUS
This offering is for 3,750,000 shares. The underwriters have a 30-day
option to purchase up to 562,500 additional shares from us to cover
over-allotments. Some of the disclosures in this prospectus would be different
if the underwriters exercise their over-allotment option.
Except as otherwise noted, all information in this prospectus assumes no
exercise of the underwriters' over-allotment option.
------------------------
All references in this prospectus to "we," "us," "ours" and "FloNetwork"
are intended to include FloNetwork Inc., FloNetwork US, Inc., our wholly-owned
subsidiary, and their predecessor businesses and entities.
3
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables summarize our consolidated financial data. For a more
detailed explanation of our financial condition and operating results, you
should read "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the more detailed consolidated financial statements
and notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
YEAR ENDED JULY 31, DECEMBER 31,
---------------------------- ------------------------
1997 1998 1999 1998 1999
------ ------ ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenue:
E-mail service revenue................ $ -- $ 14 $ 431 $ 93 $ 1,194
License and software revenue(1)....... 1,155 734 346 129 2
------ ------ ---------- ------ ----------
1,155 748 777 222 1,196
E-mail service cost of revenues......... -- -- 331 82 741
Total operating expenses.............. 1,306 1,527 2,597 857 2,629
Net loss attributable to common
shareholders.......................... $ (174) $ (811) $ (2,429) $ (768) $ (2,384)
====== ====== ========== ====== ==========
Net loss per common share:
Basic and diluted..................... $(0.05) $(0.22) $ (0.66) $(0.21) $ (0.58)
====== ====== ========== ====== ==========
Weighted average shares outstanding... 3,672 3,672 3,672 3,672 4,079
------ ------ ---------- ------ ----------
Pro forma net loss per common share:
Basic and diluted..................... $ (0.65) $ (0.25)
========== ==========
Weighted average shares outstanding... 7,533 8,543
---------- ----------
</TABLE>
- ---------------
(1) Costs related to the sale and licensing of our discontinued multimedia
consumer software products are operational in nature and were included in
sales and marketing expenses during the periods we generated revenue from
this business. These costs consisted primarily of nominal expenditures
related to the printing, shipping and distribution of our multimedia
consumer software products.
4
<PAGE> 10
The following table is a summary of our balance sheet at December 31, 1999:
- on an actual basis after giving effect to a 1-for-5 reverse split of our
common shares to be effected prior to the consummation of this offering;
- on a pro forma basis to give effect to (1) the conversion upon the
consummation of this offering of our outstanding class A, B, C and D
preferred shares into an aggregate of 5,011,134 common shares (assuming
an initial public offering price of $11.00 per share), (2) the issuance
of 800,000 common shares concurrent with the consummation of this
offering upon the exercise of warrants outstanding as of December 31,
1999 at a weighted average exercise price of approximately $0.85 per
share and the receipt of net proceeds of $678,670 from the sale thereof,
and (3) the issuance of 874,870 common shares concurrent with the
consummation of this offering upon the exercise of an option pursuant to
an Option Agreement held by CNET dated September 15, 1999 at a price of
approximately $6.23 per share and the receipt of net proceeds of
approximately $5.4 million from the sale thereof (assuming an initial
public offering price of $11.00 per share); and
- on a pro forma basis to give effect to the sale of 3,750,000 common
shares in this offering at an assumed initial public offering price of
$11.00 per share and the application of the estimated net proceeds from
the sale.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................. $13,538 $19,669 $57,032
Working capital....................................... 12,507 18,638 56,345
Total assets.......................................... 17,005 23,136 60,154
Redeemable convertible class A preferred shares....... 1,369 -- --
Total shareholders' equity............................ 13,507 21,007 58,370
</TABLE>
5
<PAGE> 11
RISK FACTORS
You should consider carefully the following risks before you decide to buy
our common shares. Additional risks and uncertainties may also impair our
business operations. If any of the following risks actually occur, our business,
results of operations and financial condition would likely suffer and the
trading price of our common shares could decline, and you could lose all or part
of the money you paid to buy our common shares.
RISKS ASSOCIATED WITH OUR BUSINESS
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE HAVE BEEN OPERATING UNDER OUR
NEW BUSINESS MODEL SINCE JANUARY 1999.
Our operating history as an Internet direct marketing and communications
services provider is limited. From our inception in August 1993 through January
1999, our activities consisted primarily of the development, sale and licensing
of multimedia consumer software products. However, in 1998, we identified the
e-mail messaging opportunity and began developing e-mail messaging software
applications and services. In November 1998, we completed the development of
version 1.0 of this software, and, in January 1999, adopted a business strategy
to offer this software application on a hosted basis. During the five month
period ended December 31, 1998, we derived 42% of our revenue from the e-mail
messaging software applications and services. We have since focused our efforts
on implementing and developing the technology to execute our current business
strategy, and have discontinued the development, sale and licensing of our
multimedia consumer software products. Our decision to shift our business focus
to e-mail messaging services was based on the size of the potential market for
e-mail messaging services, as well as our belief that we could more quickly and
easily scale our business in the e-mail messaging services market as compared to
the multimedia consumer software products market. Because our operating history
in this area is limited, our business is difficult to evaluate. You must
consider the challenges, risks and difficulties frequently encountered by
companies using new and unproven business models in new and rapidly evolving
markets. We cannot be certain that our business will be successful or that we
will successfully address these and other challenges, risks and uncertainties.
WE HAVE A HISTORY OF LOSSES, WE EXPECT CONTINUING LOSSES AND WE MAY NEVER
ACHIEVE PROFITABILITY.
We have not generated enough revenue to cover the amounts we have spent to
create, launch and enhance our products and services. Our operating costs have
exceeded our revenue in all quarters since our inception. We incurred net losses
of approximately $6.0 million from August 4, 1993, the date of our inception,
through December 31, 1999.
We have invested heavily in technology and infrastructure development. In
order to continue to expand our business, we expect to continue to invest
heavily in technology and infrastructure development, including between $5.0
million and $10.0 million of the net proceeds of this offering for the expansion
of our e-mail deployment and client service infrastructure. We also plan to
devote a substantial portion of our financial and other resources to expand our
sales and marketing organizations, including between $10.0 million and $15.0
million of the net proceeds of this offering, and to expand our research and
development activities, including between $3.0 million and $5.0 million of the
net proceeds of this offering. We expect that our cost of revenues, sales and
marketing expenses, general and administrative expenses and research and
development expenses will continue to increase in absolute dollars over previous
levels and may increase as a percentage of revenue. As a result, we expect to
incur net losses and negative operating cash flow for the foreseeable future. If
we do not generate enough
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<PAGE> 12
revenue to cover the amounts we spend, we may never become profitable. In
addition, if we do not achieve or sustain profitability in the future, we may be
unable to continue our operations.
OUTSOURCED E-MAIL MESSAGING SERVICES MAY NOT ACHIEVE BROAD MARKET ACCEPTANCE OR
MARKET ACCEPTANCE MAY BE SLOWER THAN ANTICIPATED.
We anticipate that virtually all of our revenue and growth in the
foreseeable future will come from sales of our e-mail messaging services. Broad
market acceptance of these services is, therefore, critical to our future
financial performance. The market for outsourced e-mail messaging services is
new and rapidly evolving. If sufficient demand for our services does not
develop, we may not generate sufficient revenue to offset our costs and we may
never become profitable.
Our current and planned services are very different from the traditional
advertising, direct mail and information distribution methods that our clients
have historically used to attract new customers and to maintain and enhance
customer relationships. Businesses that have already invested substantial
resources in traditional or other methods of marketing and communications may be
reluctant to adopt new marketing strategies and methods. Consumers may also be
reluctant to alter established patterns of purchasing goods and services. These
factors may limit market acceptance of our existing and planned services, which
will depend on the acceptance and use of permission-based e-mail messaging
solutions.
WE MAY FAIL TO DEVELOP OR ENHANCE E-MAIL MESSAGING SERVICES.
We are developing and enhancing our e-mail messaging services to meet the
needs of our clients for customer acquisition, data management, customer
service, campaign management, personalization and content management. If we fail
to develop or enhance these services, we could lag behind our competitors in the
e-mail messaging business.
INTENSE COMPETITION EXISTS IN THE MARKET FOR E-MAIL MESSAGING SERVICES AND WE
EXPECT COMPETITION TO CONTINUE TO INTENSIFY.
Competition in the Internet direct marketing and communications services
industry and the e-mail messaging services industry is intense. If we do not
respond successfully to competitive pressures, we could lose market share. Our
ability to compete successfully in this market depends upon many factors within
and beyond our control, including:
- the performance, reliability, ease of use and price of services that we
or our competitors offer;
- market acceptance of outsourced, permission-based e-mail messaging
systems as compared to internally developed or site specific software and
hardware solutions;
- expanding the capacity of our technology infrastructure as our clients'
needs grow;
- timeliness and market acceptance of new services and enhancements to
existing services introduced by us or our competitors;
- consolidation among our existing clients, potential clients and
competitors;
- sales and marketing efforts by us or our competitors; and
- client service and support efforts by us or our competitors.
An increasing number of companies are entering our market. The market for
e-mail messaging services is still evolving and is subject to intense
competition as companies attempt to establish a market presence.
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We compete with the information technology departments of current and
prospective clients who use in-house e-mail systems to manage and deliver e-mail
messaging campaigns. We also compete with companies providing outsourced
solutions including e-mail distribution list management, reporting and bounce
processing, e-mail consulting and campaign analysis. We compete directly with
e-mail service providers such as Digital Impact, Inc., Exactis.com, Inc.,
MessageMedia, Inc., Post Communications, Inc. and Responsys.com, Inc. A number
of e-mail service providers also offer customers the ability to purchase or
license software to internally handle their own e-mail marketing programs. A
number of other companies from related market segments could enter our market,
including banner ad networks, e-mail list brokers, Internet advertising and
direct marketing agencies, corporate e-mail services providers, Internet service
providers, or ISPs, and inbound e-mail management companies.
Many of our competitors have greater financial, marketing and other
resources than we have. We have in the past been and may in the future be forced
to reduce the prices of our services in order to compete, which could materially
and adversely affect our net revenue and gross margins. Additionally, our
competitors may develop or provide services that are superior to ours or that
achieve greater market acceptance. We expect competition to persist and to
intensify. Barriers to entry of this market are insubstantial and we may face
substantial and growing competitive pressures from companies in both the United
States and Canada or abroad.
We have generally entered into contracts with our clients for terms of one
to two years. Under these contracts, we commit to meet specified capacity and
campaign delivery standards for delivering our clients' e-mails on a fixed price
basis. However, these contracts generally do not provide for any minimum usage
commitment by our clients, nor do they provide for any penalty in the event that
our clients terminate the contract early. Our client contracts generally can be
terminated by clients on short notice. Accordingly, these contracts do not
constitute a significant barrier to our competitors' ability to acquire our
clients' business.
WE DERIVED 27.5% OF OUR REVENUE FROM TWO CLIENTS DURING THE FIVE-MONTH PERIOD
ENDED DECEMBER 31, 1999.
A small number of clients account for a large portion of our revenue. If we
lose existing clients and do not replace them with new clients, our revenue will
decrease. For the five months ended December 31, 1999, we received approximately
17.0% of our revenue from the sale of e-mail messaging services to CNET, Inc.
and approximately 10.5% of our revenue from the sale of e-mail messaging
services to barnesandnoble.com (under a contract with Impower). Our reliance on
a small number of clients could cause our revenue and profitability to fluctuate
from quarter to quarter based on the timing of the signing and expiration of
contracts. The loss of a major client could harm our business.
IF WE CANNOT EFFECTIVELY MANAGE THE ANTICIPATED EXPANSION OF OUR OPERATIONS AND
AUGMENT OUR TECHNICAL INFRASTRUCTURE, WE MAY NOT BE ABLE TO GROW OUR BUSINESS.
In order to grow, we intend to rapidly expand our operations, including our
sales and marketing organizations and our client service infrastructure, and
augment our technical infrastructure. This growth will place a significant
strain on our managerial, operational and financial resources. We may not be
able to manage effectively expansion of our operations and our technical
infrastructure may not be adequate to support our operations. Failure to
effectively manage this expansion could result in service disruptions and a loss
of competitive position and could adversely affect our ability to grow our
business.
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WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN ORDER TO FUND OUR OPERATIONS, DEVELOP
NEW OR ENHANCED SERVICES AND RESPOND TO COMPETITIVE PRESSURES.
We may need to raise additional funds through the public or private sale of
our equity or debt securities or from other sources for the following purposes:
- to fund our operations;
- to develop new or enhanced services; or
- to respond to competitive pressures.
We cannot assure you that additional funds will be available when we need
them, or that if funds are available, they will be available on terms favorable
to us or our shareholders. If we are not able to obtain sufficient funds or if
adequate funds are not available on terms acceptable to us, we may not be able
to develop or enhance our services. A lack of sufficient funds could also
prevent us from taking advantage of market opportunities or being able to
respond to competitive pressures. Any of these results could have a material
adverse effect on our business, financial condition and results of operations.
Our need to raise additional funds could also directly and adversely affect
your investment in FloNetwork in another way. When a company raises funds by
issuing common shares, the percentage ownership of the existing shareholders of
that company is reduced and diluted. Although we currently have no plans to
conduct an additional public offering of our equity or a private offering of our
equity, if we do conduct such an offering in the future by issuing additional
common shares, you may experience significant dilution. Additionally, certain
types of equity securities that we may issue in the future could have rights,
preferences or privileges senior to your rights as a holder of our common
shares.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE AND MAY NOT MEET MARKET
EXPECTATIONS.
We believe that our operating results are likely to vary significantly from
period to period although our limited operating history as a provider of e-mail
messaging services is insufficient to predict the existence or magnitude of
these variations. These fluctuations may be due to a number of factors, many of
which are beyond our control. Some of the factors that may cause fluctuations
include the following:
- the fixed nature of many of our expenses, such as salaries and rent,
incurred in advance of revenue based on our expectation of future growth;
- the loss of a major client or the timing of the implementation of the
e-mail messaging campaigns of a major client; and
- the variability in our sales cycle, historically ranging from one to six
months.
Our revenue for the foreseeable future will remain dependent on the level
of e-mail messaging activity and the fees we charge for our services. This
future revenue is difficult to forecast. In addition, we plan to increase our
operating expenses significantly to increase our sales and marketing operations,
to upgrade and enhance our e-mail messaging services and to market and support
our services. We may be unable to adjust spending quickly enough to offset any
unexpected revenue shortfall. If we have a shortfall in revenue, then our
business, results of operations and financial condition would be materially and
adversely affected. This would likely affect the market price of our common
shares in a manner which may be unrelated to our long-term operating
performance.
In addition, our operating results will be affected by non-cash charges
associated with share-based compensation arrangements with employees. As a
result of our grant of options to purchase 823,282 common shares with exercise
prices below fair market value, we recorded, in the year ended
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December 31, 1999, unearned share-based compensation expense of $933,193 which
we are recognizing over the vesting period of the options, which is generally
four years.
Period-to-period comparisons of our operating results are not necessarily
indicative of our future operating or financial performance. Due to the factors
listed above and other factors, it is likely that our future operating results
will at times not meet the expectations of market analysts or investors. If our
operating results fail to meet these expectations, the price of our common
shares could decline.
SEASONAL TRENDS MAY CAUSE OUR QUARTERLY OPERATING RESULTS TO FLUCTUATE, WHICH
MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON SHARES.
The traditional direct marketing industry has typically generated lower
revenues during the summer months and higher revenues during the calendar
year-end months. We believe our business may be affected by similar revenue
fluctuations, but our limited operating history is insufficient to predict the
existence or magnitude of these fluctuations. If we do experience these
fluctuations, market analysts and investors may not be able to predict our
quarterly or annual operating results, and if we fail to meet expectations of
market analysts or investors, the price of our common shares could decline.
WE MAY NOT BE ABLE TO OPERATE OUR BUSINESS SUCCESSFULLY IF WE LOSE ANY MEMBER OF
OUR SENIOR MANAGEMENT TEAM.
We believe that our success will depend on the continued services of our
key senior management personnel, especially Eric Goodwin, our Chief Executive
Officer, Paul Chen, our Founder and Chief Technology Officer, Chris Keevill, our
President and Chief Operating Officer, Wilson Lee, our Chief Financial Officer,
Peter Evans, our Vice President Marketing, Mark Thorburn, our Vice President
Operations and Technology, Craig Rennick, our Vice President Sales, and Regina
Brady, our Vice President Partners and Strategic Development. The loss of any
member of our senior management team could negatively affect our future
operating results.
WE MAY NOT BE ABLE TO OPERATE OUR BUSINESS SUCCESSFULLY IF OUR NEWLY FORMED
MANAGEMENT TEAM DOES NOT WORK EFFECTIVELY TOGETHER.
If our management team is unable to work together effectively, our business
could be adversely affected. The majority of our executive officers, including
Eric Goodwin, our Chief Executive Officer, and Chris Keevill, our President and
Chief Operating Officer, have joined us within the past twelve months.
Accordingly, our management team has had a limited time to work together and may
not be able to work together effectively.
OUR BUSINESS WILL SUFFER IF WE DO NOT ATTRACT AND RETAIN ADDITIONAL HIGHLY
SKILLED PERSONNEL.
In order for us to succeed, we must identify, attract, retain and motivate
highly skilled technical, client service and managerial personnel. In
particular, our sales model relies on a high level of client service. As we seek
to grow our base of clients, we must add additional client service personnel to
handle the increased volume of e-mails and campaigns. Failure to retain and
attract necessary personnel will limit our ability to provide our service and
compete effectively. We plan to expand our operations significantly and we will
need to hire additional personnel as our business grows. Competition for
qualified personnel is intense. In particular, we have experienced difficulties
in hiring and retaining highly skilled technical, client services and managerial
personnel due to significant competition for experienced personnel in our
market. In 1999, we hired 71 persons and 22 persons terminated their employment
with us. In 2000, we expect to hire an additional 100 employees.
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OUR FAILURE TO EXPAND OUR SALES AND MARKETING OPERATIONS MAY ADVERSELY AFFECT
OUR BUSINESS.
If we fail to expand our direct and indirect sales and marketing operations
substantially, our growth will be limited. We have recently expanded our sales
and marketing team from 16 persons on September 30, 1999 to 28 persons on
December 31, 1999 and plan to increase our sales and marketing team to over 50
persons by December 31, 2000. We might not be able to hire, train or retain the
kind and number of sales and marketing personnel we are targeting because
competition for qualified sales and marketing personnel is intense. If we do not
effectively expand our sales and marketing channel, or execute our marketing
plans, our business and results of operations could suffer.
WE RELY ON INFORMAL RELATIONSHIPS WITH E-MARKETING COMPANIES THAT MAY NOT
CONTINUE IN THE FUTURE.
We have developed relationships with third parties, including
Directmedia.com (formerly known as Acxiom Direct Media), Grizzard List Services,
The Lake Group, Impower (formerly known as American List Counsel interactive)
and other e-marketing companies, that are in a position to influence their
customers' marketing strategies and tactics. We rely in part on these parties to
market our products and generate leads for our direct sales force. However, most
of these relationships are informal and are not exclusive, and the third party
generally is not obligated to market our services, provide leads or maintain its
relationship with us. If we fail to establish new relationships or maintain
existing relationships our business could suffer.
OUR BUSINESS IS SUBJECT TO CURRENCY FLUCTUATIONS THAT CAN ADVERSELY AFFECT OUR
OPERATING RESULTS.
Due to our multinational operations, our business is subject to
fluctuations based upon changes in the exchange rates between the currencies in
which we collect revenues, primarily the United States dollar, and pay expenses,
primarily the Canadian dollar. In particular, a decrease in the value of the
United States dollar relative to the Canadian dollar would negatively impact our
operating results.
RISKS ASSOCIATED WITH OUR TECHNOLOGY
IF WE FAIL TO UPGRADE OUR SYSTEMS AND INFRASTRUCTURE TO CONTINUE TO EXPAND OUR
BUSINESS AND TO ACCOMMODATE GROWING E-MAIL VOLUME, WE MAY EXPERIENCE SLOWER
RESPONSE TIMES OR SYSTEM FAILURES.
We must continue to expand our network infrastructure as the number of our
clients increases and as our clients' requirements change. If we do not add
sufficient capacity and adapt our network infrastructure to handle the growing
volume and complexity of e-mail messages, we could suffer slower response times
or system failures which could result in the loss of existing clients and the
failure to acquire new ones. In the past and prior to the recent expansion of
our network, we have occasionally experienced slower response times which have
not materially interfered with our business.
In addition, we may not be able to project the rate or timing of e-mail
volume increases accurately or to upgrade our systems and network infrastructure
to accommodate future volume levels. As we upgrade our network infrastructure to
increase the capacity available to our clients, we may encounter equipment or
software incompatibility which may cause delays in implementation. The expansion
of our network infrastructure will also require substantial financial,
operational and managerial resources. We may not be able to expand or adapt our
network infrastructure to meet the additional demands or the changing
requirements of our clients in a timely manner or at all.
IF WE DO NOT ADEQUATELY ADDRESS YEAR 2000 ISSUES, WE MAY INCUR SIGNIFICANT COSTS
AND OUR BUSINESS COULD SUFFER.
Failure of our internal computer systems, hardware or software systems
maintained by third parties or electronic data that we receive to operate
properly with regard to Year 2000 and thereafter could
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cause systems interruptions or loss of data or could require us to incur
significant unanticipated expenses to remedy any problems. Despite the fact that
many computer systems are currently processing 21st century dates correctly we
could experience latent Year 2000 problems. If we are unable to address any
latent Year 2000 compliance issues, or if third party vendors, licensors and
providers of hardware, software and services with which we conduct business do
not successfully address these issues, we may experience service interruptions
and a loss of clients. Presently, we are unable to estimate reasonably the
duration and extent of any interruption that may be caused by any latent Year
2000 issues, or to quantify the effect it may have on our future revenue. As of
the date of this prospectus, we have not experienced any Year 2000 interruptions
or other issues relating to our software, computer technology or services or to
the software, computer technology or services of any third parties on which we
rely.
WE MAY NOT COMPETE SUCCESSFULLY AND THE VALUE OF YOUR INVESTMENT MAY DECLINE IF
WE FAIL TO KEEP PACE WITH RAPIDLY CHANGING TECHNOLOGY AND MARKET CONDITIONS.
If we do not successfully respond to technological developments in our
industry or are unable to respond in a cost-effective manner, we may experience
a loss of competitive position and lose market share. We operate in an industry
that is characterized by rapid technological change, frequent new service
introductions, changing client demands and the emergence of new industry
standards and practices that could render our existing services, proprietary
technology and systems obsolete. We must continually improve the performance,
features and reliability of our services, particularly in response to
competitive offerings. Our success depends, in part, on our ability to enhance
our existing services and to develop new services, functionality and technology
that address the increasingly sophisticated and varied needs of our current and
potential clients. Our failure to develop new services could lead to the loss of
existing clients. The development of our technology and necessary service
enhancements may entail significant technical and business risks and may require
substantial expenditures and lead-time. We may not be able to keep pace with the
latest technological developments or adapt our services to client requirements
or emerging industry standards.
IF WE ENCOUNTER SYSTEM FAILURE, WE MAY NOT BE ABLE TO PROVIDE ADEQUATE SERVICE
TO OUR CLIENTS AND OUR BUSINESS AND REPUTATION COULD BE DAMAGED.
Our ability to send e-mail messages successfully and provide acceptable
levels of client service largely depends on the efficient and uninterrupted
operation of our computer and communications hardware and network systems. All
of our data centers are located in or near Toronto, Ontario. As a result, if
there were to be a natural disaster affecting the Toronto area, our
communications systems could be disrupted and our business and reputation could
be harmed. We may not be able to relocate quickly under those circumstances.
Our clients have experienced some short-term interruptions in our e-mail
messaging services in the past due to network outages and internal system
failures which have slowed or delayed those clients' e-mail messaging campaigns.
Similar interruptions may occur from time to time in the future. Our revenue
depends on the number of clients who use our e-mail messaging services and the
number of e-mails we send. Our business will suffer if we experience frequent or
long-term system interruptions that result in the unavailability or reduced
performance of our systems or networks or that reduce our ability to provide
e-mail messaging services. Our systems and operations are also vulnerable to
damage or interruption from fire, flood, earthquake, power loss,
telecommunications failure, physical break-ins and similar events. If any of
these events occur, our business, results of operations and financial condition
could be adversely affected.
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UNKNOWN SOFTWARE DEFECTS OR COMPUTER VIRUSES COULD DISRUPT OUR SERVICES, WHICH
COULD HARM OUR BUSINESS AND REPUTATION.
Our service offerings depend on complex software, which is both internally
developed and licensed from third parties. Complex software often contains
defects, particularly when first introduced or when new versions are released.
We also run the risk of having computer viruses infect our systems or the
systems of our clients. These defects and computer viruses could cause service
interruptions which could damage our reputation, increase our service costs,
cause us to lose revenue, delay market acceptance and divert our development
resources. Although we test the software in our network infrastructure, we may
not discover software defects or computer viruses that affect current or planned
services or enhancements until after they are deployed. Any unplanned
interruption of services as a result of software defects, computer viruses or
otherwise may adversely affect our ability to attract and retain clients and
could damage our reputation.
IF OUR SECURITY SYSTEM IS BREACHED, OUR BUSINESS AND REPUTATION COULD SUFFER.
We currently retain highly confidential client information in secure
database servers. We cannot assure you, however, that we will be able to prevent
unauthorized individuals from gaining access to these database servers. If any
compromise or breach of security were to occur, it could harm our reputation and
expose us to possible liability. Any unauthorized access to our database servers
could result in the misappropriation of confidential client information or cause
interruptions in our services. It is also possible that one of our employees
could attempt to misuse confidential client information, exposing us to
liability. In addition, our reputation may be harmed if we lose client
information maintained in our database servers due to systems interruptions or
other events.
OUR DATA CENTERS ARE LOCATED AT FACILITIES PROVIDED BY THIRD PARTIES, AND IF
THESE PARTIES ARE UNABLE TO PROTECT OUR DATA CENTERS ADEQUATELY, OUR REPUTATION
MAY BE ADVERSELY AFFECTED AND OUR RELATIONSHIP WITH OUR CLIENTS MAY BE HARMED.
Our data centers, which are critical to our ongoing operations, are located
at three facilities operated by third parties. One facility is operated by UUNet
Canada Inc. and is located in Toronto, Ontario. The second facility is operated
by Teleglobe Communication Services Inc. and is located in Scarborough, Ontario.
The third facility is operated by RACO Remote Access Company, Limited and is
located in Toronto, Ontario. We rely on these parties to house our servers, set
up the required technology and provide Internet access. Our operations depend on
the ability of these parties to protect our data centers from technological
problems, system interruptions, computer viruses, physical damage, theft,
vandalism and other negative events. If these parties are unable to protect our
data centers adequately and our ability to deliver our services is interrupted,
our reputation may be adversely affected and our relationship with our clients
may be harmed.
OUR LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY MAY ADVERSELY AFFECT
OUR COMPETITIVE POSITION.
The misappropriation of our proprietary rights could harm our competitive
position and adversely affect our profitability. Trademarks, service marks,
trade secrets, copyrights and other proprietary rights, including our trademark
flonetwork(TM) and copyrights covering our software, are important to our
success and competitive position. Our efforts to protect our proprietary rights
in this intellectual property may be inadequate. Policing unauthorized use of
our intellectual property is difficult, and existing trade secret, copyright and
trademark laws offer only limited protection. Further, effective trademark,
copyright and trade secret protection may not be available in every country in
which our services are made available, or the expense of pursuing this
protection may be prohibitive. Finally, if we resort to legal proceedings to
enforce our proprietary rights, the proceedings could be burdensome and
expensive and the outcome could be uncertain.
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OUR PROPRIETARY TECHNOLOGY MAY BE SUBJECT TO INFRINGEMENT CLAIMS WHICH COULD
HARM OUR BUSINESS.
There is a substantial risk of litigation regarding intellectual property
rights in our industry. A successful claim against us of infringement with
respect to our products or technology and our failure or inability to license
the infringed or similar technology could harm our business. From time to time,
third parties have asserted and may assert exclusive patent, copyright,
trademark and other intellectual property rights to technologies and related
standards that are used in our business. We expect that our products may be
increasingly subject to third-party infringement claims as the number of our
competitors grows. We cannot be certain that third parties will not make future
claims. Any claims, with or without merit, could:
- be time consuming to defend;
- result in costly litigation;
- divert management's attention and resources;
- cause delays in delivering services;
- require the payment of monetary damages which may be tripled if the
infringement is found to be willful;
- result in an injunction which would prohibit us from offering a
particular service; or
- require us to enter into royalty or licensing agreements, which if
required, may not be available on acceptable terms, if at all.
RISKS ASSOCIATED WITH THE INTERNET
OUR BUSINESS WILL SUFFER AND THE VALUE OF YOUR INVESTMENT WILL DECLINE IF THE
INTERNET DOES NOT ACHIEVE CONTINUING, WIDESPREAD ACCEPTANCE AS A MARKETING AND
COMMUNICATIONS MEDIUM.
Our future success will depend substantially upon our assumption that the
Internet will continue to evolve as an attractive platform for marketing and
communications applications. Most businesses and consumers have only limited
experience with the Internet as a marketing and communications medium. Our
revenue and profitability will be adversely affected if the Internet does not
achieve continuing, widespread acceptance as a marketing and communications
medium.
THE INTERNET INFRASTRUCTURE MAY NOT BE VIABLE OR CONTINUE TO GROW, WHICH WOULD
ADVERSELY AFFECT OUR BUSINESS.
Our success is largely dependent upon the viability and continued growth of
the Internet infrastructure. We depend on the Internet infrastructure to provide
the performance, capacity and reliability needed to support the growth of the
Internet. If the Internet infrastructure fails to support the growth of the
Internet, our business and results of operations would be adversely affected.
There have been regular failures in the Internet infrastructure, and there are
likely to be more in the future, which may undermine our potential clients'
confidence in the Internet as a viable commercial medium. If the Internet
continues to experience an increase in users, an increase in frequency of use or
an increase in the capacity requirements of users, we cannot assure you that the
Internet infrastructure will be able to support the demands placed upon it. Any
actual or perceived degradation in the performance of the Internet as a whole
could undermine the benefits of our services. In addition, the Internet could
lose its viability as a commercial medium due to delays in the development or
adoption of new technology required to accommodate increased levels of Internet
activity or due to increased government regulation. Changes in, or insufficient
availability of, telecommunications services to support the Internet could
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result in slower response times and could hamper the use of the Internet
generally. Even if the required infrastructure, standards, protocols and
complementary products, services and facilities are developed, we may be
required to spend heavily to adapt our solutions to emerging technologies.
WE DEPEND HEAVILY ON THIRD PARTIES TO PROVIDE US WITH INTERNET AND RELATED
TELECOMMUNICATIONS SERVICES.
We depend heavily on our third party providers of Internet and related
telecommunications services. Any interruption by our Internet and
telecommunications service providers would likely disrupt the operation of our
e-mail messaging services, causing a loss of revenue and a potential loss of
clients. In the past, we have experienced disruptions and delays in our e-mail
messaging services due to service disruption from those providers. These
companies may be unable to provide services to us without disruptions, at the
current cost or at all. The costs associated with a transition to a new service
provider would be substantial. We would have to reroute our computer systems and
telecommunications infrastructure to accommodate a new service provider. This
process would be both expensive and time consuming.
WE MAY HAVE LIABILITY FOR INTERNET CONTENT AND WE MAY NOT HAVE ADEQUATE
LIABILITY INSURANCE.
As a provider of e-mail messaging services, we face potential liability for
defamation, negligence, copyright, patent or trademark infringement and other
claims based on the nature and content of the materials transmitted by e-mail.
We do not and cannot screen all of the content generated by our users and we
could be exposed to liability with respect to this content. Furthermore, some
foreign governments have enacted laws and regulations related to content
distributed over the Internet that are stricter than those currently in place in
the United States and Canada.
Any imposition of liability, particularly liability that is not covered by
our insurance or is in excess of our insurance coverage, could harm our
reputation and our operating results or could result in the imposition of
criminal penalties. Although we carry general liability and umbrella liability
insurance, our insurance may not cover claims of these types or may not be
adequate to indemnify us for all liability that may be imposed. A single claim
or multiple claims, if successfully asserted against us, could exceed the total
of our coverage limits or may not qualify for coverage under our insurance
policies as a result of coverage exclusions that are contained within these
policies. In this case, we may need to use capital contributed by our
shareholders to settle claims.
WE MAY LOSE CLIENTS AND OUR REPUTATION MAY SUFFER IF OUR E-MAIL MESSAGING
CAMPAIGNS ARE IDENTIFIED AS SPAM.
If we fail in our attempts to prevent the distribution of unsolicited bulk
e-mail, or spam, through our system, our business and reputation may be harmed.
Our ability to avoid the delivery of spam is dependent, in part, on the accuracy
of the lists of permission-based e-mail addresses and support documentation
provided to us by our clients. Additionally, spam may contain false e-mail
addresses or be generated by the use of false e-mail addresses. Our reputation
may be harmed if e-mail addresses with our domain names are used in this manner.
If we develop a reputation for spamming, or if ISPs receive a large number of
complaints regarding our e-mail messaging campaigns, ISPs may refuse to do
business with us or anti-spam advocates may target us. Any of these events may
cause clients to become dissatisfied with our services and terminate their use
of our services.
IF THE DELIVERY OF OUR E-MAILS IS LIMITED OR BLOCKED, THEN OUR CLIENTS MAY
DISCONTINUE THEIR USE OF OUR SERVICES.
Our business model relies on our ability to deliver e-mails to recipients
over the Internet through ISPs and to recipients in major corporations. America
Online, commonly referred to as AOL, and other ISPs are able to block unwanted
messages to their users. Although, to our knowledge, our e-mail
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messages have never been ultimately identified as spam, we have had instances
where our messages have been temporarily blocked by ISPs at different times, and
in one instance our e-mails were deleted by AOL, because of the high volume of
e-mail. In those instances, we have been able to remove the temporary block
promptly and successfully by advising the ISP that the e-mails were delivered by
us and were permission-based. We were subsequently able to deploy the e-mail
messaging campaigns through these ISPs. As the volume of e-mail messages being
delivered increases, ISPs may be more likely to block or slow down e-mails to
conserve their capacity and manage network traffic. If these companies limit or
halt the delivery of our e-mails, then our clients may discontinue their use of
our services.
INCREASED GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES MAY IMPAIR THE GROWTH
OF THE INTERNET AND DECREASE DEMAND FOR OUR SERVICES OR INCREASE OUR COST OF
DOING BUSINESS.
Although there are currently few laws and regulations directly applicable
to the Internet and commercial e-mail messaging services, the adoption of
additional laws or regulations may impair the growth of our business and the
Internet which could decrease the demand for our services and increase our cost
of doing business. A number of laws in both the United States and Canada have
been proposed involving the Internet, including laws addressing:
- user privacy;
- taxation;
- content;
- copyrights;
- characteristics and quality of services; and
- consumer protection.
In particular, a number of jurisdictions have already passed statutes
prohibiting spam. In addition, a number of statutes have been introduced in the
United States Congress and state legislatures to impose penalties for sending
unsolicited e-mails which, if passed, could impose additional restrictions on
our business. Also, a California court recently held that unsolicited e-mail
distribution is actionable as an illegal trespass for which the sender could be
liable for monetary damages.
Further, the growth and development of the market for on-line e-mail may
result in more stringent consumer protection laws that may impose additional
burdens on those companies conducting business on-line, including us. Our
business, operations and financial condition may be harmed if we were alleged to
have violated United States or Canadian federal, state, provincial or foreign
civil or criminal law, even if we could successfully defend these claims.
CHANGES IN TELECOMMUNICATIONS REGULATIONS COULD CAUSE REDUCED DEMAND FOR OUR
SERVICES.
Several telecommunications carriers are advocating that the United States
Federal Communications Commission regulate the Internet in the same manner as it
does other telecommunications services by imposing access fees on ISPs. These
regulations could substantially increase the costs of communicating on the
Internet. This, in turn, could slow the growth in Internet use and thereby
decrease the demand for our services.
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RISKS ASSOCIATED WITH THIS OFFERING
BECAUSE OUR EXECUTIVE OFFICERS, DIRECTORS AND EXISTING STOCKHOLDERS WHO
CURRENTLY OWN MORE THAN 5% OF OUR COMMON SHARES, AND THEIR RESPECTIVE
AFFILIATES, WILL HOLD APPROXIMATELY 73.5% OF OUR COMMON SHARES AFTER THIS
OFFERING, YOUR ABILITY TO INFLUENCE THE OUTCOME OF DIRECTOR ELECTIONS AND OTHER
MATTERS REQUIRING SHAREHOLDER APPROVAL MAY BE LIMITED.
Following this offering, our executive officers, our directors and our
existing shareholders who currently own over five percent of our capital stock,
and their respective affiliates, will, in the aggregate, beneficially own
approximately 73.5% of our outstanding common shares (assuming an initial public
offering price of $11.00 per share). These shareholders, if they vote together,
will be able to influence significantly matters that our shareholders are
required to approve, including electing directors and approving significant
corporate transactions. This concentration of ownership could make it more
difficult for a third party to acquire control of us by, for example,
discouraging an unsolicited acquisition proposal or a proxy contest, the effect
of which may be to deprive our shareholders of a control premium that might
otherwise be realized in connection with an acquisition of our company.
FUTURE SALES OF OUR COMMON SHARES IN THE PUBLIC MARKET COULD CAUSE OUR SHARE
PRICE TO FALL AND DECREASE THE VALUE OF YOUR INVESTMENT.
The market price of our common shares could decline if our existing
shareholders sell substantial amounts of their common shares, including shares
issued upon the exercise of outstanding options, in the public market following
this offering. These sales might also make it more difficult for us to sell
equity securities in the future at a time and price that we deem appropriate.
Some shareholders possess registration rights, which entitle them, after the
date six months from the closing of this offering, to cause us to file a
registration statement under the Securities Act to cover the sale of their
shares. The exercise of these rights could adversely affect the market price of
our common shares. 11,466,513 shares will be eligible for resale 180 days after
this offering upon termination of the lock-up agreements entered into by our
existing shareholders with SG Cowen Securities Corporation on behalf of the
underwriters, including the common shares outstanding upon completion of this
offering and shares subject to options which are exercisable within 60 days of
December 31, 1999. Although SG Cowen Securities Corporation currently has no
plans to waive the provisions of the lock-up agreements and is not obligated to
do so under any circumstances, if any of the provisions of the lock-up agreement
were waived a substantial portion of the 11,466,513 common shares could become
eligible for resale sooner.
WE HAVE $2.3 MILLION IN UNAMORTIZED ACCRETION CHARGES RELATING TO OUR REDEEMABLE
CONVERTIBLE CLASS A PREFERRED SHARES WHICH WILL DECREASE OUR EARNINGS UPON
COMPLETION OF THIS OFFERING IN THE SECOND QUARTER OF 2000.
The accretion of our redeemable convertible class A preferred shares
represents the difference between the carrying value of the class A preferred
shares of $856,000 and their liquidation value of $3.7 million. The carrying
value of the class A preferred shares equals the excess of the proceeds of the
sale of class A preferred shares over the amounts allocated to warrants issued
in connection with this sale. Unamortized accretion charges are being amortized
to income to the first date of redemption, November 19, 2003. Upon conversion or
redemption, any unamortized accretion charges remaining are charged to income
during the period of conversion or redemption. Upon completion of this offering,
the class A preferred shares will be converted into common shares and the
remaining unamortized accretion amount at that time will be charged to
operations which will decrease our earnings for the second quarter of 2000. As
of December 31, 1999, the unamortized accretion amount was $2.3 million. For
additional information see the notes to our consolidated financial statements.
17
<PAGE> 23
WE HAVE ISSUED A SIGNIFICANT NUMBER OF OPTIONS WHICH HAVE EXERCISE PRICES
SIGNIFICANT LOWER THAN THE INITIAL PUBLIC OFFERING PRICE OF OUR COMMON SHARES,
WHICH WHEN EXERCISED, COULD SUBSTANTIALLY DILUTE YOUR OWNERSHIP IN OUR COMPANY.
During the year ended December 31, 1999, we issued options to employees to
purchase an aggregate of 715,100 common shares with a weighted average exercise
price of $2.57 per share and an option to an investor to purchase an aggregate
of 874,870 common shares with a weighted average exercise price of $6.23 per
share. When these instruments are exercised, you will suffer substantial
dilution, in that the net tangible book value per share of the common shares you
acquired in this offering will decrease.
OUR BOARD OF DIRECTORS MAY ISSUE, WITHOUT SHAREHOLDER APPROVAL, ADDITIONAL
COMMON SHARES AND PREFERRED SHARES THAT HAVE RIGHTS AND PREFERENCES SUPERIOR TO
THOSE OF COMMON SHARES, WHICH ISSUANCES MAY DELAY OR PREVENT A CHANGE OF
CONTROL.
Our board of directors may issue an unlimited number of common shares and
an unlimited number of preferred shares, issuable in one or more series, without
any vote or action by our shareholders. If we issue any additional common shares
or any preferred shares, the percentage ownership of existing shareholders may
be reduced and diluted. In addition, our board of directors may determine the
price, rights, preferences, privileges and restrictions, including voting,
dividend and conversion rights, of the preferred shares and determine to whom
they shall be issued. After this offering, there will be no preferred shares
outstanding and we have no present plans to issue any preferred shares. However,
the rights of the holders of any preferred shares that may be issued in the
future may be senior to the rights of holders of common shares, which could
preclude holders of common shares from receiving dividends, proceeds of a
liquidation or other benefits. The issuance of preferred shares, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could make it more difficult for a third party to acquire
control of us by, for example, discouraging an unsolicited acquisition proposal
or a proxy contest, the effect of which may be to deprive our shareholders of a
control premium that might otherwise be realized in connection with an
acquisition of our company.
YOU MAY NOT BE ABLE TO OBTAIN ENFORCEMENT OF CIVIL LIABILITIES AGAINST US
OUTSIDE THE UNITED STATES.
We are formed under the laws of the Province of Ontario, Canada. Our
principal office and many of our assets are located outside the United States.
In addition, a majority of the members of our board of directors and our
officers and certain experts named in this prospectus are residents of countries
other than the United States. As a result, it may be impossible for you to
effect service of process within the United States upon us or these persons or
to enforce against us or these persons any judgments in civil and commercial
matters, including judgments under United States federal securities laws.
Investors should not assume that Canadian courts (1) would enforce judgments of
United States courts obtained in actions against FloNetwork or such persons
predicated upon the civil liability provisions of the United States federal
securities laws or the securities or "blue sky" laws of any state within the
United States or (2) would enforce, in original actions, liabilities against
FloNetwork or such persons predicated upon the United States federal securities
laws or any such state securities or blue sky laws. No treaty exists between the
United States and Canada for the reciprocal enforcement of foreign court
judgments.
18
<PAGE> 24
USE OF PROCEEDS
We expect to receive approximately $37.3 million in net proceeds from the
sale of 3,750,000 common shares offered by us at the assumed initial public
offering price of $11.00 per share, or approximately $43.1 million if the
underwriters' over-allotment is exercised in full, after deducting estimated
offering expenses and underwriting discounts and commissions payable by us. The
principal purposes of this offering are to obtain additional capital, to create
a public market for our common shares and to facilitate our future access to the
public capital markets.
We currently expect to use between $5.0 million and $10.0 million of the
net proceeds of this offering for the expansion of our e-mail deployment and
client service infrastructure, $10.0 million and $15.0 million for the expansion
of our sales and marketing activities and $3.0 million and $5.0 million for
research and development activities. We expect to use the remaining net proceeds
for general corporate purposes. We currently do not have specific plans with
respect to the remaining net proceeds from this offering. We may use a portion
of the net proceeds to fund acquisitions of, or investments in, businesses,
products or technologies that expand, complement or are otherwise related to our
current business. The types of any acquisitions or investments that we may make
will largely depend upon the business opportunities that we identify, if any,
which we cannot predict at this time. We presently have no agreements or
commitments with respect to any acquisition or investment. Our plans with
respect to the allocation of these proceeds among the uses described above may
change after the date of this prospectus if the number of clients using our
services or the volume of e-mails deployed by us differs from what we currently
expect. Pending these uses, we expect to invest the net proceeds in short-term,
interest-bearing investment grade securities.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our share capital and do
not currently intend to pay any cash dividends for the foreseeable future. We
currently intend to retain future earnings, if any, for use in the operation and
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future.
PRESENTATION OF FINANCIAL INFORMATION
Unless otherwise specified, all references to U.S. dollars, dollars or $
are to United States dollars, the legal currency of the United States of
America. All references to CDN$ are to the Canadian dollar, the legal currency
of Canada. Our financial statements are presented in U.S. dollars and have been
prepared in conformity with United States generally accepted accounting
principles.
In December 1999, we changed our fiscal year end from July 31 to December
31. As used in this prospectus, fiscal 1997 refers to the financial year ended
July 31, 1997, fiscal 1998 refers to the financial year ended July 31, 1998 and
fiscal 1999 refers to the financial year ended July 31, 1999.
19
<PAGE> 25
EXCHANGE RATE INFORMATION
A significant portion of our expenses is denominated in currencies other
than United States dollars. We do not currently anticipate paying any dividends
to shareholders. However, any dividends declared by us would be in the currency
determined by our directors at the time they are declared, and exchange rate
fluctuations would affect the United States dollar equivalent of any cash
dividend received by holders of common shares that is paid in a currency other
than United States dollars. Prices quoted for the common shares on the Nasdaq
National Market will be quoted in United States dollars.
The table below presents, for the periods and dates indicated, information
concerning the noon buying rates for the Canadian dollar expressed in Canadian
dollars per one United States dollar. The information below the caption "Period
Average" represents the average of the noon buying rates on the last business
day of each full calendar month during the relevant period. No representation is
made that the Canadian dollar or United States dollar amounts referred to below
could be or could have been converted into United States dollars or Canadian
dollars at any particular rate or at all.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, HIGH LOW PERIOD AVERAGE PERIOD END
- ------------------------------ ---------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
1995.......................... CDN$1.4238 CDN$1.3285 CDN$1.3689 CDN$1.3655
1996.......................... CDN$1.3822 CDN$1.3310 CDN$1.3644 CDN$1.3697
1997.......................... CDN$1.4398 CDN$1.3357 CDN$1.3894 CDN$1.4288
1998.......................... CDN$1.5770 CDN$1.4075 CDN$1.4903 CDN$1.5375
1999.......................... CDN$1.5302 CDN$1.4440 CDN$1.4827 CDN$1.4440
</TABLE>
Unless otherwise specified, the amounts in this prospectus which have been
converted into United States dollars have been converted at a conversion rate
equal to the noon buying rate on December 31, 1999: United States $1.00 =
Canadian $1.4440, which is equivalent to Canadian $1.00 = United States $0.6925.
FORWARD-LOOKING STATEMENTS; MARKET DATA
Many statements made in this prospectus under the captions "Prospectus
Summary", "Risk Factors", "Management's Discussion and Analysis of Financial
Condition and Results of Operations", "Business" and elsewhere are
forward-looking statements that are not based on historical facts. In some
cases, you can identify forward-looking statements by terminology such as "may",
"will", "should", "potential", "continue", "expects", "anticipates", "intends",
"plans", "believes", "estimates" and similar expressions. Because these
forward-looking statements involve risks and uncertainties, there are important
factors that could cause actual results to differ materially from those
expressed or implied by these forward-looking statements, including those
discussed under "Risk Factors."
The forward-looking statements made in this prospectus relate only to
events as of the date on which the statements are made. We undertake no
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which the statement is made or to reflect the
occurrence of unanticipated events, except as may be required by law.
This prospectus contains market data related to our business and the e-mail
messaging services industry. This market data includes projections that are
based on a number of assumptions. If these assumptions turn out to be incorrect,
actual results may differ from the projections based on these assumptions. The
failure of these markets to grow at these projected rates may have a material
adverse effect on our business, results of operations and financial condition,
and the market price of our common shares.
20
<PAGE> 26
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
- on an actual basis after giving effect to a 1-for-5 reverse split of our
common shares to be effected prior to the consummation of this offering;
- on a pro forma basis to give effect to (1) the conversion of our
outstanding class A, B, C and D preferred shares into an aggregate of
5,011,134 common shares upon the consummation of this offering (assuming
an initial public offering price of $11.00 per share), (2) the issuance
of 800,000 common shares concurrent with the consummation of this
offering upon the exercise of warrants outstanding as of December 31,
1999, at a weighted-average exercise price of approximately $0.85 per
share and the receipt of net proceeds of $678,670 from the sale thereof,
and (3) the issuance of 874,870 common shares concurrent with the
consummation of this offering upon the exercise of an option pursuant to
an Option Agreement held by CNET dated September 15, 1999, at a price of
approximately $6.23 per share and the receipt of net proceeds of
approximately $5.4 million from the sale thereof (assuming an initial
public offering price of $11.00 per share); and
- on a pro forma as adjusted basis to give effect to the sale of 3,750,000
common shares in this offering at an assumed initial public offering
price of $11.00 per share and the application of the estimated net
proceeds from the sale.
The outstanding share information excludes 1,723,302 common shares issuable
upon the exercise of options outstanding as of December 31, 1999 with a
weighted-average exercise price of approximately $1.54 per share, and an
additional 1,427,336 common shares available for issuance under our share
incentive plan and employee share purchase plan.
21
<PAGE> 27
This information should be read in connection with our financial statements
and the notes relating to these statements included elsewhere in this
prospectus, as well as "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Redeemable convertible class A preferred shares,
unlimited number of shares authorized; 550,000
shares issued and outstanding, actual; and no shares
issued and outstanding, pro forma and pro forma as
adjusted............................................ $ 1,369 $ -- $ --
Shareholders' equity:
5% cumulative voting convertible class B preferred
shares, unlimited number of shares authorized;
8,640,000 shares issued and outstanding, actual;
and no shares issued and outstanding, pro forma
and pro forma as adjusted........................ 772 -- --
Voting convertible class C preferred shares,
unlimited number of shares authorized; 2,650,423
shares issued and outstanding, actual; and no
shares issued and outstanding, pro forma and pro
forma as adjusted................................ 1,003 -- --
Voting convertible class D preferred shares,
unlimited number of shares authorized; 12,033,983
shares issued and outstanding, actual; and no
shares issued and outstanding, pro forma and pro
forma as adjusted................................ 14,900 -- --
Common shares, unlimited number of shares
authorized; 6,212,973 shares issued and
outstanding, actual; and 12,898,977 shares issued
and outstanding, pro forma; and 16,648,977 shares
issued and outstanding pro forma as adjusted..... 2,766 29,380 66,743
Additional paid in capital............................ 933 933 933
Unearned share-based compensation..................... (872) (872) (872)
Accumulated deficit................................... (5,995) (8,434) (8,434)
------- ------- -------
Total shareholder's equity....................... 13,507 21,007 58,370
------- ------- -------
Total capitalization............................. $14,876 $21,007 $58,370
======= ======= =======
</TABLE>
22
<PAGE> 28
DILUTION
Our net tangible book value, as of December 31, 1999, was $21.0 million or
$1.63 per common share after giving effect to (1) the conversion of our
outstanding class A, B, C and D preferred shares into an aggregate of 5,011,134
common shares upon the consummation of this offering (assuming an initial public
offering price of $11.00 per share), (2) the issuance of 800,000 common shares
concurrent with the consummation of this offering upon the exercise of warrants
outstanding as of December 31, 1999 at a weighted average exercise price of
approximately $0.85 per share and the receipt of net proceeds of $678,670 from
the sale thereof, and (3) the issuance of 874,870 common shares concurrent with
the consummation of this offering upon the exercise of an option pursuant to an
Option Agreement held by CNET dated September 15, 1999 at a price of
approximately $6.23 per share and the receipt of net proceeds of approximately
$5.4 million from the sale thereof (assuming an initial public offering price of
$11.00 per share). Net tangible book value per share is calculated by
subtracting our total liabilities from our total tangible assets, which equals
total assets minus intangible assets, and dividing this amount by the number of
common shares outstanding as of December 31, 1999.
After giving effect to the sale by us of 3,750,000 common shares in this
offering at an assumed initial public offering price of $11.00 per share and the
application of the estimated net proceeds from this offering, our net tangible
book value as of December 31, 1999 would have been $58.4 million, or $3.51 per
common share. This represents an immediate increase in pro forma net tangible
book value of $1.63 per common share to existing shareholders and an immediate
and substantial dilution in pro forma net tangible book value of $7.49 per
common share to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Pro forma net tangible book value per share as of December
31, 1999............................................... $1.63
Pro forma increase per share attributable to new
investors.............................................. 1.88
-----
Pro forma net tangible book value per share after the
offering.................................................. 3.51
------
Pro forma dilution per share to new investors............... $ 7.49
======
</TABLE>
The following table summarizes the total number of common shares purchased
from us, the total consideration paid to us and the average price per common
share paid, before deducting discounts and commissions and estimated offering
expenses, by existing shareholders and by new investors, in each case on a pro
forma basis as of December 31, 1999:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders........ 12,898,977 77.5% $26,557,341 39.2% $ 2.06
New investors................ 3,750,000 22.5 41,250,000 60.8% 11.00
---------- ----- ----------- -----
Total................... 16,648,977 100.0% $67,807,341 100.0%
========== ===== =========== =====
</TABLE>
The tables and calculations above exclude 1,723,302 common shares issuable
upon the exercise of options outstanding as of December 31, 1999 with a
weighted-average exercise price of approximately $1.54 per share and an
additional 1,427,336 common shares available for issuance under our share
incentive plan and employee share purchase plan. To the extent that any of these
options are exercised there will be further dilution to new investors.
23
<PAGE> 29
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data should be read in
connection with the financial statements and notes and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this prospectus. The statement of operations data for the years
ended July 31, 1999, 1998 and 1997 and the five months ended December 31, 1999
and the balance sheet data at July 31, 1999 and 1998 and December 31, 1999 are
derived from our financial statements which have been audited by Arthur Andersen
LLP, independent auditors, and are included elsewhere in this prospectus. The
statement of operations data for the five months ended December 31, 1998 have
been derived from our unaudited financial statements which have been prepared on
the same basis as the audited financial statements and, in our opinion, contain
all adjustments, consisting only of normal recurring adjustments necessary for a
fair presentation of the financial position and results of operations for this
period. The balance sheet data at July 31, 1997 are derived from our financial
statements which have been audited by Arthur Andersen LLP, independent auditors,
and are not included in this prospectus. The statement of operations data for
the years ended July 31, 1995 and 1996 and the balance sheet data at July 31,
1995 and 1996 are derived from unaudited financial statements not included in
this prospectus, but have been prepared on the same basis as the audited
financial statements and, in our opinion, contain all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
financial position and results of operations for these periods. Historical
results are not necessarily indicative of the results to be expected in the
future and results for interim periods are not necessarily indicative of results
for the entire year.
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
YEARS ENDED JULY 31, DECEMBER 31,
-------------------------------------------- ----------------------
1995 1996 1997 1998 1999 1998 1999
---- ----- ------ ------ ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
E-mail service revenue................................. $ -- $ -- $ -- $ 14 $ 431 $ 93 $ 1,194
License and software revenue(1)........................ 108 234 1,155 734 346 129 2
---- ----- ------ ------ ------- ------ -------
108 234 1,155 748 777 222 1,196
E-mail service cost of revenues.......................... -- -- -- -- 331 82 741
---- ----- ------ ------ ------- ------ -------
Gross margin............................................. 108 234 1,155 748 446 140 455
Operating expenses:
Sales and marketing.................................... 68 218 647 580 1,110 348 1,444
General and administrative............................. 66 104 381 388 674 210 584
Research and development............................... 25 41 278 559 813 299 540
Share-based compensation............................... -- -- -- -- -- -- 61
---- ----- ------ ------ ------- ------ -------
Total operating expenses............................. 159 363 1,306 1,527 2,597 857 2,629
---- ----- ------ ------ ------- ------ -------
Loss from operations..................................... (51) (129) (151) (779) (2,151) (717) (2,174)
Interest income, net..................................... -- -- 4 4 26 4 70
---- ----- ------ ------ ------- ------ -------
Loss before income taxes................................. (51) (129) (147) (775) (2,125) (713) (2,104)
Provision for income taxes............................... -- -- -- -- -- -- (20)
---- ----- ------ ------ ------- ------ -------
Net loss for the period.................................. $(51) $(129) $ (147) $ (775) $(2,125) $ (713) $(2,124)
==== ===== ====== ====== ======= ====== =======
Accretion of redeemable convertible class A preferred
shares to liquidation value.......................... -- -- -- -- (268) (40) (244)
Convertible class B preferred share dividends.......... -- -- (27) (36) (36) (15) (16)
---- ----- ------ ------ ------- ------ -------
Net loss attributable to common shareholders............. $(51) $(129) $ (174) $ (811) $(2,429) $ (768) $(2,384)
==== ===== ====== ====== ======= ====== =======
Net loss per common share:
Basic and diluted...................................... $(0.05) $(0.22) $ (0.66) $(0.21) $ (0.58)
====== ====== ======= ====== =======
Weighted average shares outstanding.................... 3,672 3,672 3,672 3,672 4,079
------ ------ ------- ------ -------
Pro forma net loss per common share:
Basic and diluted...................................... $ (0.65) $ (0.25)
======= =======
Weighted average shares outstanding.................... 7,533 8,543
</TABLE>
- ---------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
(1) Costs related to the sale and licensing of our discontinued multimedia consumer software products are operational in
nature and were included in sales and marketing expenses during the periods we generated revenue from this business.
These costs consisted primarily of nominal expenditures related to the printing, shipping and distribution of our
multimedia consumer software products.
</TABLE>
24
<PAGE> 30
<TABLE>
<CAPTION>
JULY 31,
----------------------------------------- DECEMBER 31,
1995 1996 1997 1998 1999 1999
---- ----- ----- ----- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 1 $ 30 $ 243 $ 348 $ 920 $13,538
Working capital............................................. (72) (206) 267 (538) 776 12,507
Total assets................................................ 41 100 774 537 1,545 17,005
Redeemable convertible class A preferred shares............. -- -- -- -- 1,125 1,369
Total shareholders' equity (deficit)........................ (67) (196) (314) (461) (91) 13,507
</TABLE>
25
<PAGE> 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and related notes which appear elsewhere in
this prospectus. The consolidated financial statements have been prepared in
conformity with United States generally accepted accounting principles. The
following discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
those discussed below and elsewhere in this prospectus, particularly under the
heading "Risk Factors."
OVERVIEW
We provide Internet direct marketing and communications services. Our
technology infrastructure, software and services enable businesses to market to
and communicate with their customers through personalized and targeted e-mail
messaging campaigns. Our clients access our technology and services, and retain
control of their e-mail campaigns, through the Internet. Our technology platform
is comprised of specialized hardware and software applications which we host for
clients who wish to outsource any or all aspects of e-mail messaging. We also
provide our clients with a full range of e-marketing services on an outsourced
basis to assist in the development, execution and assessment of their e-mail
campaigns.
In 1998, we began developing and selling e-mail messaging software
applications and services and, in January 1999, we adopted a business strategy
to offer these software applications over a hosted technology platform and
discontinued the development, sale and licensing of our multimedia consumer
software products. Our decision to shift our business focus to e-mail messaging
services was based on the size of the potential market for e-mail messaging
services, as well as our belief that we could more quickly and easily scale our
business in the e-mail messaging services market as compared to the multimedia
consumer software products market. Since we shifted our focus to the e-mail
messaging service business, our percentage of revenue derived from that business
has increased from 42.1% of our total revenue for the five month period ended
December 31, 1998 to 99.8% for the five month period ended December 31, 1999.
We generate revenue from the sale of e-mail messaging services. We
generally seek to provide e-mail messaging services under contracts entered into
with our clients for terms of one to two years. Under these contracts, we commit
to meet specified capacity and campaign delivery standards for delivery of our
clients' e-mails on a fixed price basis. These contracts generally do not
provide for a minimum usage commitment by our clients, nor do they provide for
any penalty in the event that our clients terminate the contract early. The
amounts we generally charge our clients are determined on a case-by-case basis
and vary depending on expected e-mail volume levels, and on the range of
professional services, technical services and initial set-up work provided to
clients. Set-up fees and fees for professional and technical services are
charged to a particular client as separate items or included in the calculation
of the overall rate for each 1,000 e-mail messages delivered.
We recognize the annual program fee evenly over the term of the contract
and the variable fee as the e-mail messages are delivered. We also enter into
contractual arrangements with certain customers to provide e-mail messaging
services for a fixed fee which is invoiced and recognized monthly. Revenue for
integration and development services is recognized upon the completion of the
services, provided there are no remaining significant obligations and collection
of the resulting receivable is probable. Revenue that has been prepaid or
invoiced, but does not yet qualify for recognition under our policies is
recorded as deferred revenue and recognized as we fulfill our obligation to
deploy e-mails or complete services.
26
<PAGE> 32
E-mail service cost of revenues consists primarily of expenses relating to
the delivery of e-mail messaging services, including client services and network
operations staff, depreciation and amortization of network equipment and
licensed technology, equipment leases, Internet connectivity charges and data
center co-location costs.
Costs related to the sale and licensing of our discontinued multimedia
software are operational in nature and were included in sales and marketing
expenses during the periods we generated revenue from this business. These costs
consisted primarily of nominal expenditures related to the printing, shipping
and distribution of our multimedia software product.
Sales and marketing costs consist primarily of salaries and other personnel
costs related to our sales, account management, client care and marketing
employees, as well as commissions, travel, advertising and other promotional
costs.
General and administrative costs consist primarily of salaries and other
personnel costs related to executive and administrative personnel, finance,
human resources, legal, office and facilities costs, professional fees,
depreciation and amortization of equipment and recognition of gains and losses
from foreign currency transactions.
Research and development costs consist primarily of salaries and other
personnel costs related to research and development, consultants and outside
contractor costs, and software and hardware maintenance expenses. Research and
development costs are expensed as incurred.
Share-based compensation represents the aggregate difference, at the date
of grant, between the respective exercise price of options to acquire our shares
and the deemed fair market value of the underlying shares. Share-based
compensation is amortized over the vesting period of the underlying options,
generally four years. For the five months ended December 31, 1999, we recorded
unearned share-based compensation of $933,000, of which $61,100 was amortized
during the five months ended December 31, 1999. The remaining unamortized
share-based compensation balance at December 31, 1999 of $872,000 will be
amortized as follows: $156,000 for the year ending December 31, 2000; $233,000
for the year ending December 31, 2001; $179,000 for the year ending December 31,
2002; $174,000 for the year ending December 31, 2003; and $130,000 for the year
ending December 31, 2004.
Accretion of redeemable convertible class A preferred shares represents the
difference between the carrying value of the class A preferred shares of
$856,000 and their liquidation value of $3.7 million. The carrying value of the
class A preferred shares is the excess of the proceeds of the sale of the class
A preferred shares over the amounts allocated to warrants issued in connection
with this sale. The difference of $2.8 million between the carrying value and
the liquidation value is being amortized over five years to the fixed date of
redemption, November 19, 2003. As of December 31, 1999, $512,000 had been
amortized. Upon completion of this offering, the class A preferred shares will
be converted into common shares and the remaining unamortized balance at that
time will be charged to operations. As of December 31, 1999, the unamortized
accretion amount was $2.3 million. For additional information, see the notes to
our consolidated financial statements.
Convertible class B preferred share dividends represents the 5% cumulative
dividends attributable to the stated capital of the class B preferred shares,
when and if those dividends are declared by our board of directors. We recorded
dividends of $15,800 and $14,800 for the five months ended December 31, 1999 and
1998 and $36,000, $36,200 and $27,400 for the fiscal years ended July 31, 1999,
1998 and 1997, respectively. Presently, our board of directors does not
anticipate declaring any dividends on the class B preferred shares prior to the
consummation of this offering. Therefore, upon conversion of the class B
preferred shares to common shares, the stated capital of the class B preferred
shares and the unpaid cumulative dividends will be included in the stated
capital of common shares.
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<PAGE> 33
We have incurred significant losses since inception and, as of December 31,
1999, we had an accumulated deficit of $6.0 million. This deficit is the
accumulation of losses of $2.4 million for the five month period ended December
31, 1999, $2.4 million for the year ended July 31, 1999, $811,000 for the year
ended July 31, 1998, $174,000 for the year ended July 31, 1997 and $196,000 from
August 1, 1993 (inception) to July 31, 1996. The increases in our net losses in
the years ended July 31, 1999 and 1998 and the five month period ended December
31, 1999 reflect the development of our infrastructure and network to provide
e-mail messaging services and the shift in focus to our new business strategy.
We expect to increase spending on sales and marketing as we expand our
sales force and increase promotional and advertising expenditures to build brand
and market awareness. We also expect to incur higher general and administrative
and research and development expenses as we expand our infrastructure to support
expected growth in the number of clients serviced and the volume of e-mail
messages sent, and continue to develop and expand our suite of e-mail messaging
services. As a result of these increases, we expect to continue to incur
significant net losses on a quarterly and annual basis for the foreseeable
future.
FIVE MONTHS ENDED DECEMBER 31, 1999 AND 1998
Revenue. Total revenue increased by 439% to $1.2 million for the five
months ended December 31, 1999 from $222,000 for the five months ended December
31, 1998. E-mail service revenue as a percentage of total revenue increased to
99.8% of revenue for the five months ended December 31, 1999 from 42.1% of total
revenue for the five months ended December 31, 1998, reflecting our shift in
focus to the e-mail messaging services business. E-mail service revenue
increased to $1.2 million for the five months ended December 31, 1999 from
$93,400 for the five months ended December 31, 1998. The increase in e-mail
service revenue was primarily due to an increase in the number of clients to
whom we provide e-mail messaging services, including integration and development
services, and a significant increase in the number of e-mails sent on behalf of
our clients.
License and software revenue decreased by 98% to $2,400 for the five months
ended December 31, 1999 from $129,000 for the five months ended December 31,
1998, as we discontinued the sale and licensing of our multimedia consumer
software products to concentrate on e-mail messaging services.
For the five months ended December 31, 1999, CNET, Inc. and
barnesandnoble.com accounted for 27.5% of our revenue, while RealNetworks Inc.
and International Microcomputer Software Inc. accounted for 52.6% of our revenue
during the five months ended December 31, 1998.
E-mail Service Cost of Revenues. E-mail service cost of revenues increased
by 803% to $741,000 for the five months ended December 31, 1999 from $82,100 for
the five months ended December 31, 1998. The increase reflects our shift in
focus to the e-mail services business and was primarily due to increased
personnel costs and increased Internet connectivity charges associated with
supporting a larger number of clients and the significant increase in the number
of e-mails sent on behalf of our clients. Costs related to the sale and
licensing of our multimedia consumer software products were operational in
nature and are included in sales and marketing expenses. For the five months
ended December 31, 1999 and 1998, the cost of revenues related to software
licensing and sales activities was nominal.
Sales and Marketing. Sales and marketing expenses increased by 315% to
$1.4 million for the five months ended December 31, 1999 from $348,000 for the
five months ended December 31, 1998. The increase primarily reflects increased
personnel costs associated with the growth in our direct sales and marketing
staffs, as well as increased promotional spending and travel and entertainment
expenses. We expect our sales and marketing expenses to increase significantly
as we continue to expand our sales force and our marketing activities.
General and Administrative. General and administrative expenses increased
by 178% to $584,000 for the five months ended December 31, 1999 from $210,000
for the five months ended December 31,
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<PAGE> 34
1998. The increase was primarily due to an increase in senior management and
administrative personnel costs and an increase in facilities and overhead
related costs associated with the expansion of our office space. These increases
were partially offset by higher foreign currency gains for the five months ended
December 31, 1999 than for the five months ended December 31, 1998.
Research and Development. Research and development expenses increased by
81% to $540,000 for the five months ended December 31, 1999 from $299,000 for
the five months ended December 31, 1998. The increase was primarily due to an
increase in personnel costs. As a result of the change in our business strategy,
we hired additional research and development professionals and terminated
certain employees who were focused on multimedia consumer software development.
We expect our research and development expenses to continue to increase as we
continue to invest substantially in the development of new product features and
services.
Share-Based Compensation. We recorded unearned share-based compensation of
$933,000 during the five months ended December 31, 1999, which is being
amortized over the period during which the options vest, generally four years.
For the five months ended December 31, 1999, the related amortization for
options granted was $61,100. No unearned share-based compensation was recognized
for the five months ended December 31, 1998.
Provision For Income Taxes. The provision for income taxes of $20,000 for
the five months ended December 31, 1999 relates to our wholly owned subsidiary,
FloNetwork US, Inc., which commenced operations in January 1999. No provision
for income tax was recorded in the prior period as our Canadian operations were
in a loss position.
Net Loss Attributable to Common Shareholders. Our net loss attributable to
common shareholders increased by 210% to $2.4 million for the five months ended
December 31, 1999, from 768,000 for the five months ended December 31, 1998. The
increase was primarily due to an increase in sales and marketing expenses of
$1.1 million, an increase in general and administrative expenses of $374,000,
and an increase in research and development expenses of $241,000, reflecting our
shift in focus to e-mail messaging services. In addition, the net loss was
increased by non-cash charges related to our class A and class B preferred share
financings. These non-cash charges totaled $260,000 for the five months ended
December 31, 1999 and $54,700 for the five months ended December 31, 1998, an
increase of $205,000.
YEARS ENDED JULY 31, 1999 AND 1998
Revenue. Total revenue increased by 4% to $777,000 for the year ended July
31, 1999 from $748,000 for the year ended July 31, 1998. In January 1999, we
adopted a business strategy to offer e-mail messaging services on a hosted basis
and focused our efforts on implementing and developing the infrastructure and
technology required to execute our new strategy. In addition, we began to
discontinue the development, sale and licensing of our multimedia consumer
software products to enable us to focus exclusively on the development of the
e-mail messaging services business.
E-mail service revenue as a percentage of total revenue increased to 55.5%
for the year ended July 31, 1999 from 1.8% for the year ended July 31, 1998,
reflecting our shift in focus to the e-mail messaging service business. E-mail
service revenue increased to $431,000 for the year ended July 31, 1999 from
$13,800 for the year ended July 31, 1998. The increase in e-mail service revenue
was primarily due to an increase in the number of clients to whom we provide
e-mail messaging services and a significant increase in the number of e-mails
sent on behalf of our clients.
License and software revenue decreased by 53% to $346,000 for the year
ended July 31, 1999 from $734,000 for the year ended July 31, 1998, as we
discontinued the sale and licensing of our multimedia consumer software products
to concentrate on e-mail messaging services.
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<PAGE> 35
For the year ended July 31, 1999, Hallmark Connections, RealNetworks, Inc.
and International Microcomputer Software, Inc. accounted for 41.2% of our
revenue. For the year ended July 31, 1998, Hallmark Connections and Tarae
Information and Communications Co., Ltd. accounted for 61.0% of our revenue.
E-mail Service Cost of Revenues. E-mail service cost of revenues increased
to $331,000 for the year ended July 31, 1999 from a nominal amount for the year
ended July 31, 1998, reflecting our shift in focus to the e-mail messaging
services business. The increase was primarily due to increased client service
and network operation personnel costs, and network equipment and Internet
connectivity charges. For the years ended July 31, 1999 and 1998, the cost of
revenues related to software licensing and sales activities was approximately
$19,000 and $36,000, respectively. These costs were operational in nature and
are included in sales and marketing expenses.
Sales and Marketing. Sales and marketing costs increased by 92% to $1.1
million for the year ended July 31, 1999 from $580,000 for the year ended July
31, 1998. The increase reflects increased personnel costs associated with the
growth in our U.S. based direct sales force and the growth in our marketing
staff, as well as increased promotional costs aimed at building our brand and
increasing our sales.
General and Administrative. General and administrative costs increased by
74% to $674,000 for the year ended July 31, 1999 from $388,000 for the year
ended July 31, 1998. The increase was primarily due to increased occupancy and
general office costs, increased personnel costs relating to the addition of
senior management and administrative personnel and foreign currency losses.
Research and Development. Research and development costs increased by 45%
to $813,000 for the year ended July 31, 1999 from $559,000 for the year ended
July 31, 1998. The increase was primarily due to the growth in personnel costs
incurred to further develop and enhance our e-mail messaging services.
Provision for Income Taxes. No provision for income taxes was recorded for
the years ended July 31, 1999 and 1998 as our Canadian operations were in a loss
position. As of July 31, 1999, we had approximately $3.1 million of net
operating loss carryforwards which expire in varying amounts beginning in the
taxation year ending July 31, 2001. Due to the uncertainty regarding the
realization of the benefit of the net operating loss carryforwards, a valuation
allowance has been recorded for the entire amount of the net deferred tax asset.
Net Loss Attributable to Common Shareholders. Our net loss increased by
200% to $2.4 million for the year ended July 31, 1999, from $811,000 for the
year ended July 31, 1998. The increase was primarily due to an increase in sales
and marketing expenses of $530,000, an increase in general and administrative
expenses of $286,000 and an increase in research and development expenses of
$254,000, reflecting our shift in focus to e-mail messaging services. In
addition, the net loss was increased by non-cash charges related to our class A
and class B preferred share financings. These non-cash charges totaled $304,000
for the year ended July 31, 1999 and $36,200 for the year ended July 31, 1998,
an increase of $268,000.
YEARS ENDED JULY 31, 1998 AND 1997
Revenue. Total revenue decreased by 35% to $748,000 for the year ended
July 31, 1998 from $1.2 million for the year ended July 31, 1997. The decrease
was primarily due to a decrease in license and software revenue from our
multimedia consumer software products. E-mail service revenue was $13,800 for
the year ended July 31, 1998 and nil for the year ended July 31, 1997. For the
year ended July 31, 1998, Hallmark Connections and Tarae Information and
Communications Co., Ltd. accounted for 61.0% of our revenue. For the year ended
July 31, 1997, Nippon Denso Industry Co., Ltd., Seyang Information and
Communication Co., Ltd. and VRex, Inc. accounted for 56.4% of our revenue.
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E-mail Service Cost of Revenues. E-mail service cost of revenues was
nominal for the year ended July 31, 1998 and non-existent in the prior year.
Costs related to the licensing and sale of our multimedia consumer software
products were included in operating expenses for the years ended July 31, 1998
and 1997.
Sales and Marketing. Sales and marketing costs decreased by 10% to
$580,000 for the year ended July 31, 1998 from $647,000 for the year ended July
31, 1997. The decline was primarily due to a decrease in sales commissions
resulting from lower sales for the year ended July 31, 1998 than for the prior
year.
General and Administrative. General and administrative costs increased by
2% to $388,000 for the year ended July 31, 1998 from $381,000 for the year ended
July 31, 1997. The initial transition from multimedia consumer software sales
and licensing to e-mail messaging services was accomplished without substantial
increases in administrative personnel, occupancy and general office costs during
the development stage.
Research and Development. Research and development costs increased by 101%
to $559,000 for the year ended July 31, 1998 from $278,000 for the year ended
July 31, 1997. The increase was primarily due to the increase in personnel costs
as we began to invest in the development of our e-mail messaging solution.
Provision for Income Taxes. No provision for income taxes was recorded for
the years ended July 31, 1998 and 1997 as our Canadian operations were in a loss
position.
Net Loss Attributable to Common Shareholders. Our net loss attributable to
common shareholders increased by 364% to $811,000 for the year ended July 31,
1998, from $174,000 for the year ended July 31, 1998. The increase was primarily
due to the decrease in revenue from sales of multimedia software of $407,000 and
the increase in our research and development expenses of $281,000 as we began
our shift in focus to e-mail messaging services. In addition, the net loss was
increased by non-cash charges related to our class B preferred share financing.
These non-cash charges totaled $36,200 for the year ended July 31, 1998 and
$27,400 for the year ended July 31, 1997, an increase of $8,800.
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QUARTERLY RESULTS OF OPERATIONS
The following table presents our unaudited quarterly statements of
operations data for the four quarters ended December 31, 1999. This information
is derived from our consolidated financial statements and notes included
elsewhere in this prospectus, which have been prepared in conformity with United
States generally accepted accounting principles, and, in the opinion of
management, contains all necessary adjustments, consisting only of normal
recurring adjustments, to present fairly the unaudited quarterly results of
operations. This data should be read in conjunction with the consolidated
financial statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1999 1999 1999 1999
--------- -------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenue:
E-mail service revenue................. $ 112 $ 155 $ 268 $ 994
License and software revenue(1)........ 211 3 1 2
----- ----- ------- -------
323 158 269 996
E-mail service cost of revenues.......... 69 105 222 594
----- ----- ------- -------
Gross margin............................. 254 53 47 402
Operating expenses:
Sales and marketing.................... 327 265 501 1,198
General and administrative............. 151 166 235 398
Research and development............... 197 209 239 418
Share-based compensation............... -- -- 24 37
----- ----- ------- -------
Total operating expenses............ 675 640 999 2,051
----- ----- ------- -------
Loss from operations..................... (421) (587) (952) (1,649)
Interest income, net..................... 8 15 5 65
----- ----- ------- -------
Loss before income taxes................. (413) (572) (947) (1,584)
Provision for income taxes............... -- -- (13) (7)
----- ----- ------- -------
Net loss for the period.................. $(413) $(572) $ (960) $(1,591)
===== ===== ======= =======
Accretion of redeemable convertible
class A preferred shares to
liquidation value................... (90) (90) (147) (147)
Convertible class B preferred share
dividends........................... (9) (9) (9) (9)
----- ----- ------- -------
Net loss attributable to common
shareholders........................... $(512) $(671) $(1,116) $(1,747)
===== ===== ======= =======
</TABLE>
- ---------------
(1) Costs related to the sale and licensing of our discontinued multimedia
consumer software products are operational in nature and were included in
sales and marketing expenses during the periods we generated revenue from
this business. These costs consisted primarily of nominal expenditures
related to the printing, shipping and distribution of our multimedia
consumer software products.
Our quarterly operating results have fluctuated significantly in the past,
and will continue to fluctuate in the future, as a result of a number of
factors, many of which are outside our control. As a result of our limited
operating history under our present business model, we cannot forecast operating
expenses based on historical results. Accordingly, we base our anticipated level
of expense in part on our future revenue projections. Most of our expenses are
fixed and, therefore, in the short term we may not be able to quickly reduce
spending if revenue is lower than we have projected. If revenue in a particular
quarter does not meet expectations, our net losses in a given quarter would be
greater than
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expected. As a result, these operating results are not necessarily indicative of
results for any future period. Investors should not rely on them to predict
future performance.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations and met our capital
expenditure requirements primarily through private sales of our equity
securities, which have resulted in net proceeds of $20.2 million through
December 31, 1999. At December 31, 1999, we had $13.5 million in unrestricted
cash and cash equivalents and $12.5 million in working capital.
Net cash used in operating activities was $1.3 million and $738,000 for the
five months ended December 31, 1999 and 1998, respectively, and $2.2 million,
$448,000 and $346,000 for the years ended July 31, 1999, 1998 and 1997,
respectively.
Net cash used in investing activities was $1.9 million and $53,000 for the
five months ended December 31, 1999 and 1998, respectively, and $217,000,
$46,500 and $46,000 for the years ended July 31, 1999, 1998 and 1997,
respectively. Net cash used in investing activities was related to purchases of
property, equipment and software.
Net cash provided by financing activities was $15.9 million and $2.0
million for the five months ended December 31, 1999 and 1998, respectively, and
$3.0 million, $600,000 and $605,000 for the years ended July 31, 1999, 1998 and
1997, respectively. Net cash provided by financing activities was primarily from
proceeds of the sale of our preferred shares.
Upon the consummation of this offering, pursuant to the exercise of an
option issued to CNET in connection with the sale of our class C preferred
shares, CNET has agreed to purchase a number of common shares which, on the date
of exercise, equals 5% of all of our issued and outstanding common shares on a
fully diluted basis at a price of approximately $6.23 per share. See "Related
Transactions".
We believe that the cash flows that we expect to generate from sales of our
services and our current cash balances will be sufficient to meet our
anticipated cash needs for working capital and capital expenditure requirements
for at least the next 12 months if this offering does not occur and we do not
expand our infrastructure, sales and marketing activities and research and
development activities as we currently contemplate. We believe that the net
proceeds from this offering, together with the cash flows that we anticipate
generating from sales of our services, the proceeds from the exercise of our
outstanding warrants, the option held by CNET, and our current cash and cash
equivalents, will be sufficient to meet our anticipated cash needs for working
capital and capital expenditure requirements assuming the expansion of our
business as currently contemplated for at least the next eighteen months. If we
do not generate our anticipated cash flows, we may require additional funds
prior to such date. If such additional financing is not available on acceptable
terms, we would seek to reduce our planned rate of growth, reduce our operating
expenses as necessary and use other sources of cash on hand and from our
operations.
FOREIGN CURRENCY TRANSLATION AND HEDGING
We are exposed to foreign currency fluctuations through our operations in
Canada. Substantially all of our revenue and corresponding receivables are
denominated in United States dollars. However, a majority of our network
operations, client services, research and development and administrative
expenses are denominated in Canadian dollars. Changes in the value of the
Canadian dollar relative to the U.S. dollar may result in currency translation
gains and losses and could adversely affect our operating results. We have not
engaged in any hedging transactions to mitigate our exposure to currency
fluctuations and, accordingly, include gains and losses on foreign currency
transactions in our statement of operations. To date, foreign currency exposure
has been minimal. However, in the future we intend to hedge all or a significant
portion of our annual estimated Canadian dollar expenses to minimize our
Canadian dollar exposure. We are in the process of implementing our currency
strategy with respect to other foreign currencies.
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YEAR 2000 READINESS DISCLOSURE
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. This could result in
system failures or miscalculations causing disruption of operations for any
company using these computer programs or hardware. Among other things, this
could include a temporary inability to process transactions, send or receive
e-mail messages, send invoices or engage in normal business activities. As a
result, many companies' computer systems may need to be upgraded or replaced in
order to avoid Year 2000 issues.
We are a comparatively new enterprise. Accordingly, the majority of
software and hardware we use to operate and manage our business has all been
purchased or developed by us within the last two years. While this does not
uniformly protect us against Year 2000 exposure, and subject to the comments
below concerning other companies' products and software, we believe our exposure
is limited because the information technology we use to operate and manage our
business is not based upon legacy hardware and software systems. Generally,
hardware and software designed within the current decade and the past several
years in particular has given greater consideration to Year 2000 issues.
We have evaluated the Year 2000 readiness of substantially all of the
information technology systems that we use. Based on the results of our
evaluation, we believe our information technology systems are Year 2000
compliant and will not suffer any latent Year 2000 problems. We have also
received certifications from our providers of our non-information technology
systems, such as our phone systems, power supplies and other systems. These
certifications indicate that our non-information technology systems are Year
2000 compliant.
In implementing our Year 2000 compliance program, we have identified and
inventoried Year 2000 sensitive components in our internal systems. We have also
made reasonable efforts to contact vendors and suppliers that provide us with
Year 2000 sensitive components in order to determine the compliance of these
components. The majority of our vendors have certified to us that they are Year
2000 compliant. We have completed our evaluation of substantially all of our
hardware components and have received vendor certification that they are Year
2000 compliant. We have also upgraded all our operating systems to Year 2000
compliant system versions.
Because we are unable to control other companies' products and software, we
are not able to certify that these products and software will not suffer any
errors or malfunctions related to Year 2000. Our suppliers and vendors could
experience latent Year 2000 problems. In addition, although some Year 2000
sensitive components in our internal systems may have passed internal Year 2000
compliance testing by our suppliers or vendors, we do not certify that these
materials or components will perform as tested when used in circumstances not
reflected in the testing.
As of the date of this prospectus, we have not experienced any material
Year 2000 problems relating to our software, computer technology or services,
nor are we aware of any material Year 2000 problems relating to the software,
computer technology or services of any third parties on which we rely. We do not
believe that any aspects of our business are still subject to any material Year
2000 problems.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-1, or SOP 98-1, "Software for Internal Use," which
provides guidance on accounting for the cost of computer software developed or
obtained for internal use. SOP 98-1 is effective for financial statements for
fiscal years beginning after December 15, 1998. We do not expect that the
adoption of SOP 98-1 will have a material impact on our financial statements.
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BUSINESS
OVERVIEW
We provide Internet direct marketing and communications services. Our
technology infrastructure, software and services enable businesses to market to
and communicate with their customers through personalized and targeted e-mail
messaging campaigns. Our clients access our technology and services, and retain
control of their e-mail campaigns, through the Internet. Our technology platform
is comprised of specialized hardware and software applications which we host for
clients who wish to outsource any or all aspects of e-mail messaging. We also
provide our clients with a full range of e-marketing services on an outsourced
basis to assist our clients in the development, execution and assessment of
their e-mail campaigns.
INDUSTRY BACKGROUND
Many companies have begun to expand their use of Internet-based
technologies to replace or improve traditional operations such as marketing and
advertising. According to Forrester Research, total Internet marketing and
advertising expenditures in the United States will increase from $2.8 billion in
1999 to $22.2 billion in 2004. E-mail has become an increasingly popular choice
for companies to market to and communicate with their customers both through
advertising and direct marketing. According to Forrester Research, the market
for e-mail marketing services will grow from $156.4 million in 1999 to $4.8
billion in 2004.
The significant increase in e-mail as a vehicle for marketing is a
reflection of the cost effectiveness, speed of delivery and higher response
rates of e-mail marketing relative to traditional direct marketing campaigns and
Internet banner advertising. Marketing through e-mail offers a potentially more
effective medium for reaching target audiences and soliciting higher response
rates from recipients. However, to date, a large number of e-mail campaigns for
marketing purposes have principally involved mass e-mailings of promotional
messages. Although these e-mailings are a low-cost method of communication for
many businesses, the unsolicited and untargeted nature of these e-mailings,
commonly referred to as spam, has resulted in relatively low rates of
effectiveness, negative consumer reaction and proposals for legislation to
regulate the activity.
The need for more effective, targeted e-mail has resulted in the
development of permission-based e-mail campaigns. Unlike unsolicited mass e-mail
campaigns, recipients of permission-based e-mails have given their consent to
receive e-mails on specific topics. Given this self-selection, permission-based
e-mail messaging campaigns do not face the same issues as untargeted and
unsolicited mass e-mail campaigns do, and the success rates of permission-based
e-mail messaging campaigns are significantly higher than those of traditional
campaigns. Forrester Research reports response rates for permission-based e-mail
campaigns of 5.0% to 25.0%, compared to response rates of 1.2% to 3.9% for
traditional direct mail marketing methods and an average of approximately 0.7%
for Internet banner advertisements. Another significant benefit of e-mail is the
estimated cost of e-mail as compared to traditional physical mail campaigns.
According to Forrester Research, a traditional catalog mailing costs $0.50 to
$1.00 per catalog, while a highly personalized e-mail campaign costs $0.05 to
$0.10 per e-mail. The combined success rate and cost benefits provide a more
efficient method to reach target customers and provide greater returns on
investment than the available alternatives.
CHALLENGES IN IMPLEMENTING AND OPERATING E-MAIL MESSAGING SYSTEMS
The majority of companies today conduct their commercial e-mail messaging
activities in-house and face several challenges in implementing and operating
their e-mail communications systems. These challenges include the need to
implement, scale, maintain and enhance an e-mail communications system for
commercial e-mail messaging, which require large investments in technology and
staff, as well as dedicated computing facilities. To deliver a high volume of
e-mail messages, companies must
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invest in high bandwidth data facilities, servers that can accommodate a high
volume of e-mail, and software that can be used to develop, send and schedule
campaigns. Companies must also establish a dedicated team of information
technology professionals to maintain, enhance and operate their e-mail
communication systems. In addition, companies require significant expertise in
the following areas to ensure the success of their e-mail messaging efforts:
- Database Management. Companies must develop and maintain databases which
contain accurate e-mail addresses for proposed recipients of e-mail
communications and appropriate demographic, transactional and behavioral
data about the recipients.
- Campaign Management. Companies must have the ability to assemble and
deliver high volumes of personalized e-mail messages, track and analyze
large volumes of individual customer responses and obtain reports
concerning the effectiveness of the campaign while the campaign is being
executed in order to make immediate adjustments.
- Safeguards to Avoid Spam. Companies must have the ability to conduct
high volume e-mail messaging campaigns that will not be identified as
spam. Spam is a major concern among Internet users and ISPs and a number
of jurisdictions have enacted or are considering enacting legislation
banning spam. In addition, many corporations and ISPs utilize software to
block spam. Significant expertise is required both to comply with the
rules and protocols that govern the delivery of high volume e-mail
messaging campaigns and to manage relationships with major ISPs in order
to facilitate the delivery of our e-mail messages.
We believe that as e-mail messaging becomes more heavily used by companies
seeking to market to and communicate with existing and potential customers, the
costs associated with obtaining the required resources and expertise necessary
to successfully address the challenges of implementing e-mail communication
systems in-house will lead many companies to seek an outsourced solution to
their e-mail messaging needs.
THE FLONETWORK SOLUTION
We provide the technology and services needed by businesses to market to
and communicate with their customers using e-mail. Our technology platform is
comprised of specialized hardware and software applications which we host for
clients who wish to outsource any or all aspects of e-mail messaging campaigns.
Our clients access our technology and services, and can retain control of their
e-mail messaging campaigns, through the Internet. We also provide our clients
with a full range of Internet direct marketing and communications services.
We manage all aspects of permission-based e-mail messaging campaigns,
including designing the campaigns, building and managing e-mail address lists,
testing and deploying the campaigns and tracking, reporting and analyzing the
results. Our e-mail messaging services provide our clients with the following
benefits:
Lower Cost of Ownership. By outsourcing their e-mail messaging functions
to us, our clients can reduce their administrative burdens and relieve their
internal information technology departments of the responsibility for
purchasing, installing and maintaining a system required to support in-house
e-mail messaging services. Our technology infrastructure is maintained at our
facilities, where we employ a team of systems administrators who monitor the
network seven days a week, 24 hours a day. Our services eliminate our clients'
need to lease, buy or continually upgrade bandwidth, hardware and software, and
recruit and retain systems engineers and administrative personnel to run and
monitor their e-mail messaging systems and campaigns.
Quicker Time to Market. Many companies attempting to manage their e-mail
messaging needs in-house do not have the resources or expertise to implement a
dedicated e-mail deployment network on a timely basis. By outsourcing their
e-mail messaging functions to us, new clients can begin e-mail
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<PAGE> 42
campaign deployment within one to two months from the signing of a contract with
us, depending on the level of required customization and the complexity of the
e-mail database. Once the initial integration and setup is complete, we can
generally deploy an e-mail messaging campaign in five to 48 hours from the time
we receive a client's list of recipients, e-mail content and permission to
deploy the campaign.
Reliable and Scalable High Volume Deployment. We have developed a network
of specialized servers and software which have been engineered to handle high
volumes of personalized and trackable e-mail messages. E-mails are deployed
through three data centers which are connected to high-speed Internet
connections. We maintain a reliable network by using several server farms in
multiple locations with different ISPs, decreasing our reliance on any single
location or ISP, and monitoring our system seven days a week, 24 hours a day.
The network is designed to be easily scaled to handle large volumes of e-mails.
Web-based Client Control. Our clients have access to our technology
infrastructure, software and services through the Internet, seven days a week,
24 hours a day, giving them control over their e-mail campaigns and enabling
them to organize their campaigns, compose and personalize messages, choose the
time and pace of delivery, perform test campaigns and evaluate reports while the
campaign is being executed.
Personalization. We collect data on customer behavior and response rates
to help our clients target their customers. We also store information on our
clients' customers to create a database of customer value information. This
information enables our clients to make more informed decisions regarding the
content and offer being delivered to their existing and potential customers. Our
clients can also personalize each e-mail to the needs and interests of a
particular recipient based on information contained within the database of
customer value information. Messaging can be personalized by inserting any text
into the subject line, body of the text message or HTML message.
Sophisticated Targeting and Tracking. Our sophisticated e-mail messaging
campaign tracking capabilities allow our clients to more effectively target
their audiences and evaluate the effectiveness of their campaigns. We track
statistics including total dollars spent and total number of transactions
measured by individual customers and by customer segment, pass-along rates of
e-mails sent by the original recipient to other on-line users, rates of
click-throughs from an e-mail to a client's web site, click-through rates at
certain time periods, the number of recipients who have subscribed or
unsubscribed and the number of e-mails that have bounced back.
Instantaneous Reporting. Our Internet-based reports enable our clients to
evaluate the effectiveness of a campaign and to make immediate adjustments to
the campaign during execution. These reports provide transactional and response
statistics which allow our clients to identify their most active customers.
Transactional and response information from these reports can be exported into a
spreadsheet application for further analysis using standard data analysis tools.
We believe that our reporting capabilities represent a significant competitive
advantage compared with that of e-mail service bureaus.
OUR STRATEGY
Our objective is to become a leading provider of e-marketing services. As
part of this strategy we intend to continue to broaden our e-mail messaging
services and to develop other hosted direct marketing applications and services
over the Internet. Key elements of our strategy include:
Expand Our Client Base. We intend to more than double the size of our
direct sales force by the end of 2000. Presently, our sales force focuses
primarily on the e-publishing and e-business markets. As we expand the size of
our sales force, we intend to increase our focus on specific vertical markets in
order to provide our clients with solutions and services tailored to their
particular needs.
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<PAGE> 43
Develop Strategic Relationships. We believe that by strengthening
relationships with our clients and by developing relationships with other
e-marketing companies, we can further strengthen our market position and enhance
the products and services we offer to our clients. For example, we continue to
work closely with CNET to design new and innovative product features and service
offerings. In addition, the relationships we maintain with direct marketers and
e-mail list brokers, including Directmedia.com (formerly known as Acxiom Direct
Media), Grizzard List Services, The Lake Group and Impower, provide a marketing
channel that supplements our direct sales force. We intend to continue to
develop close relationships with clients and e-marketing companies to bring
innovative solutions to market and to expand our client base.
Develop Value Added Services. We are developing additional e-mail
messaging services for customer acquisition, data management, customer service,
campaign management, personalization and content management to provide clients
with a complete e-marketing solution. We will develop some of these services
internally and access others through relationships with third parties. These
additional services will be designed specifically for Internet direct marketing
campaigns to enable our clients to more effectively target their customers and
better evaluate the success of their campaigns.
Create a Network of Resellers. We intend to enter into reseller
arrangements to help establish the FloNetwork brand as the preferred provider of
e-mail messaging services. Under these arrangements, we expect resellers to use
our technology platform to deliver Internet direct marketing and communications
professional services to their clients. We also expect that these resellers will
provide us with services that complement our core offerings. We also believe
that a network of resellers can give us access to additional vertical and
geographical markets, and provide us with greater market reach and revenue
potential.
Enhance and Expand Our Technology. We are investing heavily in research
and development activities to incorporate additional direct marketing features
into the services we provide. In addition, we are continuing to invest in
enhancing the reliability, scalability and performance of our specialized
servers, data centers and network infrastructure to support higher e-mail volume
deployment capacities, a greater degree of personalization and enhanced
targeting capabilities.
Continue to Provide a High Level of Client Service. We will continue to
emphasize the importance of client service throughout our company. We assign
each client an account team that is responsible for the quality execution of
each element of the service delivery process including sales, contract
management, scheduling, set-up, deployment and data administration. We are
highly client-focused and committed to having 100% of our clients act as
positive references for future business.
Build Brand Awareness. We are pursuing an aggressive branding strategy to
promote our technological excellence and our clients' high level of satisfaction
with our services. We intend to establish FloNetwork as the standard for
reliable, high-volume e-mail deployment with exceptional tracking and reporting
capabilities. We plan to expand this brand identity to promote our brand as the
standard for Internet direct marketing and communications services. In pursuing
this strategy, we will continue to participate in key industry associations and
conferences, actively report our service capabilities and client successes to
the trade press and direct marketing community and leverage relationships with
leading Internet direct marketing and communications analysts.
Pursue Strategic Acquisitions and Investments. We plan to evaluate
acquisition and investment opportunities in complementary businesses, products
and technologies. We will explore opportunities that may accelerate our growth,
provide us with new technologies or help us penetrate new markets. Presently, we
do not have any commitments or understandings for acquisitions or investments,
and we are not presently engaged in any negotiations in that regard.
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OUR SERVICES
We provide services that address all aspects of e-mail messaging.
LOGO
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DESIGN OF E-MAIL MESSAGING CAMPAIGNS
<TABLE>
<S> <C>
LOGO - Personalization of E-mail Messages. We provide our
clients with the ability to personalize e-mails through an
Internet browser using customer information stored in a
database. Messages can be personalized by inserting any
text into the subject line or the message, whether in
plain text, HTML or Rich Media formats.
- Targeting E-mails Through Filtering and Segmenting E-mail
Address Lists. Our filtering and segmentation technology
allows our clients to segment their list for a particular
campaign based on the demographic, geographic or
behavioral information contained in the database.
- Targeting AOL Users. Often a large percentage of a
client's mailing list is made up of recipients who are AOL
users, who cannot click-through directly from a universal
resource locator, commonly referred to as a URL, link. We
have developed software that provides active URL links for
these recipients, improving click-through rates for this
important audience.
- Multiple Content Formats for Better Targeting. We can
support and deliver plain text, HTML and Rich Media
messages. This provides clients with the flexibility to
choose the right content for the right message.
- HTML Auto-Sensing for Better Targeting. Our auto-sensing
technology detects whether a recipient is able to view HTML
messages and updates the database accordingly. This
information can be used for all future mailings to ensure
that the highest level of content is sent to the
recipient.
</TABLE>
BUILDING AND MANAGING E-MAIL ADDRESS LISTS
<TABLE>
<S> <C>
LOGO - E-mail Address and Data Hosting. We provide e-mail
address and data hosting services that enable our clients to
store their e-mail address lists. We continually update
the database of response and transactional information
gathered as a result of delivering e-mail messages.
Updating this database with response and transactional
information allows our clients to target their customers
more effectively on future mailings.
- Building E-mail Address Lists from a Client's Web Site.
Our technology enables our clients to build an "enter your
e-mail address here" form on their web sites to capture
subscription requests for e-mail newsletters as well as
user profile information such as age, income, gender, and
occupation. All e-mail addresses and user profile
information entered into the form are automatically
imported into our database providing a centralized point
of data collection and maintenance.
</TABLE>
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<PAGE> 46
<TABLE>
<S> <C>
- E-mail Address List Management. We provide e-mail address
list management services to assist our clients with
maintaining and updating their e-mail lists and with
preparing an e-mail address list in advance of a mailing.
Our technology identifies defective e-mail addresses,
merges multiple e-mail address lists, suppresses duplicate
e-mail addresses and allows filtering of e-mail addresses
or domain names to which we or our clients have had
trouble delivering e-mails in the past or which have
specifically requested not to receive e-mail deliveries
from us. Our technology is designed to ensure that no
e-mail address will receive the same message twice.
Invalid e-mail addresses and bounced back e-mails are
flagged in the database and suppressed from future
mailings. Subscribe and unsubscribe requests are
automatically handled by us and are flagged and updated in
the database.
- Web-Based Subscriber Profile Management. We can host a
branded web page for each of our clients where e-mail
recipients may update their own profiles and unsubscribe
from a mailing list. For example, if the recipient's
e-mail address is going to change, the recipient can go to
the member profile page of the branded web page and
provide a new address which will be reflected
automatically in the database for future mailings.
</TABLE>
TESTING
<TABLE>
<S> <C>
LOGO - Splitting E-mail Messaging Campaigns to Test Different
Offers. Our technology enables clients to create
statistically valid and random e-mail address lists in
order to test a campaign before sending it out to the
entire list. This allows our clients to determine which
messages generate better response rates before deploying a
full campaign. The names used on test lists are
automatically removed from the original list so that they
are not sent the message again when the full mailing is
executed.
- Analyze Performance of Tests in Hours. Tests can be
deployed and the results can be viewed through the Internet.
Our tracking and reporting features allow our clients to
make immediate changes to their campaigns, delay their
campaigns or abort campaigns depending on the response to
the test mailing.
- Quality Control Testing. We test e-mail messages against
leading e-mail packages and web-based e-mail services to
ensure that message format and URL links are optimized for
maximum viewing impact and click-throughs.
- Anti-Spam Testing. New e-mail address lists are sampled
to determine if they give rise to an unusually high number
of complaints. E-mail address lists that result in
unusually high complaints are investigated.
</TABLE>
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<PAGE> 47
DEPLOYMENT OF E-MAILS
<TABLE>
<S> <C>
LOGO - Reliable and Scalable Deployment of E-mails. Our targeted
e-mail delivery system delivers e-mail messages quickly,
reliably and in high volumes. Customizing and
personalizing each e-mail message typically affects volume
throughput. Our services have been optimized to deliver
high volumes of personalized e-mail messages. All messages
are delivered from our data centers, using high speed
Internet connections, which currently provide a high
volume capacity of over 20 million personalized and
targeted e-mail messages per day.
- Direct Client Control Over Deployment. Our services are
hosted on our specialized network of e-mail servers to which
our clients have direct access through the Internet. This
provides our clients with the ability to control the
delivery of their e-mail messaging campaigns. Clients can
change, delay or stop an e-mail campaign at any point
during its deployment. Our clients can also schedule
e-mail messaging campaigns to be deployed at a specific
date and time.
</TABLE>
TRACKING, REPORTING AND ANALYSIS
<TABLE>
<S> <C>
LOGO - Tracking of Specific Online Behavior. We track statistics
that are important to our clients. These statistics include
buy rates measured by total dollars spent, pass-along
rates of e-mails sent by the original recipient to other
on-line users, rates of click-throughs from an e-mail to a
client's web site, click-through rates at certain time
periods, the number of e-mail recipients who have
subscribed or unsubscribed and the number of e-mail
messages that have bounced back. These statistics provide
our clients with the ability to identify their most active
customers and prospects, and those who have specifically
requested not to receive e-mail messages.
- Reporting and Analysis. We capture transactional and
response data from e-mail messages delivered through our
network. This information is captured in standard reports
which can be viewed at the same time as a mailing is being
executed. This information can be exported into a
spreadsheet application for further analysis using
standard data analysis tools.
- Historical Reports on Customers over Multiple Campaigns.
We capture response and transactional data by individual
e-mail address on a continuous basis over multiple
campaigns. Our customer value reports provide our clients
with key statistics such as total purchases and total
number of click-throughs over the last twelve months. This
historical data extends our clients' understanding of
their customers over multiple e-mail messaging campaigns.
</TABLE>
SALES AND MARKETING
We market and sell our services primarily through direct sales
representatives located in Pleasanton, California, Chicago, Illinois, Cos Cob,
Connecticut and Toronto, Ontario. Presently, our sales force is primarily
focused on the e-publishing and the e-business markets. As we expand the size of
our sales force, we intend to increase our focus on specific vertical markets.
We believe that by focusing on
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specific vertical markets we will be able to provide our clients with solutions
and services specifically tailored to their particular needs. As of December 31,
1999, we employed a total of 28 sales and marketing personnel. We plan to
increase the number of sales and marketing personnel significantly in the next
twelve months to over 50 by the end of calendar 2000.
We complement our direct sales force generally through informal, unwritten
and nonbinding relationships with direct marketers and e-mail list brokers who
are in a position to influence their clients' marketing strategies and tactics.
We have relationships with Directmedia.com (formerly known as Acxiom Direct
Media), Grizzard List Services, Impower (formerly known as American List Counsel
interactive) and The Lake Group. We also have an informal marketing relationship
with Michael Tchong, publisher of Iconocast, an Internet marketing newsletter,
who uses our services for the electronic distribution of his newsletter. We
generally pay these direct marketers and e-mail list brokers commissions for
each client that they introduce to us. We plan to enter into additional
relationships in the future.
Our marketing strategy is focused on continuing to develop and promote our
brand as the standard for reliable, high-volume e-mail deployment with superior
tracking and reporting capabilities. We plan to expand this brand identity to
promote our brand as the standard for e-marketing services on the Internet. To
generate qualified leads for our sales team, we focus our marketing efforts on
entities that use direct marketing to promote their products and services, with
an emphasis on e-publishers and e-business merchants. We use a range of
marketing initiatives including exhibits and speaking engagements at key trade
shows, ongoing contact with leading industry analysts, space advertising in
leading direct marketing and Internet magazines, sponsorship of direct marketing
web sites, conferences, industry events and trade associations, and our own web
site. We publish collateral materials including company brochures, feature
descriptions, technology research papers and client case studies.
CLIENTS
We began providing e-mail messaging services in May 1998, and, to date, we
have provided these services to over 100 clients primarily in the e-publishing
and e-business markets. We have concentrated on clients in these markets because
of their e-mail volume potential, the range of e-mail services they require and
their desire for outsourced e-mail solutions.
We typically seek to enter into contracts with our clients for terms of one
to two years. Under these contracts, we typically commit to deliver a specified
volume of e-mails in a specified time period as may be requested by our clients
from time to time and commit to having our services fully functional and
available for our clients, with limited downtime, during the term of the
contract. These contracts generally do not provide for any minimum usage
commitment by our clients, nor do they provide for any penalty in the event that
our clients terminate the contract early. The amounts we generally charge our
clients are determined on a case-by-case basis and vary depending on expected
e-mail volume levels, and on the range of professional services, technical
services and initial set-up work provided to clients. Set-up fees and fees for
professional and technical services are charged to a particular client as
separate items or included in the calculation of the overall rate for each 1,000
e-mail messages delivered.
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For the five months ended December 31, 1999, a two-year e-mail services
contract with CNET and a two-year e-mail services contract with Impower for
services provided to barnesandnoble.com, both of which have contract terms
consistent with the terms described in the previous paragraph, accounted for
17.0% and 10.5% of our revenues, respectively.
Under the CNET agreement, we have committed to provide e-mail deployment
and support services including data maintenance, maintenance of customer
unsubscribe requests, handling of undeliverable e-mail, provision of all
hardware, software, Internet connections and bandwidth necessary to send the
e-mails and tracking and reporting of campaign statistics. In consideration for
our services, CNET paid us an initial start up fee and pays us for each 1,000
e-mail messages we send. Through December 31, 1999, we have received revenues of
$201,000 from CNET under this agreement. The agreement, which terminates on July
18, 2001, unless automatically renewed in accordance with the terms of the
agreement, may be terminated by either party for cause and by CNET for any
reason upon 90 days notice.
Under the Impower agreement, we have agreed to support barnesandnoble.com's
marketing efforts through Impower by providing e-mail deployment and support
services including data maintenance, maintenance of customer unsubscribe
requests, handling of undeliverable e-mail, provision of all hardware, software,
Internet connections and bandwidth necessary to send the e-mails and tracking
and reporting of campaign statistics. In consideration for our services, Impower
pays us for each 1,000 e-mail messages we send and for specified services
provided at the client's request. Through December 31, 1999, we have received
revenues $126,000 from Impower under this agreement. The agreement, which
terminates on October 24, 2001, may be terminated by either party for cause.
Select customers who have signed one to two year contracts with us are
listed below. Most of our other clients have signed contracts for terms of less
than one year or have used our services for a specific number of e-mail
messaging campaigns.
<TABLE>
<S> <C>
AdvanStar Internet World
AIG iPrint.com
barnesandnoble.com Lawnmower Online
Bigstep.com LowestFare.com
Brain.com Meredith Corporation
Broadband Digital Group MicroWarehouse Inc.
Buy.com New Media
Calyx & Corrolla Petstore.com
Chapters Online Shopping4sure.com
CNET Tech Republic
Continental Airlines Thomas Publishing Company
Day Timers Transpoint
DigiTrends ValueAmerica.com
DoubleDay Select Viewsonic
E machines Win Freestuff
Eve.com Worldwide Business Research
Fashionmall.com Ziff Davis Publishing
</TABLE>
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<PAGE> 50
CLIENT CASE STUDIES
The client case studies set forth below illustrate the five key aspects of
e-mail messaging and are representative of the ways in which our clients use our
services, although the listed clients use our services for more than the key
aspect described below. For the five months ended December 31, 1999, we received
17.0% of our revenues from CNET and 7.3% from the other clients listed below.
<TABLE>
<CAPTION>
CLIENT CURRENT SERVICES SUMMARY OF CASE STUDY
- ----------------- --------------------- -----------------------------------------------
<S> <C> <C>
LOWESTFARE.COM Design of E-mail LowestFare.com, an on-line provider of discount
Campaigns travel services, used our HTML technology and
creative design services to create a compelling
travel promotion aimed at generating new
customers. This HTML promotion resulted in a
higher response than previously attained when
plain text e-mail was used. We started working
with LowestFare.com in September 1999.
CNET Building and Managing CNET, a new media company, uses our services to
E-mail Lists build and manage their e-mail address lists and
to deliver millions of plain text and HTML
newsletters. We built a direct link between
CNET's web site and the FloNetwork database.
This link enables users to sign up to CNET
newsletters and be instantly included in the
FloNetwork database, which streamlines the
e-mail collection process. Since June 1999,
CNET's subscription growth has increased
nine-fold. This growth represents a significant
increase in CNET's revenue potential from their
mailing lists. We began working with CNET in
June 1999.
VALUEAMERICA.COM Testing Value America Inc. (ValueAmerica.com), an
online electronics and technology superstore,
uses our system to segment and test offers to
their existing customers. ValueAmerica.com can
send several offers to different segments of
their mailing lists and track which one
performs the best. Each mailing list is also
split automatically into plain text and HTML
mailings using our auto-sensing technology. The
different offers and formats are evaluated
before a final offer is generated. Through this
process, we have helped ValueAmerica.com
improve response rates by 200-300% over
standard text, non-tested offers. We began
working with ValueAmerica.com in September
1999.
</TABLE>
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<PAGE> 51
<TABLE>
<CAPTION>
CLIENT CURRENT SERVICES SUMMARY OF CASE STUDY
- ----------------- --------------------- -----------------------------------------------
<S> <C> <C>
CONTINENTAL Deployment Continental Airlines, the fifth largest airline
AIRLINES in the U.S., needed reliable e-mail deployment
services using a high quality e-mail database.
Continental also required a deployment process
which would include content from its numerous
marketing partners (hotels, rental car
agencies, etc.) in all mailings. We did
extensive work to improve the quality of
Continental's e-mail database and created a
process which enabled campaigns to be executed
in hours. As a result of this work, we
currently deliver millions of targeted and
measurable messages per month to Continental's
customers. We began working with Continental in
October 1999.
PETSTORE.COM Tracking, Reporting & Petstore.com, an on-line pet supply store, uses
Analysis our advanced reporting services to measure
return on investment from e-mail campaigns. Our
tracking features integrate with Petstore.com's
web site to provide them with information on
purchases resulting from e-mail messaging
campaigns. We began working with Petstore.com
in September 1999.
</TABLE>
CLIENT SERVICES, ACCOUNT MANAGEMENT AND THE SERVICE DELIVERY PROCESS
We emphasize the importance of client service throughout our company. Our
goal is to provide a high level of service and support that results in each
client being a positive reference for future clients. An account team is
responsible for each client relationship and is led by an account executive from
sales. The team is supported by an account manager, an inside client services
manager, deployment staff, data administrators and a representative from our
executive team. The account team is responsible for the quality execution of
each element of the service delivery process including sales, contract
management, scheduling, set-up, deployment and data administration.
Historically, the number of clients served by each account team has been
relatively small. However, as our number of clients grows, we face the challenge
of serving more clients per account team without compromising service quality.
TECHNOLOGY
Our proprietary technology is optimized for high volume, personalized
e-mail messaging, complete with back-end reporting and analysis. We have spent
over two years developing this technology. The web-based user interface,
features and functionality were created with a direct marketing application in
mind. By constructing a distributed network of over 100 servers to run the
software and connecting this network to the Internet backbone through our ISPs,
we have created a scalable, reliable e-mail network which is currently capable
of delivering over 20 million, highly personalized and targeted e-mail messages
per day. Our software handles the critical elements of an e-mail messaging
campaign including e-mail delivery, e-mail address list management, targeting,
segmentation, testing, personalization, tracking, real-time reporting, bounced
back e-mail processing and data hosting. We can also deliver e-mail in multiple
formats including plain text, HTML or Rich Media.
ARCHITECTURE
Our technology has been designed to offer a reliable and scalable
operation. The network design is based on a distributed architecture consisting
of Unix OS, Cisco and IBM hardware, Microsoft NT and
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SQL 7.0 database. Multiple redundancy is built in to provide parallel processing
to enhance the overall reliability of the system.
The distributed system can be divided into these functional components:
- Data Hosting. Client databases, such as campaign results and profile
information, are warehoused in a secure and reliable environment based on
Microsoft SQL technology. Our proprietary software and design allow us to
leverage advanced Microsoft SQL technology without sacrificing
performance and ease of maintenance.
- Content Management and Personalization. A proprietary client-server
application is used for multi-format management, content configuration,
personalization, e-mail list management and campaign scheduling. The
application architecture can be distributed across multiple hardware
platforms and systems for maximum scalability.
- E-mail Deployment. Our e-mail deployment engine is based on both
proprietary and open source simple messaging transfer protocol, commonly
referred to as SMTP, technology. The open source SMTP technology is
modified to meet our requirement of scaled performance and distributed
server farms.
- Tracking. A centralized tracking and measuring sub-system is used to
collect e-mail campaign statistics from various measurable events such as
e-mails delivered, opened and responded to, and amounts purchased. This
event architecture allows us to increase the overall measurability of the
system with little incremental development.
- Bounced E-mail Processing. Inbound e-mails and bounced e-mails are
sorted and processed through our proprietary distributed server-based
software, which is configurable through rule tables. Processed incoming
e-mails are tracked and reported for further analysis. Customer inquiries
are forwarded to our clients for response.
- Reporting. We provide reporting capability to our clients through a
secure web-based user interface accessible via a web browser. In
addition, our reports can be exported to a spreadsheet application for
further analysis using standard data analysis tools.
NETWORK OPERATIONS CENTER
Our data and network centers are located at three separate third party
facilities. These facilities are climate controlled, equipped with back up
generators and include service level guarantees for bandwidth uptime, fire
protection and seven days a week, 24 hours a day security surveillance. Our data
centers are connected remotely to our network operations headquarters via a
direct private network with multi-layered security to ensure reliable and secure
remote network management. In building and maintaining the network, we have
focused on reliability, scalability and performance. We are planning to open an
additional remote facility within the next twelve months. The current network is
monitored and managed by our internal operations team of network engineers,
database administrators and network operators for around the clock operation.
SECURITY
Our security system which safeguards client data consists of five layers:
comprehensive security policies and standard operating procedures; control of
access to our technology platform through log-ins and passwords; independent
security audits on server farms; real-time intrusion detection through a
hardware-based firewall; and maintenance of a dedicated emergency response team
providing seven days a week, 24 hours a day surveillance.
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COMPETITION
The Internet direct marketing and communications services industry in
general, and the e-mail messaging services industry in particular, is intensely
competitive with few barriers to entry. Accordingly, a number of competitors
entered the market during 1999. We believe that competitive pressures will
increase with new and established companies entering the e-mail messaging
services space.
We compete on the basis of a number of factors including the quality of our
clients and our clients' willingness to act as references, the quality of our
client service, the scalability and reliability of our solution, the
effectiveness of our outsourced model, the technical strength of our reporting
and tracking capabilities, and the direct marketing expertise of our people. We
compete with the information technology departments of current and prospective
clients who use in-house e-mail systems to manage and deliver e-mail messaging
campaigns.
We also compete with companies providing outsourced solutions including
e-mail distribution, list management, reporting and bounce processing, e-mail
consulting and campaign analysis. We compete directly with e-mail service
providers such as Digital Impact, Exactis.com, MessageMedia, Post Communications
and Responsys.com. A number of e-mail service providers also offer customers the
ability to purchase or license software to internally handle their own e-mail
marketing programs. A number of other companies from related market segments
could enter our market, including banner ad networks, e-mail list brokers,
Internet advertising and direct marketing agencies, corporate e-mail services
providers, ISPs, inbound e-mail management companies, customer relationship
management vendors, marketing automation companies, personalization companies
and others with large and established Internet businesses, including portals.
These include companies such as Yesmail.com, Mypoints.com, Cybergold,
NetCreations, Netcentives, Kana Communications, eGain, Mail.com, and Critical
Path.
INTELLECTUAL PROPERTY
Our success and ability to compete are substantially dependent upon our
technology and intellectual property. Trademarks, service marks, trade secrets,
copyrights and other proprietary rights, including our trademark flonetwork(TM)
and copyrights covering our software, are important to our success and
competitive position. While we rely on copyright, trade secret and trademark law
to protect our technology and intellectual property, we believe that factors
such as the technological and creative skills of our personnel, new service
developments and frequent service enhancements are more essential to
establishing and maintaining an intellectual property leadership position.
We generally enter into confidentiality agreements with our employees and
consultants. Our confidentiality agreements require our employees and
consultants not to disclose any of our proprietary information that is not
generally available to or generally known by the public. Despite our efforts to
protect our proprietary information, unauthorized parties may attempt to obtain
and use our proprietary information. Policing unauthorized use of our
proprietary information is difficult, and the steps we have taken may not
prevent misappropriation, particularly in foreign countries where the laws may
not protect our proprietary rights as fully as do the laws of the United States
and Canada.
We collect and use data derived from our clients. This creates the
potential for claims to be made against us, either directly or through
contractual indemnification provisions with clients, including copyright or
trademark infringement, invasion of privacy or other legal theories. Although we
carry general liability and umbrella liability insurance, our insurance may not
cover potential claims of this type or may not be adequate to indemnify us for
all liability that may be imposed.
Substantial litigation regarding intellectual property rights exists in the
technology industry. From time to time, third parties have asserted and may
assert exclusive patent, copyright, trademark and other
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intellectual property rights to technologies and related standards that are
important to us. We expect that we may face infringement claims as the number of
competitors in our industry segment grows and the functionality of products and
services in different industry segments overlaps. In addition, we believe that
many of our competitors have filed or intend to file patent applications
covering aspects of their technology that they may claim our intellectual
property infringes. Although we currently are not party to any litigation
asserting claims that allege infringement of intellectual property rights, we
cannot assure you that we will not be a party to litigation in the future. Any
third party claims, with or without merit, could be time-consuming to defend,
result in costly litigation, divert management's attention and resources or
require us to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
us. A successful claim of infringement against us could harm our business.
GOVERNMENT REGULATION
As the Internet continues to evolve, we expect federal, state or foreign
agencies will adopt regulations covering such issues as user privacy, pricing,
content and quality of products and services. A number of legislative and
regulatory proposals are currently under consideration by federal and state
lawmakers and regulatory bodies and may be adopted with respect to the Internet.
In particular, a number of states have already passed statutes prohibiting
unsolicited commercial e-mail, or spam. A number of statutes have also been
introduced in Congress and state legislatures to impose penalties for sending
unsolicited e-mails which, if passed, could impose additional restrictions on
our business. In addition, a California court recently held that unsolicited
e-mail distribution is actionable as an illegal trespass for which the sender
could be liable for monetary damages.
The adoption of any such laws or regulations may decrease the growth of the
Internet, which could in turn decrease the projected demand for e-mail services
or increase our cost of doing business. The applicability to the Internet of
existing United States, Canadian and international laws governing issues such as
property ownership, copyright, trade secret, libel taxation and personal privacy
is uncertain and developing and may take years to resolve.
Any new legislation or regulation or application or interpretation of
existing laws could harm our business, operating results and financial
condition. Additionally, because we expect to expand our operations outside the
United States and Canada, the international regulatory environment relating to
the Internet could harm our business, operating results and financial condition.
PRIVACY CONCERNS
We believe that issues relating to the privacy of Internet users and the
monitoring of online behavior are extremely important. We have a comprehensive
privacy policy which we publish on our web site. We also strictly adhere to
government and industry privacy standards, including those of the Direct
Marketing Association. We are also a member of the TRUSTe Privacy Partnership.
We manage all aspects of permission-based e-mail messaging campaigns, which
involve sending e-mails to individuals who have provided e-mail addresses and
explicitly asked to receive information on specific topics. With each e-mail
sent, individuals are given the opportunity to opt-out or unsubscribe from
receiving any future mailings. Our policy is not to send out unsolicited
commercial e-mail (or "spam") on behalf of our clients. We work with our clients
to maintain a suppression list of e-mail addresses that have opted-out of
receiving any e-mails from us no matter which client is sending the e-mail. We
monitor the mailing lists we receive from clients to make sure the opt-out rate
is low and that the amount of replies to e-mail from concerned or dissatisified
recipients is low. When we encounter a high opt-out rate or a high amount of
inbound e-mail from concerned or dissatisfied recipients, we notify our client
of the possibility that the list being used contains addresses that are not
opt-in. When this occurs, we discontinue the mailing and notify our client of
the high rate of dissatisfaction. We work
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with our client to determine whether there is a problem with the offer, the list
being used or some other technical problem. If the list is deemed to be not
opt-in, the campaign is discontinued until an opt-in list is used.
EMPLOYEES
As of December 31, 1999, we employed 91 full-time people, 20 in research
and development, 28 in sales and marketing, 31 in operations, and 12 in finance
and administration. None of our employees is represented by a labor union, and
we consider our relations with our employees to be good.
FACILITIES
Our principal executive and administrative offices are located in a 13,651
square foot leased office facility in Toronto, Ontario. Our principal executive
and administrative offices for the United States are located in a 2,318 square
foot leased facility in Pleasanton, California. We also have a sales office in
Cos Cob, Connecticut and in Chicago, Illinois.
LEGAL PROCEEDINGS
We are not party to any material legal proceedings.
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<PAGE> 56
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth our executive officers, directors and key
employees, their ages and the positions they hold as of December 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Eric Goodwin........................ 58 Chief Executive Officer and Director
John Eckert(1)(2)................... 43 Chairman and Director
Paul Chen........................... 40 Founder and Chief Technology Officer
and Director
Wilson Lee.......................... 33 Chief Financial Officer
Chris Keevill....................... 34 President and Chief Operating
Officer
Craig Rennick....................... 39 Vice President Sales
Peter Evans......................... 37 Vice President Marketing
Regina Brady........................ 52 Vice President Partners and
Strategic Development
Mark Thorburn....................... 39 Vice President Operations and
Technology
Edward Anderson(2).................. 45 Director
Kit Wong(1)(2)...................... 35 Director
John Hayter(1)...................... 59 Director
John MacDonald...................... 46 Director
</TABLE>
- -------------------------
(1) Member of the compensation committee
(2) Member of the audit committee
Set forth below is certain information regarding the business experience
during the past five years for each of the above-named persons.
Eric Goodwin has served as our Chief Executive Officer since July 1, 1999
and as a director since June 1998. From April 1999 to June 1999, Mr. Goodwin
served as a consultant to us. Prior to joining us as a consultant, Mr. Goodwin
served as the Chairman and Chief Executive Officer of Fulcrum Technologies Inc.,
a computer software company that he co-founded in 1983. Mr. Goodwin received a
Bachelor of Commerce degree from Carleton University in Ottawa.
John Eckert has served as a director since October 1996. Mr. Eckert is a
co-founder and Managing Partner of McLean Watson Capital Inc., a Toronto-based
venture capital company and the manager of McLean Watson SOFTECH Fund and McLean
Watson Ventures II Fund, each of which invests in information technology
companies. Mr. Eckert has held his position at McLean Watson since 1992. Mr.
Eckert currently serves on the board of directors of IVL Technologies, Ltd.,
Pictorius Incorporated, KyberPASS, and RainMaker Digital Pictures Corp., each an
information technology company. Mr. Eckert received a Bachelor of Arts degree
and an MBA degree from the University of Western Ontario.
Paul Chen founded FloNetwork in 1993 and currently serves as our Chief
Technology Officer and a director. From August 1993 until July 1999, Mr. Chen
served as our Chief Executive Officer. Prior to founding FloNetwork, Mr. Chen
held senior development positions with IBM, Honeywell Inc., a
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<PAGE> 57
diversified manufacturing and technology company, and Bell-Northern Research
Inc., the research and development subsidiary of Northern Telecom. Mr. Chen
received a Bachelor of Applied Science in Electrical Engineering degree from the
University of Toronto.
Wilson Lee has served as our Chief Financial Officer since June 1, 1997.
From September 1990 to June 1997, Mr. Lee worked with Arthur Andersen LLP in
their audit and business advisory practice. Mr. Lee received a Bachelor of
Commerce degree from the University of Toronto and is a Chartered Accountant.
Chris Keevill has served as our President and Chief Operating Officer since
October 1, 1999. From 1994 until joining us, Mr. Keevill served in senior
executive positions within a variety of BCE companies, most recently as
President and Chief Operating Officer of MediaLinx Inc., a consumer Internet
access service and portal. From November 1994 to May 1999, Mr. Keevill was with
New North Media Inc., a company that develops direct marketing screen phone
services. His most recent position at New North Media was that of President.
From October 1998 to May 1999, Mr. Keevill also served as President of NBTel
Global Inc., a subsidiary of Bruncor Inc., a part of BCE Inc. Mr. Keevill
received a Bachelor of Business Administration degree from Acadia University and
an MBA from The Ivey School at the University of Western Ontario.
Craig Rennick has served as our Vice President Sales since August 24, 1998.
From 1996 until joining us, Mr. Rennick served as National Sales Manager of New
North Media Inc. From 1994 to 1996, Mr. Rennick served as Director of Sales and
Marketing of Le Groupe Videotron/UBI, one of the largest cable companies in
Canada. Mr. Rennick received a Bachelor of Arts in Business Administration from
the University of Western Ontario.
Peter Evans has served as our Vice President Marketing since August 17,
1999. From December 1997 until joining us, Mr. Evans served as Director of
Marketing and Research at MediaLinx/ Sympatico. From 1994 to 1997, Mr. Evans
served as the head of the product management team for Bell Canada's Advantage
outbound long distance portfolio. Mr. Evans studied Cognitive Psychology and
Telecommunications Management at the University of Toronto and Ryerson
Polytechnic University, and received an MBA from Queen's University.
Regina Brady has served as our Vice President Partners and Strategic
Development since October 18, 1999. From 1997 until joining us, Ms. Brady served
as the head of Acxiom Direct Media, Inc.'s direct marketing, interactive and
Internet initiatives for business-to-business and consumer clients. From 1986 to
1997, Ms. Brady served as the Director of Interactive Marketing for CompuServe,
Inc., where she focused on strategic development and management of e-commerce,
interactive advertising and direct marketing activities. Ms. Brady received a
Bachelor of Arts degree in English from Pace University in White Plains, New
York and studied communications at Temple University in Philadelphia,
Pennsylvania.
Mark Thorburn has served as our Vice President Operations and Technology
since October 12, 1999. From 1993 until joining us, Mr. Thorburn held various
senior positions with NBTel Global Inc., most recently as Vice President of
Technology for NBTel Global Inc., and Vice President, Operations & Technology,
at New North Media Inc. Mr. Thorburn received a Bachelor degree in Science and
Engineering from Acadia University and the Technical University of Nova Scotia,
and a Masters of Applied Science in Operations Research from the Technical
University of Nova Scotia.
Edward Anderson has served as a director since November 26, 1998. Since
1996, Mr. Anderson has served as Senior Vice President of Ventures West
Management Inc., a venture capital firm based in Vancouver and Toronto that
invests exclusively in high technology companies. From 1994 to 1996, he served
as a vice president at Trillwood Investments Inc., a venture capital firm. He
currently serves on the board of directors of InSystems Technologies Inc.,
InterNetivity Inc., Trimax Retail Systems Inc. and
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Instrumar Inc., each an information technology company. Mr. Anderson received a
Bachelor of Arts in Economics from Victoria College at the University of Toronto
and an MBA from York University.
Kit Wong has served as a director since November 23, 1999. Since 1996, Mr.
Wong has served as a Partner at Sycamore Ventures, a venture capital firm based
in New Jersey. Prior to joining Sycamore Ventures, from 1990 to 1996, Mr. Wong
held various positions at J.P. Morgan & Co., including as a Vice President in
charge of managing the bank's worldwide credit exposure to a portfolio of hedge
funds. Mr. Wong currently serves on the board of directors of Horizon ABS
(China) Holdings, Ltd., an information technology holding company. Mr. Wong
graduated summa cum laude in Mechanical Engineering from The Cooper Union in New
York and received an MBA with honors from Columbia University.
John Hayter has served as a director since June 1, 1998. Mr. Hayter is the
Chairman, Chief Executive Officer and a major shareholder of Vickers and Benson
Companies Limited, a communications and advertising agency. He has held his
position at Vickers and Benson since 1990. Mr. Hayter studied at the University
of New Brunswick.
John MacDonald has served as a director since March 23, 2000. Mr. MacDonald
is the President and Chief Executive Officer of Leitch Technology Corporation, a
company that designs and manufactures broadcasting digital electronic equipment,
positions he has held since November 1999. Prior to joining Leitch, Mr.
MacDonald served as President and Chief Operating Officer of Bell Canada, a
subsidiary of BCE Inc. Mr. MacDonald also serves as a director of Sask Tel Inc.,
a telecommunications firm. Mr. MacDonald received a Bachelor of Science degree
from Dalhousie University and a Bachelor of English degree from Technical
University of Nova Scotia.
Pursuant to a shareholders' voting agreement that we entered into with each
of our shareholders in connection with the sale of our preferred shares, Eric
Goodwin, Paul Chen, John Eckert, Edward Anderson, John Hayter and Kit Wong were
elected to our board of directors. This agreement will terminate by its terms
upon the completion of this offering. By our request, all of the directors
elected pursuant to the shareholders' voting agreement have agreed to remain on
the board following this offering.
BOARD COMPOSITION
Our board of directors is comprised of seven persons. In accordance with
the provisions of the Business Corporations Act (Ontario), the directors are
authorized to fill vacancies on the board of directors, to increase the size of
the board of directors, to fix the number of directors, up to the maximum of ten
persons currently provided under our articles of incorporation, and to appoint
additional directors, provided that the total number of directors after any
appointment does not exceed one and one-third times the number of directors
required to have been elected at the last annual meeting of shareholders, in
each case without the prior consent of the shareholders. Each director is
elected at the annual meeting of shareholders to serve until the next annual
meeting or until a successor is elected or appointed.
BOARD COMMITTEES
Our board of directors may delegate certain aspects of its responsibilities
to committees of the board. We established an audit committee and a compensation
committee in January 1999. The audit committee consists of Edward Anderson, John
Eckert and Kit Wong. The audit committee reviews the professional services
provided by our independent auditors, recommends the engagement of auditors and
reviews our internal audits.
The compensation committee consists of John Hayter, John Eckert and Kit
Wong. The compensation committee establishes compensation policies and is
responsible for determining cash and
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equity compensation for executive officers, including the granting of options
under our share incentive plan.
DIRECTOR COMPENSATION
The board of directors may, in its discretion, grant directors options,
restricted share awards or other share-based awards under our share incentive
plan. Our directors receive no cash remuneration for their service on the board
of directors. The board of directors may establish and change the amount of
director remuneration at its discretion. Directors are reimbursed for travelling
and other expenses properly incurred by them in attending meetings of the board
and any meetings of its committees.
Since January 1, 1999, we have granted options to purchase 2,800, 2,400,
2,800, 2,400 and 30,000 common shares to Mr. Eckert, Mr. Anderson, Mr. Wong, Mr.
Hayter and Mr. MacDonald, respectively, at an exercise price of $6.93. These
options vest immediately with respect to 25% of the options and vest with
respect to the remainder of the options in three equal annual installments in
arrears commencing on the first anniversary of the date of grant.
EXECUTIVE COMPENSATION
The following table sets forth the compensation received by the two
officers who served as our Chief Executive Officer during the 12 months ended
December 31, 1999 and a third officer whose salary and bonus during the 12
months ended December 31, 1999 exceeded U.S. $100,000, referred to as the named
executive officers. No other executive officer's salary and bonus during the 12
months ended December 31, 1999 exceeded U.S. $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION SHARES
------------------- UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
- --------------------------- -------- ------- ------------
<S> <C> <C> <C>
Eric Goodwin(1)...................................... $ 87,834 -- 520,282
Chief Executive Officer
Paul Chen(2)......................................... 100,992(3) -- --
Former Chief Executive Officer and Chief Technology
Officer
Craig Rennick........................................ 76,466 $56,293 60,000
Vice President Sales
</TABLE>
- -------------------------
(1) Mr. Goodwin became our Chief Executive Officer on July 1, 1999. From April
to June 1999, he served as a consultant to FloNetwork.
(2) Mr. Chen resigned as Chief Executive Officer and assumed the position of
Chief Technology Officer on July 1, 1999.
(3) Includes $57,133 paid to Mr. Chen in 1999 for services provided by Mr. Chen
to us prior to January 1, 1999.
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<PAGE> 60
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding options
granted to the named executive officers during the 12 months ended December 31,
1999. We have never granted any share appreciation rights. The potential
realizable value is calculated based on the term of the option at its time of
grant. It is calculated assuming that the fair market value of the common shares
on the date of grant appreciates at the indicated annual rate compounded
annually for the entire term of the option and that the option is exercised and
sold on the last day of its term for the appreciated share price. These numbers
are calculated based on the requirements of the Securities and Exchange
Commission and do not reflect our estimate of future share price growth. The
percentage of total options granted to employees in the last fiscal year is
based on options to purchase an aggregate of 1,235,382 common shares granted
during the 12 months ended December 31, 1999.
<TABLE>
<CAPTION>
% OF
INDIVIDUAL GRANTS
-------------------------------------------------------------
TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS AT ASSUMED ANNUAL RATES
SECURITIES GRANTED EXERCISE MARKET OF SHARE APPRECIATION
UNDERLYING TO PRICE PRICE FOR OPTION TERM
OPTIONS EMPLOYEES PER PER EXPIRATION --------------------------------
NAME GRANTED IN 1999 SHARE SHARE DATE 0% 5% 10%
---- ---------- ---------- -------- ------ --------------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Eric Goodwin(1)...... 520,282 42% $0.87 $1.28 July 1, 2009 $213,316 $632,135 $1,274,686
Paul Chen............ -- -- -- -- -- -- -- --
Craig Rennick(2)..... 40,000 3 1.28 1.28 April 30, 2004 -- 14,145 31,258
20,000 2 2.42 2.42 August 14, 2004 -- 13,372 29,548
</TABLE>
- -------------------------
(1) Each option represents the right to purchase one common share. The options
shown in the table vest in 24 equal monthly installments. At the completion
of this offering, the vesting of these options will be accelerated in part.
See "-- Employment Agreements and Change in Control Arrangements." These
options will become fully vested in the event of a merger in which we are
not the surviving corporation or upon the sale of all or substantially all
of our assets. See "-- Employment Agreements and Change in Control
Arrangements".
(2) Each option represents the right to purchase one common share. The options
shown in the table vest in four equal annual installments. These options
will become fully vested in the event of a merger in which we are not the
surviving corporation or upon the sale of all or substantially all of our
assets and Mr. Rennick's position is terminated without cause. See
"-- Employment Agreements and Change in Control Arrangements".
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR 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 on
December 31, 1999. None of our named executive officers exercised options in the
12 months ended December 31, 1999. There was no public trading market for the
common shares as of December 31, 1999. Accordingly, the value of these options
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have been calculated on the basis of the assumed initial public offering price
of $11.00 per share, less the applicable exercise price per share, multiplied by
the number of shares underlying such options.
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Eric Goodwin................................. 140,071 400,211 $1,418,919 $4,054,137
Paul Chen.................................... -- -- -- --
Craig Rennick................................ 15,000 105,000 155,400 1,024,600
</TABLE>
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
On July 1, 1999, we entered into an employment agreement with Mr. Goodwin
for an indefinite period. Mr. Goodwin receives an annual base salary of
CDN$200,000. We may terminate Mr. Goodwin without cause if we provide him with
three months prior written notice, or instead of notice, we may pay him an
amount equal to the salary and benefits he would have received over the three
month notice period. On July 1, 1999, Mr. Goodwin received options to purchase
520,282 common shares. These options have an exercise price of $0.87 per share
and vest over two years in 24 equal monthly installments. Upon the consummation
of this offering, the vesting of Mr. Goodwin's options will accelerate such that
a number of common shares issuable under the options equal to the number of
common shares that are fully vested under the options on the date of closing of
this offering shall become fully vested. The remaining unvested shares under the
options will vest at a rate of 43,357 common shares per month until all of such
options are vested. If we are sold or upon certain other events constituting a
change in control, all of Mr. Goodwin's options will automatically become fully
vested.
On November 15, 1996, we entered into an employment agreement with Mr. Chen
for an indefinite period. This agreement was amended on May 1, 1999 and March 8,
2000. Under the terms of this agreement, as amended, Mr. Chen receives an annual
base salary of CDN$110,000. We may terminate Mr. Chen without cause if we
provide him with written notice of such termination equal to the aggregate of
one week plus one further week for every full year of Mr. Chen's service with
FloNetwork, or, instead of notice, the salary and benefits he would have
received over the proper notice period.
On September 2, 1998, we entered into an employment agreement with Mr.
Rennick for an indefinite period. This agreement was amended on May 6, 1999 and
October 7, 1999. Under the terms of this agreement, as amended, Mr. Rennick
receives an annual base salary of CDN$125,000. Mr. Rennick is also entitled to
receive an annual bonus and quarterly commissions based the achievement of
corporate targets and personal objectives. We may terminate Mr. Rennick without
cause if we provide him with written notice equal to the aggregate of one week
plus one additional week for every full year of Mr. Rennick's service with
FloNetwork, or, instead of notice, we may pay him an amount equal to Mr.
Rennick's salary and benefits that otherwise would have been paid over the
proper notice period. Mr. Rennick may terminate his employment upon two weeks
written notice. On August 24, 1998, Mr. Rennick received options to purchase
60,000 common shares. These options have an exercise price of $0.64 per share,
and vest in four equal annual installments commencing on August 24, 1998. On May
1, 1999, Mr. Rennick received options to purchase an additional 40,000 shares
with an exercise price of $1.28 per share, which vest in four equal annual
installments commencing on May 1, 2000. On August 15, 1999, Mr. Rennick received
options to purchase 20,000 common shares with an exercise price of $2.42, which
vest in four equal annual installments commencing August 15, 2000. If we are
sold or upon certain other events constituting a change in control, and Mr.
Rennick's position is terminated, all of Mr. Rennick's options will
automatically become fully vested.
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SHARE INCENTIVE PLAN
Under our Share Incentive Plan we are authorized to issue an aggregate of
2,200,000 common shares. In addition, beginning on January 1, 2001, the number
of common shares authorized for issuance under the Share Incentive Plan, will
increase by an amount equal to the lesser of 700,000 shares, 4% of our
outstanding shares or a lesser amount determined by our board of directors. As
of December 31, 1999, options to purchase an aggregate of 1,203,020 common
shares at a weighted average exercise price of approximately $1.83 per share
were outstanding under the plan and 69,644 options to purchase common shares had
been exercised. No restricted share awards have been granted under the plan.
The plan provides for the grant of incentive share options intended to
qualify under Section 422 of the United States Internal Revenue Code of 1986, as
amended, non-statutory share options, restricted share awards and other
share-based awards.
All of our officers, employees, directors, consultants and advisors and all
officers, employees, directors, consultants and advisors of our subsidiaries are
eligible to receive awards under the plan. Under present law, however, incentive
share options may only be granted to employees.
We may grant options at an exercise price less than, equal to or greater
than the fair market value of the common shares on the date of grant. Under
present law, incentive share options and options intended to qualify as
performance-based compensation under Section 162(m) of the United States
Internal Revenue Code of 1986, as amended, may not be granted at an exercise
price less than the fair market value of the common shares on the date of grant
or less than 100% of the fair market value in the case of incentive share
options granted to optionees holding more than 10% of the voting power of our
company. The plan permits the board of directors to determine how optionees may
pay the exercise price of their options, including by cash, check or in
connection with a "cashless exercise" through a broker, by surrender of common
shares, by delivery to us of a promissory note or by any combination of the
permitted forms of payment.
Our board of directors administers the plan. The board of directors has the
authority to adopt, amend and repeal the administrative rules, guidelines and
practices relating to the plan and to interpret its provisions. It may delegate
authority under the plan to one or more committees of the board of directors
and, subject to certain limitations, to one or more of our executive officers.
The board of directors has authorized the compensation committee to administer
the plan, including the granting of options to executive officers. Subject to
any applicable limitations contained in the plan, the board of directors, the
compensation committee or any other committee or executive officer to whom the
board of directors delegates authority, as the case may be, selects the
recipients of awards and determines:
- the number of common shares covered by options and the dates upon which
such options become exercisable;
- the exercise price of options;
- the duration of options; and
- the number of common shares subject to any restricted share or other
share-based awards and the terms and conditions of such awards, including
the conditions for repurchase, issue price and repurchase price.
In the event of a merger, liquidation or other acquisition event, our board
of directors is authorized to provide for outstanding options or other
share-based awards to be assumed or substituted for by the acquiror and to
accelerate the vesting schedule of awards.
No award may be granted under the plan after August 4, 2003, but the
vesting and effectiveness of awards previously granted may extend beyond that
date. The board of directors may at any time amend, suspend or terminate the
plan, except that no award granted after any amendment of the plan and
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designated as subject to Section 162(m) of the United States Internal Revenue
Code of 1986, as amended, by the board of directors shall become exercisable,
realizable or vested, to the extent the amendment was required to grant the
award, unless and until the amendment is approved by our shareholders.
SHARE PURCHASE PLAN
Our Share Purchase Plan authorizes the issuance of up to a total of 500,000
common shares to participating employees.
All of our employees, including our directors who are employees and all
employees of any participating subsidiaries, whose customary employment is more
than 20 hours per week for more than five months in a calendar year, are
eligible to participate in the plan. However, employees who immediately after an
option grant would own 5% or more of the total combined voting power or value of
our shares or the shares of any of our subsidiaries are not eligible to
participate in the plan.
We will make one or more offerings to our employees to purchase shares
under the plan. Our board of directors will determine the dates upon which these
offerings will begin. Each offering commencement date will begin a six-month
period during which payroll deductions will be made and held for the purchase of
our common shares at the end of the purchase period.
On the first day of a designated payroll deduction period, or offering
period, we will grant to each eligible employee who has elected to participate
in the purchase plan an option to purchase common shares as follows: the
employee may authorize between 1% and 10% of his or her base pay to be deducted
by us during the offering period. On the last day of the offering period, the
employee is deemed to have exercised the option, at the option price, to the
extent of accumulated payroll deductions. Under the terms of the purchase plan,
the option price is an amount equal to 85% of the closing price (as defined) per
share of our common shares on either the first day or the last day of the
offering period, whichever is lower. In no event may an employee purchase in any
one offering period a number of shares which is more than 15% of the employee's
annualized base pay divided by 85% of the market value of our common shares on
the commencement date of the offering period. Our board of directors may, in its
discretion, choose an offering period of 12 months or less for each offering and
may choose a different offering period for each offering.
An employee who is not a participant on the last day of the offering period
is not entitled to exercise any option, and the employee's accumulated payroll
deductions will be refunded. An employee's rights under the purchase plan
terminate upon voluntary withdrawal from the purchase plan at any time, or when
the employee ceases employment for any reason, except that upon termination of
employment because of death, the employee's beneficiary has certain rights to
elect to exercise the option to purchase the shares that the accumulated payroll
deductions in the employee's account would purchase at the date of death.
Because participation in the purchase plan is voluntary, we cannot now
determine the number of our common shares to be purchased by any particular
current executive officer, by all current executive officers as a group or by
non-executive employees as a group.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
Subject to the limitations contained in the Business Corporations Act
(Ontario), our by-laws provide that we may indemnify our directors and officers,
our former directors and officers and any person who acts or has acted at our
request as a director or officer of a body corporate of which our company is or
was a shareholder or creditor, from and against all costs, charges and expenses,
including amounts paid to settle an action or satisfy a judgment in a civil,
criminal or administrative action or proceeding to which they are made parties
because they have been directors or officers. Indemnification of a director
58
<PAGE> 64
or officer under the Business Corporations Act (Ontario) is possible only if it
is shown that the director or officer acted honestly and in good faith with a
view to our best interests, and, in the case of a criminal or administrative
action or proceeding that is enforced by a monetary penalty, the director or
officer had reasonable grounds for believing that his or her conduct was lawful.
We have authorized and are in the process of entering into indemnity
agreements with each of our directors and officers. Each indemnity agreement
calls for us to indemnify the director or officer against all liabilities in
connection with any claim arising out of the individual's status or service as a
director or officer of FloNetwork, other than claims arising from gross
negligence or willful misconduct. Each agreement also calls for us to advance
expenses incurred by the individual in connection with any action with respect
to which the individual may be entitled to indemnification by FloNetwork.
Currently, there is no pending litigation or proceeding where a current or
past director, officer or employee is seeking indemnification, nor are we aware
of any threatened litigation that may result in claims for indemnification.
We maintain insurance for the benefit of our directors and officers against
liability in their respective capacities as directors and officers. The total
amount of insurance purchased for the directors and officers as a group is $15.0
million. Our directors and officers are not required to pay any premium with
respect to the insurance policy. The policy contains standard industry
exclusions and no claims have been made under the policy to date.
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<PAGE> 65
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information known to us regarding
the beneficial ownership of our common shares as of December 31, 1999 and as
adjusted to reflect the sale of common shares in this offering for:
- each person known by us to beneficially own more than 5% of our common
shares;
- each of our directors;
- each of our executive officers named in the Summary Compensation Table;
and
- all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. The information is not necessarily
indicative of beneficial ownership for any other purpose. Unless otherwise
indicated, each person or entity named in the table below has sole voting and
investment power (or shares such power with his or her spouse) with respect to
all common shares shown as beneficially owned by them, subject to applicable
community property laws.
Percentage of beneficial ownership is based on 12,898,977 common shares
outstanding as of December 31, 1999, after giving effect to:
- the conversion upon the consummation of this offering of our outstanding
class A preferred shares, class B preferred shares, class C preferred
shares and class D preferred shares into an aggregate of 5,011,134 common
shares (assuming an initial public offering price of $11.00 per share);
- the issuance of 800,000 common shares concurrent with the consummation of
this offering upon the exercise of warrants outstanding as of December
31, 1999 at a weighted-average exercise price of approximately $0.85 per
share; and
- the issuance of 874,870 common shares concurrent with the consummation of
this offering upon the exercise of an option pursuant to an Option
Agreement held by CNET dated September 15, 1999 at a price of
approximately $6.23 per share (assuming an initial public offering price
of $11.00 per share).
The number of common shares deemed outstanding after this offering includes
3,750,000 common shares being offered for sale in this offering, but assumes no
exercise of the underwriters' over-allotment option.
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<PAGE> 66
In computing the number of common shares beneficially owned by a person and
the percentage ownership of that person, common shares subject to options held
by that person that are currently exercisable or exercisable within 60 days
after December 31, 1999 are deemed outstanding. These shares, however, are not
deemed outstanding for the purpose of computing the percentage ownership of any
other person. Unless otherwise indicated, the address of each beneficial owner
listed below is c/o FloNetwork Inc., 260 King Street East, Toronto, Ontario,
Canada, M5A 1K3.
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON SHARES
BENEFICIALLY OWNED
--------------------
COMMON SHARES PRIOR TO AFTER
NAME AND ADDRESS BENEFICIALLY OWNED OFFERING OFFERING
- ---------------- ------------------ -------- --------
<S> <C> <C> <C>
5% Shareholders:
McLean Watson(1)................................... 3,938,246 30.5% 23.7%
Suite 1410
One First Canadian Place
Toronto, Ontario
M5X 1A4
Entities Affiliated with Ventures West Capital
Ltd.(2).......................................... 2,401,350 18.6% 14.4%
20 Adelaide Street East
Suite 1200
Toronto, Ontario
M5C 2T6
Pi-Hsia Hsiao...................................... 1,396,800 10.8% 8.4%
5400 Fallingbrook Drive
Missisauga, Ontario
LSV 1P7
CNET, Inc.(3)...................................... 1,485,180 11.5% 8.9%
150 Chestnut Street
San Francisco, California 94111
Mina Chen Lux...................................... 686,400 5.3% 4.1%
MacDonald Communications
135 W. 50th Street, 16th Floor
New York, New York 10020
Entities Affiliated with Sycamore Ventures(4)...... 641,812 5.0% 3.9%
989 Lenox Drive, Suite 208
Laurenceville, New Jersey 08648
Directors and Executive Officers:
Eric Goodwin(5).................................... 183,427 1.4% 1.1%
John Eckert(6)(7).................................. 3,938,246 30.5% 23.7%
Paul Chen(8)....................................... 1,366,800 10.6% 8.2%
Edward Anderson(7)(9).............................. 2,401,350 18.6% 14.4%
John Hayter(5)(7).................................. 10,000 * *
Kit Wong(7)(10).................................... 645,021 5.0% 3.9%
John MacDonald(7).................................. * * *
Craig Rennick(5)................................... 15,000 * *
</TABLE>
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<PAGE> 67
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON SHARES
BENEFICIALLY OWNED
--------------------
COMMON SHARES PRIOR TO AFTER
NAME AND ADDRESS BENEFICIALLY OWNED OFFERING OFFERING
- ---------------- ------------------ -------- --------
<S> <C> <C> <C>
All directors and executive officers as a group (12
persons)(11)..................................... 8,910,177 67.3% 52.5%
</TABLE>
- -------------------------
* Represents beneficial ownership of less than one percent of the common
shares.
(1) Includes 800,000 common shares issuable upon the exercise of warrants
outstanding as of December 31, 1999, which McLean Watson has agreed to
exercise concurrent with the consummation of this offering.
(2) Includes 1,200,675 shares held by Ventures West VI Limited Partnership and
1,200,675 shares held by Bank of Montreal Capital Corporation. Ventures
West Management VI Ltd., a wholly-owned subsidiary of Ventures West Capital
Ltd., is the general partner of Ventures West VI Limited Partnership.
Ventures West Management TIP Inc., also a wholly-owned subsidiary of
Ventures West Capital Ltd., is the manager of certain investments held by
Bank of Montreal Capital Corporation, including an investment in us.
(3) Includes 874,870 shares issuable upon the exercise of an option pursuant to
an Option Agreement dated September 15, 1999 (assuming an initial public
offering price of $11.00 per share). CNET has agreed to exercise this
option concurrent with the consummation of this offering.
(4) Includes 521,472 shares held by CG Asian-American Fund, L.P. and 120,340
shares held by Princeton Global Fund, L.P. Sycamore Management Corp., a
subsidiary of Sycamore Ventures, is the general partner of the general
partner of CG Asian-American Fund, L.P. and Princeton Global Fund, L.P.
(5) Consists solely of shares issuable pursuant to options that are currently
exercisable or exercisable within 60 days after December 31, 1999.
(6) Consists solely of shares held by McLean Watson. Mr. Eckert is a director
of McLean Watson Capital Inc. which is the parent of McLean Watson. Mr.
Eckert disclaims beneficial ownership of the shares held by McLean Watson.
(7) Excludes shares issuable upon exercise of options granted after January 1,
2000. See "Management -- Director Compensation."
(8) Consists solely of shares held by 1391715 Ontario Limited for the benefit
of Mr. Chen and members of Mr. Chen's family.
(9) Consists solely of shares held by entities affiliated with Ventures West VI
Limited Partnership and Bank of Montreal Capital Corporation, which are
managed by affiliates of Ventures West Capital Ltd. Mr. Anderson is a
Senior Vice President of Ventures West Capital Ltd. Ventures West
Management VI Ltd., a wholly-owned subsidiary of Ventures West Capital
Ltd., is the general partner of Ventures West VI Limited Partnership.
Ventures West Management TIP Inc., also a wholly-owned subsidiary of
Ventures West Capital Ltd., is the manager of certain investments held by
Bank of Montreal Capital Corporation, including an investment in us. Mr.
Anderson disclaims beneficial ownership of the shares held by Ventures West
VI Limited Partnership and Bank of Montreal Capital Corporation.
(10) Includes shares held by Princeton Global Fund, L.P. and CG Asian-American
Fund, L.P. Mr. Wong is a partner of Sycamore Ventures. Sycamore Management
Corp., a subsidiary of Sycamore Ventures, is the general partner of the
general partner of Princeton Global Fund, L.P. and CG Asian-American Fund,
L.P. Mr. Wong disclaims beneficial ownership of the shares held by
Princeton Global Fund, L.P. and CG Asian-American Fund, L.P.
(11) Includes 800,000 shares issuable upon the exercise of warrants outstanding
as of December 31, 1999 and 336,760 shares issuable pursuant to options
that are currently exercisable or exercisable within 60 days after December
31, 1999. Excludes shares issuable upon exercise of options granted after
January 1, 2000. See "Management -- Director of Compensation."
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<PAGE> 68
RELATED TRANSACTIONS
Since August 1, 1996, we have engaged in the following transactions with
the following directors, officers, and shareholders who beneficially own more
than 5%, known as 5% shareholders, of any class of our voting securities, and
affiliates of our directors, officers and 5% shareholders.
NOTE FINANCING AND ISSUANCE OF CLASS A PREFERRED SHARES
On March 30, 1998, we issued a promissory note in the principal amount of
$692,521 to 1206832 Ontario Inc., a nominee of McLean Watson and referred to as
McLean Watson. On October 20, 1998, we issued two additional promissory notes in
the aggregate principal amount of $207,756 to McLean Watson and Ventures West VI
Limited Partnership. The notes bore interest at a rate equal to the prime
lending interest rate of a Canadian chartered bank plus 2% per annum. On
November 20, 1998, the outstanding principal amount of these notes was converted
into an aggregate of 130,000 class A preferred shares at a price of $6.93 per
share. The outstanding interest on each of the notes was forgiven by the holders
at the time of the conversion of the notes. In addition, in connection with the
conversion of these notes, we sold an additional 420,000 class A preferred
shares on November 20, 1998 and June 30, 1999 for an aggregate purchase price of
$2,908,587. In connection with the sale of the class A preferred shares we
issued to the purchasers warrants to purchase an aggregate of 2,471,329 common
shares at an exercise price of $0.0003 per share. These warrants were exercised
in full on November 30, 1999 and December 8, 1999.
<TABLE>
<CAPTION>
CLASS A COMMON SHARES ISSUED UPON
NAME PREFERRED SHARES EXERCISE OF WARRANTS
- ---- ---------------- -------------------------
<S> <C> <C>
McLean Watson.................................. 150,000 673,999
Bank of Montreal Capital Corporation........... 200,000 898,665
Ventures West VI Limited Partnership........... 200,000 898,665
</TABLE>
Also on November 20, 1998, McLean Watson exchanged warrants to purchase an
aggregate of 800,000 common shares, which it had acquired in a previous
transaction for warrants to purchase 400,000 common shares at an exercise price
of $1.2812 per share and warrants to purchase 400,000 common shares at an
exercise price of $0.4155 per share. McLean Watson has agreed in writing that it
will exercise these warrants prior to or concurrent with the consummation of
this offering.
All class A preferred shares will be automatically converted into an
aggregate of 346,261 common shares which, upon the consummation of this
offering, will have an aggregate value of $3,808,871 (assuming an initial public
offering price of $11.00 per share).
CLASS B FINANCING
In November 1996 and April 1997, we issued an aggregate of 2,880,000 class
A preferred shares to McLean Watson for a total consideration of $692,521. In
July 1997, we effected a three-for-one share split resulting in 8,640,000 class
A preferred shares outstanding. In November 1998, prior to the issuance of the
class A preferred shares referenced above we exchanged all of these class A
preferred shares for class B preferred shares on a one-for-one basis. All class
B shares will automatically be converted into an aggregate of 1,728,000 common
shares which, upon the consummation of this offering, will have an aggregate
value of $19,008,000 (assuming an initial public offering of $11.00 per share).
CLASS D FINANCING
On November 3, 1999, we issued three non-interest bearing promissory notes
in the principal amounts of $165,900, $82,950 and $82,950 to McLean Watson,
Ventures West VI Limited Partnership
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<PAGE> 69
and Bank of Montreal Capital Corporation, respectively. On November 24, 1999, we
issued 12,033,983 units, each unit consisting of one class D preferred share and
one warrant to purchase 0.10 of a common share, at a price per unit of $1.24647
for a total purchase price of $15,000,000 to the shareholders listed below,
Telepeak Investments, Ltd., Ontario Teachers Pension Plan Board and 10
individual investors. Each of the notes was repaid from the proceeds of that
offering and was cancelled. Of the 12,033,983 units sold by us, an aggregate of
8,580,230 units were sold to the following shareholders:
<TABLE>
<CAPTION>
COMMON SHARES
ISSUABLE UPON
CLASS D EXERCISE OF
NAME PREFERRED SHARES WARRANTS TOTAL CONSIDERATION
- ---- ---------------- ------------- -------------------
<S> <C> <C> <C>
McLean Watson............................. 3,209,062 320,906 $4,000,000
Bank of Montreal Capital Corporation...... 880,486 88,049 1,097,500
Ventures West VI Limited Partnership...... 880,486 88,049 1,097,500
CNET, Inc. ............................... 401,133 40,113 500,000
CG Asian-American Fund, L.P. ............. 2,607,363 260,736 3,250,000
Princeton Global Fund, L.P. .............. 601,700 60,170 750,001
Kit Wong.................................. 16,045 1,605 20,000
</TABLE>
By their terms, all of the warrants issued as part of the units will expire
without being exercised upon the consummation of this offering. All class D
preferred shares will be automatically converted into an aggregate of 2,406,789
common shares which, upon the consummation of this offering, will have an
aggregate value of $26,474,679 (assuming an initial public offering price of
$11.00 per share).
RELATIONSHIP WITH CNET, INC.
On July 19, 1999, we entered into a two-year automatically renewable
contract to provide e-mail messaging services to CNET. Under this contract, we
provide e-mail messaging services in connection with the distribution of CNET's
e-mail newsletters. As of December 31, 1999, we have received a total of
$100,000 from CNET under the agreement.
On September 15, 1999, we issued 2,650,423 class C preferred shares to CNET
at a price of $0.3972 per share for a total purchase price of $1,052,748. All
class C preferred shares will automatically be converted into an aggregate of
530,084 common shares which, upon the consummation of this offering, would
represent an aggregate value of $5,830,924 (assuming an initial public offering
price of $11.00 per share).
We have also provided CNET with an irrevocable option to purchase a number
of common shares which, on the date of exercise, would equal 5% of all of our
issued and outstanding common shares on a fully diluted basis. CNET has agreed
in writing that it will exercise this option to purchase all common shares to
which it is entitled (expected to equal 874,870 common shares upon the
consummation of this offering, assuming an initial public offering price of
$11.00 per share) at a price of approximately $6.23 per share resulting in net
proceeds of approximately $5.4 million from the sale thereof concurrent with the
consummation of this offering.
LOANS FROM EXECUTIVE OFFICERS AND DIRECTORS
On August 1, 1993, Paul Chen, a director and our Chief Technology Officer,
loaned us $148,282 to provide us with initial working capital. This loan was an
interest-free loan. In December 1999, the loan was repaid in full.
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<PAGE> 70
DESCRIPTION OF SHARE CAPITAL
After this offering, we will be authorized to issue an unlimited number of
common shares and an unlimited number of preferred shares. The following is a
summary of the material terms of the common shares and the preferred shares. You
should carefully read our articles of incorporation, as amended to date, and our
by-laws, as amended to date, which are included as exhibits to the registration
statement containing this prospectus.
COMMON SHARES
As of December 31, 1999, we were authorized to issue an unlimited number of
common shares of which 12,898,977 common shares were issued and outstanding and
after giving effect to the automatic conversion upon the consummation of this
offering of our class A, B, C and D preferred shares into an aggregate of
5,011,134 common shares, the issuance of 800,000 common shares concurrent with
the consummation of this offering upon the exercise of warrants outstanding as
of December 31, 1999, and the issuance of 874,870 common shares concurrent with
the consummation of this offering upon the exercise of an option pursuant to an
Option Agreement with CNET dated September 15, 1999 (assuming an initial public
offering price of $11.00 per share). Following this offering (and assuming no
exercise of the underwriters' over-allotment option or of any options
outstanding as of December 31, 1999 or granted thereafter), there will be
16,648,977 common shares outstanding.
Holders of common shares are entitled to one vote per share on all matters
to be voted by the shareholders. Subject to preferences of any outstanding
preferred shares, the holders of common shares are entitled to receive any
dividends the board of directors declares out of funds legally available for the
payment of dividends. Upon the liquidation, dissolution or winding up of
FloNetwork, the holders of common shares are entitled to share all of our assets
remaining after payment of liabilities and after giving effect to the
liquidation preferences of any outstanding preferred shares. All outstanding
common shares are fully paid and non-assessable, and the common shares to be
issued following this offering will be fully paid and non-assessable.
PREFERRED SHARES
Effective upon the consummation of this offering, all of our outstanding
redeemable, convertible class A preferred shares, our 5% cumulative, voting,
convertible class B preferred shares, our voting, convertible class C preferred
shares and our voting, convertible class D preferred shares will convert into
common shares and these classes of preferred shares will be cancelled.
Our articles of incorporation, as amended, will provide that the board of
directors will have the authority, without further action by the shareholders,
to issue an unlimited number of preferred shares in one or more series. The
preferred shares are entitled to dividend and liquidation preferences over the
common shares. The board may also fix the price, rights, privileges and
restrictions of the preferred shares. Special rights which may be granted to a
series of preferred shares may include dividend rights, conversion rights,
voting rights, terms of redemption and liquidation preferences, any of which may
be superior to the rights of the common shares. Preferred share issuances could
decrease the market price of the common shares and may adversely affect the
voting and other rights of the holders of common shares. The issuance of
preferred shares also could have the effect of delaying or preventing a change
of control of our company.
REGISTRATION RIGHTS
After this offering, the holders of 12,829,333 common shares will be
entitled to require us to register their shares under the Securities Act as
provided in a registration rights agreement between us
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<PAGE> 71
and such holders. Under this agreement, if we propose to register any of our
securities under the Securities Act, either for our account or for the account
of other security holders exercising registration rights, the holders are
entitled to notice of the registration and to include their common shares in the
registration. Additionally, such holders are also entitled to demand
registrations pursuant to which they may, on up to two occasions, require us to
register their common shares under the Securities Act. We are required to use
our best efforts to effect any such registration. We are responsible for paying
the expense of any such registration. Further, such holders may require us to
file six additional registration statements on Form F-3 at our expense. These
registration rights are subject to conditions and limitations, including the
right of the underwriters of an offering to limit the number of shares included
in such registration and our right not to effect a requested registration within
180 days following an offer of our securities pursuant to a Form F-1, including
this offering made hereby.
ANTI-TAKEOVER PROVISIONS
There are provisions of our articles of incorporation, as amended to date,
and of the Business Corporation Act (Ontario) which may hinder or impede
take-over bids. For example, as described above, our board of directors may,
without shareholder approval, issue preferred shares with rights superior to the
rights of the holders of common shares. As a result, preferred shares could be
issued quickly and easily, adversely affecting the rights of holders of common
shares and could be issued with terms calculated to delay or prevent a change in
control of FloNetwork or make removal of management more difficult. In addition,
under the Business Corporations Act (Ontario), certain business combinations,
including a merger or reorganization or the sale, lease, or other disposition of
all or substantially all of our assets, must be approved by at least two-thirds
of the votes cast by shareholders or, in certain cases, holders of each class of
shares. In some cases, a business combination must be approved by an Ontario
court. Shareholders may also have a right to dissent from the transaction, in
which case we would be required to pay dissenting shareholders the fair value of
their shares provided they have followed the required statutory procedures.
EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING HOLDERS OF COMMON SHARES
There is no law, governmental decree or regulation in Canada that restricts
the export or import of capital, or which would affect the remittance of
dividends or other payments by us to non-resident holders of our common shares,
other than tax withholding requirements. See "Income Tax
Consequences -- Canadian Federal Income Tax Considerations."
There are no limitations imposed by Canadian law or by our articles of
incorporation, as amended to date, or other charter documents, on the right of a
non-resident of Canada to hold or vote our common shares, other than those
imposed by the Investment Canada Act (Canada), as amended and as amended by the
North American Free Trade Agreement Implementation Act (Canada) (NAFTA) and the
World Trade Organization Agreement Implementation Act (Canada). This legislation
subjects an acquisition of control of FloNetwork by a non-Canadian to government
review if the value of our assets at the time exceeds a threshold amount which
is adjusted annually to reflect inflation and the Canadian real growth rate.
Generally speaking, the threshold for review will be higher in monetary terms
for residents or members of the World Trade Organization or NAFTA.
The acquisition of a majority of our voting shares is deemed to be an
acquisition of control. The acquisition of less than a majority but one-third or
more of our voting shares is presumed to be an acquisition of control unless the
acquirer can establish that there is no control in fact by the acquirer through
the ownership of voting shares. The acquisition of less than one-third of our
voting shares is deemed not to be an acquisition of control. Share acquisitions
in the ordinary course of an acquirer's business as a trader or dealer in
securities are exempt from review under this legislation.
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<PAGE> 72
TRANSFER AGENT AND REGISTRAR
The registrar and transfer agent for our common shares will be Chase Mellon
Shareholder Services. Its address is 111 Founders Plaza, Eleventh Floor, East
Hartford, Connecticut 06108, and its telephone number at this location is (860)
282-3509.
NASDAQ NATIONAL MARKET LISTING
We have applied for the listing of common shares on the Nasdaq National
Market, subject to official notice of issuance, under the symbol "FNWK."
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<PAGE> 73
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there has been no public market for our shares. We
cannot provide any assurance that a significant public market for our common
shares will develop or be sustained after this offering has been completed. The
sale of a substantial number of common shares in the public market, or the
possibility of such a sale, could adversely affect prevailing market prices for
our common shares.
Upon completion of this offering, a total of 16,648,977 of our common
shares will be outstanding, assuming (1) no exercise of the underwriters'
over-allotment option or of any options outstanding as of December 31, 1999 or
granted thereafter, (2) the conversion upon the consummation of this offering of
our class A, B, C and D preferred shares into an aggregate of 5,011,134 common
shares, (3) the issuance of 800,000 common shares concurrent with the
consummation of this offering upon the exercise of warrants outstanding as of
December 31, 1999, and (4) the issuance of 874,870 common shares concurrent with
the consummation of this offering upon the exercise of an option pursuant to an
Option Agreement held by CNET dated September 15, 1999.
All of the common shares sold in the offering will be freely tradable
without restriction under the Securities Act, except by "affiliates" as defined
in Rule 144 under the Securities Act.
Holders of the remaining 12,898,977 common shares outstanding upon
completion of this offering have entered lock-up agreements pursuant to which
they have agreed not to dispose of or hedge any of their common shares for 180
days following the date of the prospectus without the consent of SG Cowen
Securities Corporation on behalf of the underwriters. See "Underwriting."
Upon completion of this offering, options to purchase 1,723,302 common
shares will be held by existing optionees, based on options outstanding at
December 31, 1999. Under the terms of their option agreements, holders of all of
these options have agreed to be bound by a 180-day lock-up.
We intend to file with the Securities and Exchange Commission registration
statements on Form S-8 after the date of this prospectus covering shares issued
under our share incentive plan and employee share purchase plan. The S-8
registration statements will allow holders of common shares that are issued
under our share plans to resell those shares in the public market, without
restriction under the Securities Act subject to the lock-up agreements.
As a result of the lock-up agreements, the S-8 registration statements and
the provisions of Rule 144 and Rule 701 under the Securities Act and the
continued vesting of outstanding options, the common shares outstanding upon
completion of this offering (other than the common shares sold in this
offering), including shares subject to presently outstanding options, will be
eligible for resale in the public market in the United States as follows,
subject in some cases to Rule 144 limitations:
<TABLE>
<CAPTION>
TOTAL
-----------
<S> <C>
At the date of this prospectus.............................. --
90 days after the date of this prospectus................... --
180 days after the date of this prospectus.................. 11,466,513
Later than 180 days after the date of this prospectus....... 3,155,766
</TABLE>
U.S. RESALE RESTRICTIONS
Upon completion of this offering, 16,648,977 common shares will be held by
U.S. residents or others (including residents of Ontario who acquired common
shares prior to this offering and whose shares were "restricted securities" when
issued), assuming (1) no exercise of the underwriters' over-allotment option or
of any options outstanding as of December 31, 1999 or granted thereafter, (2)
the
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<PAGE> 74
conversion upon the consummation of this offering of our class A, B, C and D
preferred shares into an aggregate of 5,011,134 common shares, (3) the issuance
of 800,000 common shares concurrent with the consummation of this offering upon
the exercise of warrants outstanding as of December 31, 1999, and (4) the
issuance of 874,870 common shares concurrent with the consummation of this
offering upon the exercise of an option pursuant to an Option Agreement held by
CNET dated September 15, 1999. As a result of the lock-up agreements and the
provisions of Rule 144 and Rule 701 under the Securities Act, such shares will
be available for sale in the public market in the United States as set forth in
the table above, subject in some cases to Rule 144 limitations.
In general, under Rule 144, as in effect on the date of this prospectus,
any person, including an affiliate of FloNetwork, who has beneficially owned
common shares for at least one year will be entitled to sell, in any three-month
period, a number of shares that, together with sales of any common shares with
which such person's sales must be aggregated, does not exceed the greater of:
- 1% of the then outstanding common shares; and
- the average weekly trading volume of the common shares on the Nasdaq
National Market during the four calendar weeks immediately preceding the
date on which such sale is made.
Sales of restricted securities pursuant to Rule 144 are subject to
requirements relating to manner of sale, notice and availability of current
public information about us. Persons who are affiliates of FloNetwork must also
comply with the restrictions and requirements of Rule 144, other than the one-
year holding period requirement, in order to sell common shares in the public
market which are not restricted securities.
Our employees, directors, officers, consultants or advisers may rely on
Rule 701 to resell common shares issued to them, pursuant to written
compensatory benefit plans or written contracts relating to their compensation.
Rule 701 also will apply to shares acquired upon exercise of options granted
before the date of this prospectus, including exercises after the date of this
prospectus. Common shares issued in reliance on Rule 701 are restricted
securities and, subject to the 180-day lock-up agreements described above, may
be sold beginning 90 days after the date of this prospectus:
- by persons other than affiliates of FloNetwork, subject only to the
manner of sale provisions of Rule 144; and
- by persons deemed to be affiliates of FloNetwork under Rule 144 without
compliance with its one-year minimum holding period requirements.
Holders of 12,829,333 common shares will be entitled to require us to
register their common shares under the Securities Act, subject to the lock-up
agreements. See "Description of Share Capital -- Registration Rights".
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INCOME TAX CONSEQUENCES
In this section we summarize the material anticipated United States and
Canadian federal income tax considerations relevant to a purchase of shares in
this offering by individuals and corporations which:
- for purposes of the United States Internal Revenue code, the Income Tax
Act (Canada) and the Canada-United States Income Tax Convention, are
resident in the United States and not in Canada and have never been
resident in Canada;
- hold shares as capital assets for purposes of the Internal Revenue Code
and capital property for purposes of the Income Tax Act;
- deal at arm's length with us for purposes of the Income Tax Act; and
- do not use or hold the shares in carrying on a business in Canada and, in
the case of insurers, do not hold shares as designated insurance property
for purposes of the Income Tax Act and, in the case of individual
holders, are also U.S. citizens.
We will refer to persons who satisfy the above conditions as "Unconnected
U.S. Shareholders."
We will assume, for purposes of this discussion, that you are an
Unconnected U.S. Shareholder. The tax consequences of a purchase of common
shares by persons who are not Unconnected U.S. Shareholders may differ
substantially from the tax consequences discussed in this section. The Income
Tax Act contains rules relating to securities held by shareholders that are
financial institutions for the purposes of the Act. We do not discuss these
rules and holders that are financial institutions should consult their own tax
advisors.
This discussion is based upon the current provisions of:
- the Income Tax Act and regulations under the Income Tax Act;
- the Internal Revenue Code and regulations under the Internal Revenue
Code;
- the Canada-United States Income Tax Convention;
- our understanding of the current administrative policies and assessing
practices of the Canada Customs and Revenue Agency;
- all specific proposals to amend the Income Tax Act and the regulations
under the Income Tax Act that have been publicly announced by the
Minister of Finance (Canada) prior to the date of this prospectus;
- the administrative policies published by the U.S. Internal Revenue
Service; and
- judicial decisions;
all of which are subject to change either prospectively or retroactively. We do
not discuss the potential effects of any recently proposed legislation in the
United States and do not take into account the tax laws of the various provinces
or territories of Canada or the tax laws of the various state and local
jurisdictions of the United States or foreign jurisdictions.
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WE INTEND THIS DISCUSSION TO BE A GENERAL DESCRIPTION OF THE U.S. FEDERAL
AND CANADIAN FEDERAL INCOME TAX CONSIDERATIONS MATERIAL TO A PURCHASE OF COMMON
SHARES. THIS DISCUSSION DOES NOT DEAL WITH ALL POSSIBLE TAX CONSEQUENCES
RELATING TO AN INVESTMENT IN OUR COMMON SHARES. WE HAVE NOT TAKEN INTO ACCOUNT
YOUR PARTICULAR CIRCUMSTANCES AND DO NOT ADDRESS CONSEQUENCES PECULIAR TO YOU
UNDER PROVISIONS OF U.S. OR CANADIAN INCOME TAX LAW. THEREFORE, YOU SHOULD
CONSULT YOUR OWN TAX ADVISOR REGARDING YOUR INDIVIDUAL TAX CONSEQUENCES OF
PURCHASING COMMON SHARES IN THIS OFFERING.
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
As an Unconnected U.S. Shareholder, you generally will include in income
dividend distributions paid by us to the extent of our current or accumulated
earnings and profits. You must include in income an amount equal to the U.S.
dollar value of such dividends on the date of receipt based on the exchange rate
on such date, without reduction for the Canadian withholding tax. You generally
will be entitled to a foreign tax credit, or deduction for U.S. federal income
tax purposes, in an amount equal to the Canadian tax withheld. To the extent
dividend distributions paid by us exceed our current or accumulated earnings and
profits, they will be treated first as a return of capital up to your adjusted
tax basis in the shares, and then as a gain for the sale of exchange of the
shares.
Dividends paid by us generally will constitute "passive income" for
purposes of the foreign tax credit, which could reduce the amount of foreign tax
credit available to you. The Internal Revenue Code applies various limitations
on the amount of foreign tax credit that may be available to a U.S. taxpayer.
Because of the complexity of those limitations, you should consult your own tax
advisor with respect to the potential consequences of those limitations.
Dividends paid by us on the shares generally will not be eligible for the
"dividends received" deductions. An Unconnected U.S. Shareholder which is a
corporation may, under some circumstances, be entitled to a 70% deduction of the
U.S. source portion of dividends received from us if such Unconnected U.S.
Shareholder owns shares representing at least 10% of our voting power and value.
If you sell the shares, you generally will recognize gain or loss in an
amount equal to the difference, if any, between the amount realized on the sale
and your adjusted tax basis in the shares. Any gain or loss you recognize upon
the sale of shares held as capital assets will be long-term or short-term
capital gain or loss, depending on whether the shares have been held by you for
more than one year.
Under current U.S. tax regulations, dividends paid by us on the shares
generally will not be subject to U.S. information reporting or the 31% backup
withholding tax unless they are paid in the United States through a U.S. or
U.S.-related paying agent, including a broker. If you furnish the paying agent
with a duly completed and signed Form W-9 such dividends will not be subject to
the backup withholding tax. You will be allowed a refund or a credit equal to
any amounts withheld under the U.S. backup withholding tax rules against your
U.S. federal income tax liability, provided you furnish the required information
to the Internal Revenue Service.
PERSONAL HOLDING COMPANIES
We could be classified as a personal holding company for U.S. federal
income tax purposes if both of the following tests are satisfied:
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<PAGE> 77
- if at any time during the last half of our taxable year, five or fewer
individuals own or are deemed to own more than 50% of the total value of
our shares; and
- we receive 60% or more of our U.S. related gross income from specified
passive sources, such as royalty payments.
A personal holding company is taxed on a portion of its undistributed U.S.
source income, including specific types of foreign source income which are
connected with the conduct of a U.S. trade or business, to the extent this
income is not distributed to shareholders. We do not believe we are a personal
holding company presently, and we do not expect to become one. However, we can
not assure you that we will not qualify as a personal holding company in the
future.
FOREIGN PERSONAL HOLDING COMPANIES
We could be classified as a foreign personal holding company if in any
taxable year both of the following tests are satisfied:
- five or fewer individuals who are United States citizens or residents own
or are deemed to own more than 50% of the total voting power of all
classes of our shares entitled to vote or the total value of our shares;
and
- at least 60% or 50% in some cases, of our gross income consists of
"foreign personal holding company income," which generally includes
passive income such as dividends, interest, gains from the sale or
exchange of shares or securities, rent and royalties.
If we are classified as a foreign personal holding company and if you hold
shares on the last day of our taxable year, you must include in your gross
income as a dividend your pro rata portion of our undistributed foreign personal
holding company income. If you dispose of your shares prior to such date, you
will not be subject to tax under these rules. We do not believe we are a foreign
personal holding company presently, and we do not expect to become one. However,
we can not assure you that we will not qualify as a foreign personal holding
company in the future.
PASSIVE FOREIGN INVESTMENT COMPANIES
The rules governing "passive foreign investment companies" can have
significant tax effects on Unconnected U.S. Shareholders. We could be classified
as a passive foreign investment company if, for any taxable year, either:
- 75% or more of our gross income is "passive income," which includes
interest, dividends and some types of rents and royalties; or
- the average percentage, by fair market value, or, in some cases, by
adjusted tax basis, of our assets that produce or are held for the
production of "passive income," is 50% or more.
Distributions which constitute "excess distributions," as defined in
Section 1291 of the Internal Revenue Code, from a passive foreign investment
company and dispositions of shares of a passive foreign investment company are
subject to the highest rate of tax on ordinary income in effect and to an
interest charge based on the value of the tax deferred during the period during
which the shares are owned. However, if an Unconnected U.S. Shareholder makes a
timely election to treat us as a qualified electing fund under section 1295, the
above-described rules generally will not apply. Instead, the Unconnected U.S.
Shareholder would include annually in his gross income his pro rata share of our
ordinary earnings and net capital gain, regardless of whether such income or
gain was actually distributed. Tax on this income, however, may be deferred.
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In addition, subject to specific limitations, Unconnected U.S. Shareholders
actually or constructively owning marketable shares in a passive foreign
investment company may make an election under section 1296 of the Internal
Revenue Code to mark that stock to market annually, rather than being subject to
the above-described rules. Amounts included in or deducted from income under
this mark to market election and actual gains and losses realized upon
disposition, subject to specific limitations, will be treated as ordinary gains
or losses.
In addition, special rules apply if we qualify as both a passive foreign
investment company and a "controlled foreign corporation," as defined below, and
an Unconnected U.S. Shareholder owns, actually or constructively, 10% or more of
the total combined voting power of all classes of our shares entitled to vote.
We believe that we will not be a passive foreign investment company for the
current fiscal year and we do not expect to become a passive foreign investment
company in future years. You should be aware, however, that if we are or become
a passive foreign investment company we may not be able to satisfy
record-keeping requirements that would permit you to make a qualified electing
fund election. You should consult your tax advisor with respect to how the
passive foreign investment company rules affect your tax situation, including
the advisability of making an election to treat us as a qualified electing fund
or making a mark to market election.
CONTROLLED FOREIGN CORPORATION
If more than 50% of the voting power of all classes of our shares or the
total value of our shares is owned, directly or indirectly, by citizens of the
United States, U.S. domestic partnerships and corporations or estates or trusts
other than foreign estates or trusts, each of which owns 10% or more of the
total combined voting power of all classes of our shares, we could be treated as
a "controlled foreign corporation" under Subpart F of the Internal Revenue Code.
This classification would effect many complex results, including requiring such
shareholders to include in income their pro rata shares of our "Subpart F
Income," as defined by the Internal Revenue Code. In addition, under Section
1248 of the Internal Revenue Code, gain from the sale or exchange of shares by
an Unconnected U.S. Shareholder who is or was a 10% or greater shareholder at
any time during the five-year period ending with the sale or exchange will be
ordinary dividend income to the extent of our earnings and profits attributable
to the shares sold or exchanged.
We do not believe that we are a controlled foreign corporation and we do
not anticipate that we will become a controlled foreign corporation as a result
of the offering. We are not a controlled foreign corporation presently, and we
do not expect to become one. However, we can not assure you that we will not
qualify as a controlled foreign corporation in the future.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
In this section, we summarize the material anticipated Canadian federal
income tax considerations relevant to your purchase of shares.
Under the Income Tax Act, as modified by the Canada-United States Income
Tax Convention, assuming the shares are listed on Nasdaq at all times and that
you are an Unconnected U.S. Shareholder, you will generally be exempt from
Canadian tax on a capital gain realized on an actual or deemed disposition of
the shares if either:
- you did not have a permanent establishment in Canada, and a fixed base in
Canada was not available to you, in each case within the twelve-month
period before the disposition and our shares do not derive their value
principally from real property situated in Canada; or
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<PAGE> 79
- you (either alone or together with persons with whom you did not deal at
arm's length for the purposes of the Income Tax Act) did not own or have
interests in or rights to acquire 25% or more of our issued shares of any
class or series at any time during the 60 month period ending at the time
of disposition.
Dividends paid, credited or deemed to have been paid or credited on the
shares to Unconnected U.S. Shareholders will be subject to a Canadian
withholding tax at a rate of 25% under the Income Tax Act. Under the
Canada-United States Income Tax Convention, the rate of withholding tax
generally applicable to Unconnected U.S. Shareholders who beneficially own the
dividends is reduced to 15%. In the case of Unconnected U.S. Shareholders that
are companies that beneficially own at least 10% of our voting shares, the rate
of withholding tax on dividends is reduced to 5%.
Canada does not currently impose any federal estate taxes or succession
duties; however, if you die, there is generally a deemed disposition of the
shares held at that time for proceeds of disposition equal to the fair market
value of the shares immediately before the death. Capital gains realized on the
deemed disposition, if any, will generally have the income tax consequences
described above.
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<PAGE> 80
UNDERWRITING
FloNetwork Inc. and the underwriters named below have entered into an
underwriting agreement with respect to the shares being offered. Subject to the
terms and conditions of the underwriting agreement, each underwriter has
severally agreed to purchase the number of shares indicated in the following
table at the public offering less the underwriting discounts and commissions set
forth on the cover page of this prospectus. SG Cowen Securities Corporation,
Prudential Securities Incorporated and William Blair & Company, L.L.C. are
acting as the representatives of the underwriters named below.
<TABLE>
<CAPTION>
NAME AMOUNT
- ---- ----------
<S> <C>
SG Cowen Securities Corporation.............................
Prudential Securities Incorporated..........................
William Blair & Company, L.L.C. ............................
----------
Total.................................................. 3,750,000
==========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are conditional and may be terminated at their discretion based on
their assessment of the state of the financial markets. The obligations of the
underwriters may also be terminated upon the occurrence of other events
specified in the underwriting agreement. The underwriters are severally
committed to purchase all of the common shares being offered by us if any shares
are purchased, other than those covered by the over-allotment option described
below.
The underwriters propose to offer the common shares directly to the public
at the public offering price set forth on the cover page of this prospectus. The
underwriting fee will be an amount equal to the offering price to the public of
the common shares, less the amount paid by the underwriters to FloNetwork per
common share. The underwriters may offer the common shares to securities dealers
at that price less a concession not in excess of per share. Securities
dealers may reallow a concession not in excess of $ per share to other
dealers. After the common shares are released for sale to the public, the
underwriters may vary the offering price and other selling terms from time to
time.
Prudential Securities Incorporated also facilitates the marketing of
securities online through its PrudentialSecurities.com division. Clients of
Prudential Advisor(SM), a full service brokerage firm program, may view offering
terms and a prospectus online and place orders through their financial advisors.
Other than the prospectus in electronic format, the information on the web site
is not part of this prospectus or the registration statement of which this
prospectus forms a part and has not been approved and/or endorsed by FloNetwork
or any underwriter in such capacity and should not be relied upon by prospective
investors.
Our company granted to the underwriters an option to purchase up to an
aggregate of 562,500 additional common shares at the public offering price set
forth on the cover of this prospectus to cover over-allotments, if any. The
option is exercisable for a period of 30 days. If the underwriters exercise
their over-allotment option, the underwriters have severally agreed to purchase
shares in approximately the same proportion as shown in the table above.
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933 and
liabilities arising from breaches of representations and warranties contained in
the underwriting agreement, and to contribute to payments that the underwriters
may be required to make in respect of those liabilities.
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FloNetwork, our directors and executive officers, all principal
shareholders and certain other existing shareholders who hold an aggregate of
13,873,302 shares (including 974,325 shares issuable pursuant to options, all of
which are exercisable within 60 days of December 31, 1999), based on the number
of common shares outstanding as of December 31, 1999, have agreed with the
underwriters or are otherwise subject to agreements which provide that for a
period of 180 days following the date of this prospectus, they will not dispose
of or hedge any shares of common shares or any securities convertible into or
exchangeable for common shares. SG Cowen Securities Corporation may, in its sole
discretion, at any time without prior notice, release all or any portion of the
shares from the restrictions in any such agreement to which SG Cowen Securities
Corporation is a party.
The underwriters have reserved up to 5.0% of our common shares for sale, at
the initial public offering price to directors, officers, employees and specific
existing shareholders, specific clients and third party vendors. The number of
shares available for sale to the general public will be reduced to the extent
these persons purchase the reserved shares. Any reserved shares not purchased
will be offered by the underwriters to the general public on the same terms as
the other shares.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and passive market making in
accordance with Regulation M under the Securities Exchange Act of 1934.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
common shares in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the
representatives to reclaim a selling concession from a syndicate member when the
common shares originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. Penalty bids
may have the effect of deterring syndicate members from selling to people who
have a history of quickly selling their shares. In passive market marking,
market makers in the common shares who are underwriters or prospective
underwriters may, subject to certain limitations, make bids for or purchases of
the common shares until the time, if any, at which a stabilizing bid is made.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common shares to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
Prior to this offering, there has been no public market for the common
shares. Consequently, the initial public offering price will be determined by
negotiations between us and the underwriters. The various factors to be
considered in these negotiations will include prevailing market conditions, the
market capitalizations and the states of development of other companies that we
and the underwriters believe to be comparable to us, estimates of our business
potential, our results of operations in recent periods, the present state of our
development and other factors deemed relevant.
We estimate that our out-of-pocket expenses for this offering, excluding
underwriting discounts and commissions, will be approximately $1.0 million.
We have entered into an agreement dated March 6, 2000 with SG Cowen
Securities Corporation which provides that they will act as our exclusive
financial advisor in connection with our general financial strategy and planning
activities for a period of twelve months from the date of that agreement. In
consideration for their services, SG Cowen Securities Corporation will receive a
retainer fee of $50,000, plus a transaction fee in connection with certain
completed transactions.
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LEGAL MATTERS
Certain Canadian legal matters in connection with this offering will be
passed upon on behalf of the company by Blake, Cassels & Graydon LLP, Toronto,
Ontario, our Canadian counsel. Some legal matters under U.S. law in connection
with this offering will be passed upon on behalf of the company by Hale and Dorr
LLP, Boston, Massachusetts, our U.S. counsel. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Brobeck, Phleger & Harrison LLP, Washington, D.C., with respect to United States
law, and Osler, Hoskin & Harcourt LLP, New York, New York with respect to
Canadian law.
EXPERTS
The audited financial statements as of July 31, 1998 and 1999 and December
31, 1999 and for each of the three years ended July 31, 1997, 1998, 1999 and for
the five month period ended December 31, 1999 included in this prospectus have
been audited by Arthur Andersen LLP, independent auditors, as stated in their
reports appearing herein, and have been so included in reliance upon the reports
of that firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form F-1 with the Commission for
the common shares we are offering by this prospectus. This prospectus does not
include all of the information contained in the registration statement. You
should refer to the registration statement and its exhibits for additional
information. Whenever we make reference in this prospectus to any of our
contracts, agreements or other documents, the references are not necessarily
complete and you should refer to the exhibits attached to the registration
statement for copies of the actual contract, agreement or other document.
You can read our Commission filings, including the registration statement,
over the Internet at the Commission's web site at http://www.sec.gov. You may
also read and copy any document we file with the Commission at its public
reference facilities at 450 Fifth Street, N.W., Washington, D.C. 20549; Seven
World Trade Center, Suite 1300, New York, New York 10048; and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You may also
obtain copies of the documents at prescribed rates by writing to the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the Commission at 1-800-SEC-0330 for further information on
the operation of the public reference facilities.
Upon completion of this offering, we will become subject to the reporting
requirements of the United States Securities Exchange Act of 1934, as amended,
applicable to foreign private issuers. Accordingly, we have agreed to file with
the Commission reports on Form 10-K and Form 10-Q. We also intend to furnish our
shareholders with annual reports containing consolidated financial statements
prepared in accordance with U.S. GAAP and examined by our independent auditors
and proxy statements that substantially comply with the Commission's proxy
rules. We intend to file our proxy statements with the Commission as part of or
as exhibits to reports under the Securities Exchange Act. We also intend to make
available quarterly reports containing condensed unaudited consolidated
financial information for each of the first three quarters of each fiscal year,
prepared in accordance with U.S. GAAP.
Although the rules of the Nasdaq National Market will require us to solicit
proxies from our shareholders, we will not be subject to the proxy solicitation
requirements of Section 14 of the Securities Exchange Act, and our officers,
directors and 10% beneficial owners will not be subject to the
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<PAGE> 83
beneficial ownership reporting requirements or the short-swing profits recovery
rules of Section 16 of the Securities Exchange Act.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell any of our common shares
and seeking offers to buy our common shares only in jurisdictions where offers
and sales are permitted. The information contained in this prospectus is
accurate only as of the date of this prospectus, regardless of the time of
delivery of this prospectus or any sale of the common shares.
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(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 85
FLONETWORK INC.
(FORMERLY MEDIA SYNERGY INC.)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF FLONETWORK INC.
(FORMERLY MEDIA SYNERGY INC.)
Report of Independent Chartered Accountants............... F-2
Consolidated Balance Sheets as at December 31, 1999 and
1998, and July 31, 1999 and 1998....................... F-3
Consolidated Statements of Operations for the five months
ended December 31, 1999 and 1998, and the years ended
July 31, 1999, 1998 and 1997........................... F-4
Consolidated Statements of Shareholders' Equity (Deficit)
for the five months ended December 31, 1999 and the
years ended July 31, 1999, 1998 and 1997............... F-5
Consolidated Statements of Cash Flows for the five months
ended December 31, 1999 and 1998 and the years ended
July 31, 1999, 1998 and 1997........................... F-6
Notes to Consolidated Financial Statements................ F-8
</TABLE>
F-1
<PAGE> 86
The foregoing report is in the form that will be signed upon the completion
of the reverse share split described in Note 13 and Note 8 to the financial
statements.
Arthur Andersen LLP
REPORT OF INDEPENDENT CHARTERED ACCOUNTANTS
To the Directors of
FloNetwork Inc.:
We have audited the consolidated balance sheets of FLONETWORK INC.
(formerly Media Synergy Inc., an Ontario corporation) as at July 31, 1998 and
1999 and December 31, 1999, and the consolidated statements of operations,
shareholders' equity (deficit), and cash flows for each of the three years ended
July 31, 1999 and for the five months ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the consolidated 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, these consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as at July 31, 1998 and 1999 and December 31, 1999, and the results of its
operations and its cash flows for each of the three years ended July 31, 1999
and for the five months ended December 31, 1999 in accordance with accounting
principles generally accepted in the United States of America.
Arthur Andersen LLP
(unsigned)
January 24, 2000 (except for Note 13 and Note 8
for which the date is , 2000).
Toronto, Canada.
F-2
<PAGE> 87
FLONETWORK INC.
(FORMERLY MEDIA SYNERGY INC.)
CONSOLIDATED BALANCE SHEETS
JULY 31, 1998 AND 1999 AND DECEMBER 31, 1999
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
JULY 31, DECEMBER 31, PRO FORMA
------------------------- ------------------------- DECEMBER 31,
1998 1999 1998 1999 1999
----------- ----------- ----------- ----------- ------------
(UNAUDITED)
(UNAUDITED) (NOTE 2)
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents...................... $ 347,559 $ 919,857 $ 1,518,567 $13,538,042 $57,031,708
Accounts receivable (Note 3)................... 94,143 264,819 45,053 922,346 922,346
Unbilled revenue............................... 1,837 49,427 41,669 -- --
Prepaid and other current assets............... 16,375 52,740 25,741 175,520 175,520
----------- ----------- ----------- ----------- -----------
Total Current Assets............................. 459,914 1,286,843 1,631,030 14,635,908 58,129,574
Restricted cash (Note 3)......................... -- -- -- 20,418 20,418
Deferred costs of issuing common shares (Note
4)............................................. -- -- -- 344,345 --
Property, plant and equipment, net (Note 3)...... 77,548 257,790 120,528 2,004,350 2,004,350
----------- ----------- ----------- ----------- -----------
Total Assets..................................... $ 537,462 $ 1,544,633 $ 1,751,558 $17,005,021 $60,154,342
=========== =========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
Current Liabilities
Loan payable (Note 5).......................... $ 661,400 $ -- $ -- $ -- $ --
Accounts payable and accrued liabilities (Note
3)........................................... 273,485 318,722 247,475 2,023,885 1,679,540
Deferred revenue............................... 18,986 147,561 10,090 105,018 105,018
Due to shareholder (Note 10)................... 44,285 44,285 44,285 -- --
----------- ----------- ----------- ----------- -----------
Total Liabilities................................ 998,156 510,568 301,850 2,128,903 1,784,558
----------- ----------- ----------- ----------- -----------
Redeemable convertible Class A preferred shares,
authorized -- unlimited; issued and outstanding
shares -- 550,000 at December 31, 1999 (Note
7)............................................. -- 1,124,647 895,713 1,369,228 --
----------- ----------- ----------- ----------- -----------
Shareholders' Equity (Deficit) (Note 8)
Class B cumulative, convertible preferred
shares, authorized -- unlimited; issued and
outstanding shares -- 8,640 000.............. 720,419 756,456 735,235 772,215 --
Class C convertible preferred shares,
authorized -- unlimited; issued and
outstanding shares -- 2,650,423 at December
31, 1999..................................... -- -- -- 1,002,748 --
Class D convertible preferred shares,
authorized -- unlimited; issued and
outstanding shares -- 12,033,983, at December
31, 1999..................................... -- -- -- 14,900,000 --
Common shares, authorized -- unlimited; issued
and outstanding shares -- 6,212,973 at
December 31, 1999, 3,672,000 at July 31,
1999, December 31, 1998 and July 31, 1998.... 72 72 72 2,765,532 66,743,026
Additional paid in capital..................... -- 2,763,483 1,767,633 933,193 933,193
Unearned share-based compensation.............. -- -- -- (872,058) (872,058)
----------- -----------
Accumulated deficit............................ (1,181,185) (3,610,593) (1,948,945) (5,994,740) (8,434,376)
----------- ----------- ----------- ----------- -----------
Total Shareholders' Equity (Deficit)............. (460,694) (90,582) 553,995 13,506,890 58,369,784
----------- ----------- ----------- ----------- -----------
Total Liabilities and Shareholders' Equity
(Deficit)...................................... $ 537,462 $ 1,544,633 $ 1,751,558 $17,005,021 $60,154,342
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-3
<PAGE> 88
FLONETWORK INC.
(FORMERLY MEDIA SYNERGY INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31, 1997, 1998 AND 1999
AND THE FIVE MONTHS ENDED DECEMBER 31, 1999
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED FIVE MONTHS ENDED
JULY 31, DECEMBER 31,
------------------------------------- -------------------------
1997 1998 1999 1998 1999
---------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
E-mail service revenue........... $ -- $ 13,798 $ 431,097 $ 93,402 $ 1,193,429
License and software revenue..... 1,154,536 734,501 346,339 128,436 2,389
---------- ---------- ----------- ---------- -----------
1,154,536 748,299 777,436 221,838 1,195,818
E-mail service cost of revenues.... -- -- 331,034 82,089 741,086
---------- ---------- ----------- ---------- -----------
Gross Margin....................... 1,154,536 748,299 446,402 139,749 454,732
Operating Expenses:
Sales and marketing.............. 647,032 579,794 1,110,511 347,845 1,444,208
General and administrative....... 381,307 387,725 673,947 210,420 583,218
Research and development......... 277,921 559,549 812,840 298,978 540,001
Share-based compensation......... -- -- -- -- 61,135
---------- ---------- ----------- ---------- -----------
Total Operating Expenses........... 1,306,260 1,527,068 2,597,298 857,243 2,628,562
---------- ---------- ----------- ---------- -----------
Loss from Operations............... (151,724) (778,769) (2,150,896) (717,494) (2,173,830)
Interest income, net............... 4,485 4,020 26,323 4,414 70,019
---------- ---------- ----------- ---------- -----------
Loss before income taxes........... (147,239) (774,749) (2,124,573) (713,080) (2,103,811)
Provision for income taxes......... -- -- -- -- (19,996)
---------- ---------- ----------- ---------- -----------
NET LOSS for the period............ $ (147,239) $ (774,749) $(2,124,573) $ (713,080) $(2,123,807)
========== ========== =========== ========== ===========
Accretion of redeemable,
convertible Class A preferred
shares to liquidation value
(Note 7)...................... $ -- $ -- $ (268,798) $ (39,864) $ (244,581)
Convertible Class B preferred
shares dividends (Note 8)..... (27,401) (36,193) (36,037) (14,816) (15,759)
---------- ---------- ----------- ---------- -----------
Net loss attributable to common
shareholders..................... $ (174,640) $ (810,942) $(2,429,408) $ (767,760) $(2,384,147)
========== ========== =========== ========== ===========
Net loss per common share:
Basic and Diluted................ $ (0.05) $ (0.22) $ (0.66) $ (0.21) $ (0.58)
========== ========== =========== ========== ===========
Weighted average common shares
outstanding...................... 3,672,000 3,672,000 3,672,000 3,672,000 4,079,204
Pro forma net loss per common share
basic and diluted (Note 2)....... $ (0.65) $ (0.25)
=========== ===========
Pro forma weighted average common
shares outstanding (Note 2)...... 7,533,203 8,542,962
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4
<PAGE> 89
FLONETWORK INC.
(FORMERLY MEDIA SYNERGY INC.)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JULY 31, 1997, 1998 AND 1999 AND FOR
THE FIVE MONTHS ENDED DECEMBER 31, 1999
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
COMMON SHARES
UNEARNED ADDITIONAL PREFERRED SHARES ------------------------
SHARE-BASED PAID IN ------------------------ (NOTE 8)
COMPENSATION CAPITAL SHARES AMOUNT SHARES AMOUNT (DEFICIT)
------------ ----------- ---------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 31, 1996............. $ $ $ 3,672,000 $ 72 $ (195,603)
Issuance of Class B preferred
shares, net of issuance costs of
$63,175.......................... 8,640,000 656,825
Class B preferred shares
dividends........................ 27,401 (27,401)
Net loss........................... (147,239)
--------- ----------- ---------- ----------- ----------- ---------- -----------
Balance, July 31, 1997............. 8,640,000 684,226 3,672,000 72 (370,243)
Class B preferred shares
dividends........................ 36,193 (36,193)
Net loss........................... (774,749)
--------- ----------- ---------- ----------- ----------- ---------- -----------
Balance, July 31, 1998............. 8,640,000 720,419 3,672,000 72 (1,181,185)
Issuance of 12,356,641 warrants
with redeemable, convertible
Class A preferred shares (Note
8)............................... 2,763,483
Accretion of Class A preferred
shares to liquidation value...... (268,798)
Class B preferred shares
dividends........................ 36,037 (36,037)
Net loss........................... (2,124,573)
--------- ----------- ---------- ----------- ----------- ---------- -----------
Balance, July 31, 1999............. 2,763,483 8,640,000 756,456 3,672,000 72 (3,610,593)
Issuance of Class C preferred
shares, net of issuance costs of
$50,000 (Note 8)................. 2,650,423 1,002,748
Issuance of Class D preferred
shares, net of issuance costs of
$100,000 (Note 8)................ 12,033,983 14,900,000
Exercise of 12,356,641 Class A
warrants......................... (2,763,483) 2,471,329 2,764,348
Accretion of Class A preferred
shares to liquidation value...... (244,581)
Class B preferred shares
dividends........................ 15,759 (15,759)
Exercise of employee stock
options.......................... 69,644 1,112
Unearned share-based
compensation..................... (933,193) 933,193
Amortization of share-based
compensation (Note 8)............ 61,135
Net loss........................... (2,123,807)
--------- ----------- ---------- ----------- ----------- ---------- -----------
Balance, December 31, 1999......... $(872,058) $ 933,193 23,324,406 $16,674,963 6,212,973 $2,765,532 $(5,994,740)
========= =========== ========== =========== =========== ========== ===========
<CAPTION>
TOTAL
-----------
<S> <C>
Balance, July 31, 1996............. $ (195,531)
Issuance of Class B preferred
shares, net of issuance costs of
$63,175.......................... 656,825
Class B preferred shares
dividends........................ --
Net loss........................... (147,239)
-----------
Balance, July 31, 1997............. 314,055
Class B preferred shares
dividends........................ --
Net loss........................... (774,749)
-----------
Balance, July 31, 1998............. (460,694)
Issuance of 12,356,641 warrants
with redeemable, convertible
Class A preferred shares (Note
8)............................... 2,763,483
Accretion of Class A preferred
shares to liquidation value...... (268,798)
Class B preferred shares
dividends........................ --
Net loss........................... (2,124,573)
-----------
Balance, July 31, 1999............. (90,582)
Issuance of Class C preferred
shares, net of issuance costs of
$50,000 (Note 8)................. 1,002,748
Issuance of Class D preferred
shares, net of issuance costs of
$100,000 (Note 8)................ 14,900,000
Exercise of 12,356,641 Class A
warrants......................... 865
Accretion of Class A preferred
shares to liquidation value...... (244,581)
Class B preferred shares
dividends........................ --
Exercise of employee stock
options.......................... 1,112
Unearned share-based
compensation..................... --
Amortization of share-based
compensation (Note 8)............ 61,135
Net loss........................... (2,123,807)
-----------
Balance, December 31, 1999......... $13,506,890
===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-5
<PAGE> 90
FLONETWORK INC.
(FORMERLY MEDIA SYNERGY INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1997, 1998 AND 1999 AND
THE FIVE MONTHS ENDED DECEMBER 31, 1999
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED FIVE MONTHS ENDED
JULY 31, DECEMBER 31,
------------------------------------- -------------------------
1997 1998 1999 1998 1999
--------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operations:
Net loss for the period................ $(147,239) $(774,749) $(2,124,573) $ (713,080) $(2,123,807)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization....... 9,465 15,802 37,093 9,993 166,856
Share-based compensation............ -- -- -- -- 61,135
Changes in non-cash working capital
items............................... (208,304) 310,836 (80,819) (35,014) 587,395
--------- --------- ----------- ---------- -----------
Net cash used in operating
activities..................... (346,078) (448,111) (2,168,299) (738,101) (1,308,421)
--------- --------- ----------- ---------- -----------
Cash flows from investing activities:
Purchase of property, plant and
equipment........................... (45,981) (46,460) (217,335) (52,973) (1,913,416)
--------- --------- ----------- ---------- -----------
Net cash used in investing
activities..................... (45,981) (46,460) (217,335) (52,973) (1,913,416)
--------- --------- ----------- ---------- -----------
Cash flows from financing activities:
Proceeds from issuance of Class A
redeemable, convertible preferred
shares and warrants................. -- -- 2,763,502 1,962,082 --
Proceeds from issuance of Class B
cumulative, convertible preferred
shares.............................. 656,825 -- -- -- --
Proceeds from issuance of Class C
convertible preferred shares........ -- -- -- -- 1,002,748
Proceeds from issuance of Class D
convertible preferred shares........ -- -- -- -- 14,900,000
Proceeds from exercise of Class A
warrants............................ -- -- -- 865
Proceeds from exercise of employee
stock options....................... -- -- -- -- 1,112
Repayment of amount due to
shareholder......................... (52,306) (61,891) -- -- (44,285)
Proceeds from loan payable............. -- 661,400 194,430 -- --
--------- --------- ----------- ---------- -----------
Net cash provided by financing
activities..................... 604,519 599,509 2,957,932 1,962,082 15,860,440
--------- --------- ----------- ---------- -----------
</TABLE>
F-6
<PAGE> 91
<TABLE>
<CAPTION>
YEARS ENDED FIVE MONTHS ENDED
JULY 31, DECEMBER 31,
------------------------------------- -------------------------
1997 1998 1999 1998 1999
--------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCREASE IN CASH AND CASH EQUIVALENTS.... 212,460 104,938 572,298 1,171,008 12,638,603
CASH AND CASH EQUIVALENTS, beginning of
period................................. 30,161 242,621 347,559 347,559 919,857
--------- --------- ----------- ---------- -----------
CASH AND CASH EQUIVALENTS, end of
period................................. $ 242,621 $ 347,559 $ 919,857 $1,518,567 $13,558,460
========= ========= =========== ========== ===========
SUPPLEMENTAL INFORMATION
Interest paid.......................... $ -- $ -- $ -- $ -- $ --
Income taxes paid...................... $ -- $ -- $ -- $ -- $ (19,996)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 92
FLONETWORK INC.
(FORMERLY MEDIA SYNERGY INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN U.S. DOLLARS)
1. NATURE OF BUSINESS
FloNetwork Inc. (the "Company") was incorporated in Toronto, Ontario in
August 1993 under the name Media Synergy Inc. In November 1999, the Company
changed its name to FloNetwork Inc. Initially its main business was the
development, sale and licensing of multimedia consumer software products. During
1997, the Company identified the opportunity for e-mail to be used on a broader
basis by businesses for e-mail messaging solutions. As a result, in 1997, the
Company began developing an e-mail messaging software application, which would
allow businesses to use e-mail to market to and communicate with their
customers. The Company completed the development of version 1.0 of the software
for this business in November 1998. In January 1999, the Company adopted a
business strategy to offer the software on a hosted basis and focused its
efforts on developing and implementing the infrastructure and network required
to deliver high-volume, targeted and personalized e-mail messages to
permission-based e-mail lists. In addition, the Company began to discontinue the
development, sale and licensing of its multimedia consumer software products to
enable it to focus exclusively on the development of its e-mail messaging
solutions business.
The Company is subject to risks common to rapidly growing technology-based
companies, including a limited operating history, dependence on key personnel,
the need to raise capital, managing rapid growth and technological change,
competition from other service providers, and the need for successful
development and marketing of services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CHANGE OF YEAR END
On December 15, 1999, the Company's Board of Directors approved the change
in its fiscal year end from July 31 to December 31. The change was effective for
the five month period ended December 31, 1999.
UNAUDITED COMPARATIVE RESULTS
The accompanying consolidated balance sheet as at December 31, 1998, and
the consolidated statements of operations, and cash flows for the five months
ended December 31, 1998 are unaudited. The unaudited comparative statements have
been prepared on the same basis as the annual financial statements and, in the
opinion of management, reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the Company's financial
position and its results of operations and its cash flows for the five months
ended December 31, 1998. The financial data and other information disclosed in
these notes to financial statements related to this period are unaudited.
PRINCIPLES OF CONSOLIDATION
These consolidated statements have been prepared by management in
accordance with accounting principles generally accepted in the United States of
America ("U.S. GAAP") and include the accounts of FloNetwork Inc., and its
wholly owned subsidiary, FloNetwork US Inc. All significant inter-company
accounts and transactions have been eliminated.
F-8
<PAGE> 93
FLONETWORK INC.
(FORMERLY MEDIA SYNERGY INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN U.S. DOLLARS)
USE OF ESTIMATES
The preparation of consolidated financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingencies at the date of the consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company generates revenue from the sale of e-mail messaging services
and typically charges an annual program fee and a variable fee based on the
number of e-mail messages delivered. The annual program fee is recognized evenly
over the term of the contract and the variable fee is recognized as the e-mail
message is delivered. The Company also enters into contractual arrangements with
certain customers to provide e-mail messaging services for a fixed fee which is
invoiced and recognized monthly.
Revenue for integration and development services are recognized upon the
completion of the services, provided there are no remaining significant
obligations and collection of the resulting receivable is probable.
Revenues that have been prepaid or invoiced but do not yet qualify for
recognition under the Company's policies are reflected as deferred revenue.
In October, 1997, the American Institute of Certified Public Accountants
("AICPA") issued SOP 97-2, Software Revenue Recognition, which supercedes SOP
91-1 and is effective for transactions entered into for fiscal years beginning
after December 15, 1997. The Company adopted the provisions of SOP 97-2 for the
year commencing August, 1997. The adoption of SOP 97-2 did not have an impact on
the Company's policy or the results of operation or financial position.
The Company ceased the selling and licensing of its consumer multimedia
software product during the year ended July 31, 1999. The Company previously
recognized sales of its consumer multimedia software as follows:
Software license revenues were recognized upon execution of a contract and
delivery of software, provided that the license fee was fixed and determinable,
no significant production, modification or customization of the software was
required and collection was considered probable by management.
Software license revenues under arrangements which included significant
production, modification or customization of software were recognized under the
percentage of completion method of accounting.
Royalty revenues from licensing agreements containing minimum purchase
clauses were recognized when the product master copy of the software was shipped
or when the Company fulfilled its obligations in accordance with such
agreements. Royalty revenues relating to purchases in excess of the minimum
requirements were recognized as the software was sold by the licensee.
F-9
<PAGE> 94
FLONETWORK INC.
(FORMERLY MEDIA SYNERGY INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN U.S. DOLLARS)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of less than 90 days to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure
About Fair Value of Financial Instruments", requires disclosure concerning the
estimated fair values of certain financial instruments. Financial instruments
consist primarily of cash and cash equivalents, accounts receivable, accounts
payable and accrued liabilities. The carrying amounts of these financial
instruments approximate fair value based on their liquidity or based on their
short-term nature. Financial instruments also include redeemable, convertible
Class A preferred shares. Due to the uncertainty surrounding the actual date
that the redeemable, convertible Class A preferred shares may be redeemed, in
addition to the actual terms of redemption, it is not practical to determine the
fair value of this financial instrument.
CONCENTRATION OF CREDIT RISK
SFAS No. 105, "Disclosure of Information About Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk", requires disclosure of any significant off-balance sheet risk and credit
risk concentrations.
The Company has no significant off-balance sheet concentration of credit
risk such as foreign exchange contracts, option contracts or other foreign
currency hedging arrangements.
Financial instruments that potentially subject the Company to a
concentration of credit risk consist primarily of accounts receivable.
Concentration of credit risk with respect to accounts receivable is limited to
certain customers to whom the Company makes substantial sales. During the five
month period ended December 31, 1999, two customers accounted for 27.5% of the
Company's revenue. During the five month period ended December 31, 1998, two
customers accounted for 52.6% of the Company's revenue. During the fiscal year
ended July 31, 1999, three customers accounted for 41.2% of the Company's
revenue. During the fiscal year ended July 31, 1998, two customers accounted for
61.0% of the Company's revenue.
The Company is exposed to foreign exchange risk in that the Company enters
into sales contracts with certain customers in Canadian dollars. The Company has
not entered into any foreign exchange contracts, option contracts or other
foreign currency hedging arrangements.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company and its subsidiary is the U.S.
dollar. Assets and liabilities denominated in other currencies are translated
using the exchange rates prevailing at the balance sheet date. Revenues and
expenses are translated using average exchange rates prevailing during the
period. Gains and losses on foreign currency transactions are recorded in the
consolidated statements of operations.
F-10
<PAGE> 95
FLONETWORK INC.
(FORMERLY MEDIA SYNERGY INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN U.S. DOLLARS)
DEFERRED COSTS OF ISSUING COMMON SHARES
The Company defers costs directly attributable to a proposed offering of
securities which would then be deducted from the gross proceeds of the offering.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation and
amortization are provided using the following annual rates:
<TABLE>
<S> <C>
Computer software................................. 100% declining balance
Computer equipment................................ 30% declining balance
Furniture and fixtures............................ 20% declining balance
Leasehold improvements............................ Term of lease
</TABLE>
The Company makes reviews for the impairment of long-lived assets to
determine whether any impairment of these assets has occurred. In accordance
with SFAS No. 121, an impairment loss would be recognized when estimates of
future cash flows expected to result from the use of an asset and its eventual
disposition are less than its carrying amount. No such impairment losses have
been identified by the Company to date.
SOFTWARE DEVELOPMENT COSTS
Under SFAS No. 86, "Accounting for the Costs of Computer Software to Be
Sold, Leased, or Otherwise Marketed", capitalization of computer software
development costs is to begin upon the establishment of technological
feasibility, limited to the net realizable value of the software product, and
cease when the software product is available for general release to customers.
Amortization is to be computed on each product based upon the greater of the
amount computed on units sold basis (ratio of gross product revenue to
anticipated future gross revenue for that product) or straight-line basis over
the remaining estimated economic life of the product. Costs of maintenance and
customer support are to be charged to expense when related revenue is recognized
or when those costs are incurred, whichever occurs first.
The Company incurs software development costs. The Company has determined
that technological feasibility occurs late in the development cycle and close to
general release of the products. The development costs incurred between the time
technological feasibility is established and general release of the product are
not material; accordingly, the Company expenses these costs as incurred.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed as incurred.
F-11
<PAGE> 96
FLONETWORK INC.
(FORMERLY MEDIA SYNERGY INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN U.S. DOLLARS)
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS 109,
"Accounting for Income Taxes". Under SFAS No. 109, deferred tax assets and
liabilities are determined based on temporary differences between the financial
statement and tax bases of assets and liabilities and net operating loss and
credit carryforwards using enacted tax rates in effect for the year in which the
differences are expected to reverse. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
A provision for income tax expense is recognized for the taxes payable for the
current period, plus the net changes in deferred income tax.
ACCOUNTING FOR SHARE-BASED COMPENSATION
The Company's employee stock option plan is accounted for in accordance
with the provisions of Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees" and complies with the disclosure
provisions required under SFAS 123, "Accounting for Stock-Based Compensation."
PRO FORMA CONSOLIDATED BALANCE SHEET DECEMBER 31, 1999 (UNAUDITED)
Upon completion of an Initial Public Offering ("IPO"), the Company's Class
A Preferred shares will be converted at their redemption value, on the basis
described in Note 7. The Company's Class B, C and D Preferred shares will
convert on a one-for-one basis (post reverse split are convertible into 1/5 of a
common share) into shares of the Company's common shares. Holders of the
warrants (Note 8) and option (Note 8) have served notice to the Company of their
intent to exercise and convert their respective securities into common shares.
These conversions and the IPO have been reflected in the pro forma consolidated
balance sheet.
After the conversion of the preferred shares and exercise of the warrants
and options, the common shares will be the only class of shares of the Company
outstanding.
NET LOSS PER COMMON SHARE
Basic net loss per share is computed by dividing net loss available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted net loss per share is computed by giving effect to all
dilutive securities convertible into common shares, including options, warrants
and preferred shares. Options, warrants and preferred shares were not included
in the computation of diluted net loss per share for the periods presented, as
the effect would be anti-dilutive.
PRO FORMA NET LOSS PER SHARE (UNAUDITED)
Pro forma net loss per share is computed using the weighted average number
of common shares outstanding, including the pro forma effects of the conversions
of the Company's Class A, B, C, and D Preferred Shares, and the exercise of
warrants and options, effective upon the closing of the Company's IPO, as if
such conversions occurred on August 1, 1998, or the date of issuance of the
preferred shares if later.
F-12
<PAGE> 97
FLONETWORK INC.
(FORMERLY MEDIA SYNERGY INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN U.S. DOLLARS)
The following table sets forth the computation of basic and diluted
historical and pro forma loss per share:
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
YEAR ENDED JULY 31, DECEMBER 31,
------------------------------------- -------------------------
1997 1998 1999 1998 1999
---------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
HISTORICAL
Net loss attributable to common
shareholders(A).................. $ (174,640) $ (810,942) $(2,429,408) $ (767,760) $(2,384,147)
Weighted average number of common
shares(B)........................ 3,672,000 3,672,000 3,672,000 3,672,000 4,079,204
---------- ---------- ----------- ---------- -----------
Loss per common share:
Basic and diluted(A/B)........... $ (0.05) $ (0.22) $ (0.66) $ (0.21) $ (0.58)
========== ========== =========== ========== ===========
PRO FORMA
Net loss attributable to common
shareholders..................... $(2,429,408) $(2,384,147)
Add: Class B preferred dividends... 36,037 15,759
Add: Accretion of Class A preferred
shares to liquidation value
charged in period................ 268,798 244,581
Less: Accretion of unamortized
discount on Class A preferred
shares to liquidation value...... $(2,795,601)
----------- -----------
Pro forma net loss attributable to
common shareholders(A)........... $(4,920,174) $(2,123,807)
=========== ===========
Pro forma weighted average number
of common shares(B).............. 7,533,203 8,542,962
----------- -----------
Pro forma loss per common share:
Basic and diluted(A/B)........... $ (0.65) $ (0.25)
=========== ===========
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Standards Accounting Board ("FASB") issued SFAS
No. 130, "Reporting of Comprehensive Income". SFAS No. 130 requires disclosure
of all components of comprehensive income on an annual and interim basis.
Comprehensive income is defined as the change in shareholders' equity (deficit)
of a business enterprise during a period from transactions and other events and
circumstances from non-owner sources. The Company adopted SFAS No. 130 effective
June 1997. For the years ending July 31, 1997, 1998, and 1999 and for the five
month period ending
F-13
<PAGE> 98
FLONETWORK INC.
(FORMERLY MEDIA SYNERGY INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN U.S. DOLLARS)
December 31, 1999 there were no differences between the net loss reported during
the fiscal periods and the comprehensive loss for the period.
In March 1998, the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position No 98-1, or SOP 98-1, "Software for Internal Use"
which provides guidance on accounting for the cost of computer software
developed or obtained for internal use. SOP 98-1 is effective for financial
statements for fiscal years beginning after December 15, 1998. The adoption of
SOP 98-1 did not have a material impact on the Company's financial statements.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes new standards of
accounting and reporting for derivative instruments and hedging activities. SFAS
No. 133 requires that all derivatives be recognized at fair value in the
statement of financial position, and that the corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income, depending on the type of hedging relationship that exists.
SFAS No. 133 will be effective for fiscal years beginning after June 15, 2000.
The Company does not currently hold derivative instruments or engage in hedging
activities.
3. FINANCIAL STATEMENT COMPONENTS
CASH AND CASH EQUIVALENTS
The Company has entered into lease agreements for some of its computer
hardware and software. The lessor has required that $20,418 be held by the bank
as letters of credit.
ACCOUNTS RECEIVABLE
Accounts receivable are net of an allowance for doubtful accounts of
$29,575 and $24,799 at July 31, 1998 and 1999, and $4,838 and $23,255 at
December 31, 1998 and 1999, respectively.
PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
---------------------
JULY 31, DECEMBER 31,
---------------------- ---------------------
1998 1999 1998 1999
-------- ----------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Computer equipment and software................ $ 69,136 $265,682 $112,637 $1,785,662
Furniture and fixtures......................... 25,240 44,308 34,225 154,497
Leasehold improvements......................... 13,807 15,528 14,294 298,775
-------- -------- -------- ----------
108,183 325,518 161,156 2,238,934
Accumulated depreciation and amortization...... (30,635) (67,728) (40,628) (234,584)
-------- -------- -------- ----------
Net book value................................. $ 77,548 $257,790 $120,528 $2,004,350
======== ======== ======== ==========
</TABLE>
F-14
<PAGE> 99
FLONETWORK INC.
(FORMERLY MEDIA SYNERGY INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN U.S. DOLLARS)
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
------------------------
JULY 31, DECEMBER 31,
------------------- ------------------------
1998 1999 1998 1999
-------- -------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Accounts payable............................... $131,751 $161,534 $ 99,624 $1,151,423
Accrued compensation........................... 49,008 93,601 14,054 340,388
Other accrued liabilities...................... 92,726 63,587 133,797 532,074
-------- -------- -------- ----------
$273,485 $318,722 $247,475 $2,023,885
======== ======== ======== ==========
</TABLE>
FOREIGN CURRENCY
Included in operating expenses are gains (losses) on foreign currency
transactions. For the year ended July 31, 1997, 1998 and 1999, gains (losses)
were ($12,805), $32,857 and ($19,618), respectively. For the five months ended
December 31, 1998 and 1999, gains (losses) were $(43,538) and $97,321,
respectively.
4. DEFERRED COSTS OF ISSUING COMMON SHARES
At December 31, 1999, the Company has incurred professional fees of
$344,345 in connection with a proposed offering of common shares.
5. LOAN PAYABLE
On March 30, 1998, the Company issued a term promissory note, convertible
into common shares, at a price equal to CDN $1.11 for each common share, or at
the price per share at which common shares are issued and sold pursuant to a
private placement, resulting in gross proceeds of $661,400. Additional term
promissory notes were issued in October 1998, with proceeds of $194,430 received
by the Company. The notes bear interest at CDN prime plus 2%, beginning at the
earliest of April 1999 or when the Company is deemed to be in default of the
loans. On November 20, 1998, the loans, under a new financing agreement, were
converted to redeemable, convertible Class A preferred shares (see Note 7), and
are included as part of the proceeds of $3,651,450 from the November 20, 1998
private placement of redeemable, convertible Class A preferred shares.
6. COMMITMENTS
OPERATING LEASES
The Company leases office facilities under operating leases which generally
require the Company to pay a share of operating costs, including property taxes,
insurance and maintenance. Rent expense totaled approximately $26,590, $53,831
and $69,958 in the years ended July 31, 1997, 1998 and 1999, respectively. Rent
expense totaled approximately $25,928 and $63,889 in the five month periods
ended December 31, 1998 and 1999, respectively.
F-15
<PAGE> 100
FLONETWORK INC.
(FORMERLY MEDIA SYNERGY INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN U.S. DOLLARS)
Future minimum operating lease payments for facilities and equipment for
the years ending December 31 pursuant to leases outstanding as at December 31,
1999 are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 607,410
2001........................................................ 375,692
2002........................................................ 157,000
2003........................................................ 78,477
2004........................................................ 61,350
----------
$1,279,929
==========
</TABLE>
7. REDEEMABLE CONVERTIBLE CLASS A PREFERRED SHARES
In November 1998, the Company exchanged the issued and outstanding Class A
preferred shares for Class B preferred shares on a one for one basis, and
amended its articles of incorporation to cancel the authorized class of Class A
preferred shares. The Class B preferred shares are entitled to similar rights as
the prior Class A preferred shares. In addition, a new class of unlimited
redeemable, convertible Class A preferred shares were authorized. This share
exchange has been applied retroactively for all periods presented.
Immediately subsequent to the above transactions, the Company completed a
private placement, in two closes, for total proceeds of $3,651,450 whereby
550,000 of the new redeemable, convertible Class A preferred shares were issued.
The first close of the financing took place in November 1998 for proceeds of
$2,655,600 and the second close took place in June 1999 for proceeds of
$995,850. Total issuance costs of $32,118 were incurred and charged against the
redeemable, convertible Class A preferred share account.
The redeemable, convertible Class A preferred shares are redeemable at the
option of the holder at the earlier of November 19, 2003 or at the time of
completion of an Initial Public Offering ("IPO"). If an IPO is completed, and,
if in the opinion of the lead underwriter of the IPO, cash redemption is not in
the best interests of the Company, the Class A preferred shares will be
converted to common shares. The number of common shares issuable on conversion
will be equal to CDN $5,500,000 divided by the IPO common share issue price.
In connection with the private placement, the Company issued warrants to
purchase 2,471,329 common shares for CDN $0.0005 per share. The fair value of
the warrants at the time of issuance was CDN $1.85 per warrant. During the year
ended December 31, 1999 all Class A warrants were exercised. (See Note 8).
The net proceeds of the private placement have been allocated to the
warrants (as additional paid in capital) based on the excess of the fair value
at the date of issuance of the warrants over the exercise price of the warrants.
The $855,849 allocated to the Class A preferred shares is the excess of proceeds
over the amount allocated to the warrants (see Note 8 for the allocation to the
warrants). The Class A preferred shares, if redeemed, are redeemable at CDN $10
per share or a total redemption value of
F-16
<PAGE> 101
FLONETWORK INC.
(FORMERLY MEDIA SYNERGY INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN U.S. DOLLARS)
CDN $5,500,000 (U.S. equivalent of $3,651,450 at July 31, 1999 and $3,736,150 at
December 31, 1999).
The discount on the Class A preferred shares is being amortized over their
term, to the fixed date of redemption, November 19, 2003. As at July 31, 1999,
$268,798 had been amortized. As at December 31, 1999, $513,379 had been
amortized.
8. SHAREHOLDERS' CAPITAL
SHARE SPLITS
Share information for all periods has been retroactively restated to
reflect the following:
- 61,200-for-1 common share split on its then issued 100 common shares
effected November 12, 1996, resulting in 6,120,000 common shares
outstanding;
- 3-for-1 preferred and common share split effected July 30, 1997, on its
then issued 2,880,000 Class A preference shares and 6,120,000 common
shares, resulting in 18,360,000 common shares and 8,640,000 Class A
preference shares;
- 1-for-5 reverse common share split on its then issued 18,360,000 common
shares, warrants and options or rights to acquire common shares which was
declared and approved by the Company's Board of Directors on December 15,
1999 to be effective prior to the effective date of the Company's IPO. In
connection with the reverse common share split, the conversion ratio of
the Class A, B, C, and D preferred shares was adjusted accordingly, and
upon completion of an IPO, each preferred share is convertible into 1/5
of a common share.
On November 20, 1998 the Company exchanged the 8,640,000 issued and
outstanding Class A preference shares, for 8,640,000 Class B preferred shares
(See Note 7).
CLASS B PREFERRED SHARES
The Class B preferred shares are voting, convertible on a share for share
basis into common shares (post reverse share split are convertible into 1/5 of a
common share) and are entitled to cumulative dividends at a rate of 5% per annum
of the stated capital of the Class B preferred shares. Upon completion of an
IPO, the Class B preferred shares are deemed to have been converted into common
shares.
Included in the balance attributed to Class B preferred shares are arrears
of cumulative dividends of $63,594 and $99,631, at July 31, 1998 and 1999 and
$78,410 and $115,390, at December 31, 1998 and 1999 respectively.
CLASS C PREFERRED SHARES
On September 15, 1999, the Company amended its articles of incorporation to
create an unlimited number of voting, convertible Class C preferred shares. The
Company issued 2,650,423 Class C preferred shares to one of its major customers
for $0.3972 per share (fair value at date of issuance) for total cash proceeds
of $1,052,748. Each Class C preferred share is convertible into common shares on
a
F-17
<PAGE> 102
FLONETWORK INC.
(FORMERLY MEDIA SYNERGY INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN U.S. DOLLARS)
share for share basis (post reverse share split are convertible into 1/5 of a
common share) and subject to an adjustment for dilution that may occur from
future equity transactions. The convertible Class C preferred shares convert
automatically to common shares in the event of an IPO.
As a part of this financing, the above shareholder was granted an option to
purchase common shares equal to 5% of all the issued and outstanding common
shares on a fully diluted basis. The exercise price for the options was to be
determined based on the subsequent equity financing yielding a minimum of
$2,000,000 in proceeds. As of result of the Class D financing described below,
the exercise price was determined to be $6.23235 per common share (post reverse
share split). The option expires at the earliest of: (i) September 15, 2001;
(ii) 30 days following the completion of an IPO; or (iii) 90 days after
termination or expiration of the e-mail services agreement entered into between
the Company and the shareholder.
CLASS D PREFERRED SHARES
On November 24, 1999, the Company amended its articles of incorporation to
create an unlimited number of voting, convertible Class D preferred shares. The
Company issued 12,033,983 convertible Class D preferred shares and 2,406,794
warrants entitling the holder to purchase one half of a common share at a price
of $0.05 per common share for total proceeds of $15,000,000. The warrants become
exercisable on December 31, 2000 and expire the earliest of (i) December, 31,
2005; (ii) the date of completion of an IPO; or (iii) the date the current
shareholders of the Company cease to hold a majority of the voting rights as a
result of a merger, acquisition or similar transaction. The holders of
convertible Class D preferred shares are entitled to receive cash dividends, if
declared by the Board of Directors, at the rate of $0.124647 per share per
annum.
The Class D preferred shares convert automatically to common shares: (i)
upon the consent of a majority of the outstanding Class D preferred
shareholders, at any time; or (ii) upon the completion of an underwritten public
offering that is priced so as to reflect a valuation of the Company of not less
than $125,000,000 and results in gross proceeds to the Company of not less than
$20,000,000 in cash. Each convertible Class D preferred share is convertible
into common shares on a share for share basis (post reverse share split are
convertible into 1/5 of a common share) and subject to adjustment for dilution
that may occur from future equity transactions.
All proceeds from the sale and issuance of Class D (preferred shares and
warrants) have been allocated to the Class D preferred shares. The units have
been recorded at fair value as preferred shares with a stated value of
$14,900,000 (net of issuance costs of $100,000) on the balance sheet with no
separate allocation of fair value between each security.
WARRANTS
On November 12, 1996, as part of a private placement of Class B preferred
shares, the Company granted certain rights to an Investor. These rights entitled
the Investor to be paid a 40% annual compound rate of return on its investment
in the event of a change in control, other than by way of a prospectus offering.
F-18
<PAGE> 103
FLONETWORK INC.
(FORMERLY MEDIA SYNERGY INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN U.S. DOLLARS)
On November 20, 1998, as part of a private placement of Class A preferred
shares, the 40% annual compound rate of return, given as part of the Class B
financing, was given up as a condition to closing the Class A financing. In
exchange for giving up these rights, the Company issued warrants entitling the
Investor to purchase 400,000 common shares. The issuance of these warrants was
intended to replace rights granted as of November 1996 and as such were deemed
to have been granted as of November 1996. The exercise price of CDN $0.60 for
the warrants was equal to the fair value of the Company's shares at November
1996. The warrants are exercisable at any time until the earlier of November 20,
2003 or at the time of completion of an IPO.
In connection with the issuance of a term promissory note on March 30,
1998, the Company issued warrants entitling the holder to purchase 400,000
common shares, exercisable at any time until the earlier of March 30, 2001 or on
completion of an IPO. The exercise price of the warrants was initially set at
CDN $1.11 per common share. However, in the event a private placement was
completed prior to March 30, 1999, the exercise price of the warrants would be
adjusted to equal the price per share of such private placement. On November 20,
1998, the Company completed a private placement of its Class A preferred shares.
As a result, the Company cancelled the outstanding warrants granted on March 30,
1998 and replaced them with warrants entitling the holder to purchase 400,000
common shares at an exercise price of CDN $1.85 per common share (based on the
fair value of the common shares at the date of issue). The warrants are
exercisable at any time until the earlier of March 30, 2001 or on completion of
an IPO.
In connection with the issuance of redeemable, convertible Class A
preferred shares, the Company issued 2,471,329 warrants entitling the holder to
purchase an aggregate of 2,471,329 common shares. Each warrant entitles the
holder to purchase one common share. On November 20, 1998, the Company issued
1,439,578 warrants and on June 30, 1999, the Company issued the remaining
1,031,751 warrants. The warrants are exercisable at any time until the earlier
of five years from the date of issuance, or any time until 30 days following the
completion of an Initial Public Offering by the Company, at an exercise price of
CDN $0.0005 per common share. Based on the fair value of the warrants at the
time of the grant (CDN $1.85), the warrants were recorded as additional paid in
capital in the amount of $2,763,483.
On November 30, 1999, 673,999 Class A warrants issued in connection with
the issuance of redeemable, convertible Class A preferred shares were exercised.
The remaining 1,797,330 Class A warrants, were exercised on December 8, 1999.
The warrants were exercised for an aggregate 2,471,329 common shares for total
proceeds of $865. Following the exercise of the warrants, the balance remaining
in additional paid in capital was transferred and added to the stated capital of
the Company's common shares.
EMPLOYEE STOCK OPTION PLAN AND OTHER MANAGEMENT OPTIONS
Effective December 15, 1999, the Company's Board of Directors approved a
number of actions including an increase in common shares issuable under the
Company's Employee Stock Option Plan (the "ESOP"), and the adoption of an
Employee Share Purchase Plan (the "ESPP").
The ESOP provides for the grant of options to purchase common shares to
officers, employees, and consultants of the Company. Options granted under the
ESOP may be incentive stock options or non-
F-19
<PAGE> 104
FLONETWORK INC.
(FORMERLY MEDIA SYNERGY INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN U.S. DOLLARS)
statutory stock options. Incentive stock options may only be granted to
employees. The exercise price for options granted under the ESOP is established
by the Board of Directors of the Company at the time of grant. The ESOP permits
the Company to issue options for the purchase of up to 1,800,000 common shares.
The options generally have terms of not greater than five years and vesting
periods not greater than four years.
Subsequent to December 31, 1999, the Company's Board of Directors approved
changes to the ESOP including increasing the amount of shares permitted to be
issued to 2,200,000 common shares and an automatic increase in the number of
shares permitted to be issued at the beginning of each fiscal year beginning on
January 1, 2001. [Note 13]
As of July 31, 1999, the Company has granted options for an aggregate of
738,270 common shares, including options held by officers of the Company to
acquire an aggregate of 460,000 common shares, at prices ranging from CDN $0.415
to CDN $1.85 per share.
As of December 31, 1999, the Company has granted options for an aggregate
of 1,203,020 common shares, including options held by officers of the Company to
acquire an aggregate of 790,000 common shares, at prices ranging from CDN $0.415
to CDN $10.00 per share.
The following is a summary of activity with respect to share options
(prices in Canadian dollars):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS RANGE PRICE
--------- --------------- --------
<S> <C> <C> <C>
Outstanding at July 31, 1996............ 0 $ 0 $ 0
Options granted....................... 437,000 $0.065 to $0.615 $0.595
--------- --------------- ------
Outstanding at July 31, 1997............ 437,000 $0.415 to $0.615 $0.595
Options granted....................... 460,570 $0.850 to $1.250 $1.220
Options cancelled..................... (241,700) $0.415 to $1.250 $0.625
--------- --------------- ------
Outstanding at July 31, 1998............ 655,870 $0.415 to $1.250 $0.975
Options granted....................... 258,200 $0.925 to $1.850 $1.565
Options cancelled..................... (175,800) $0.065 to $1.850 $0.575
--------- --------------- ------
Outstanding at July 31, 1999............ 738,270 $0.415 to $1.850 $1.150
Options granted....................... 552,900 $1.850 to $10.00 $4.454
Options exercised..................... (69,644) $0.065 to $0.085 $0.343
Options cancelled..................... (18,506) $0.415 to $10.00 $2.357
--------- --------------- ------
Outstanding at December 31, 1999........ 1,203,020 $0.415 to $10.00 $2.636
========= =============== ======
Exercisable at July 31, 1999............ 214,351 $0.065 to $1.250 $0.860
========= =============== ======
Exercisable at December 31, 1999........ 193,493 $0.615 to $3.500 $0.962
========= =============== ======
</TABLE>
F-20
<PAGE> 105
FLONETWORK INC.
(FORMERLY MEDIA SYNERGY INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN U.S. DOLLARS)
The following table summarizes information concerning outstanding and
exercisable options as at December 31, 1999 (prices in Canadian dollars):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C>
91,000 2.343 $0.610 46,000 $0.603
328,520 4.119 $1.220 118,993 $1.210
236,200 4.738 $1.537 22,500 $0.944
547,300 4.752 $4.295 6,000 $3.500
- --------------------- -------
1,203,020 193,493
===================== =======
</TABLE>
In addition to the employee stock option plan discussed above, on July 1,
1999, the Company granted 520,282 options to purchase common shares, at an
exercise price of CDN $1.25, to an executive officer. The options vest monthly
over a two year period. Vesting is accelerated if an Initial Public Offering is
completed or a change in control occurs. The difference between the exercise
price of options and the fair value of the common shares at the date of grant is
being charged to operations over the two year vesting period of the options. The
options have a ten year term.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123 "Accounting for Stock-Based
Compensation". As permitted by SFAS No. 123, the Company has continued to
account for employee stock options under Accounting Principles Board Opinion No.
25 and has elected the disclosure-only alternative under the FASB Statement No.
123.
Estimated fair values of the common shares at the dates of grant have been
determined based on the most recent arm's length financings by the Company.
During the five month period ended December 31, 1999, the Company recorded
unearned share-based compensation of $933,193, which represents the difference
between the exercise price of the stock options and fair value of common shares
at the dates of grant. Unearned shares-based compensation is being charged to
operations over the vesting period of the options. The Company recorded
share-based compensation expense of $61,135 for the five month period ended
December 31, 1999. Amortization of the unearned share-based compensation balance
of $872,058 at December 31, 1999 will approximate $156,079, $232,742, $178,696,
$174,224, and $130,317 for the fiscal years ending December 31, 2000, 2001,
2002, 2003, and 2004 respectively. Amortization of $61,135 at December 31, 1999
was charged to operations.
Subsequent to December 31, 1999 the Company has entered into additional
agreements with employees whereby it has granted options to purchase common
shares at prices below estimated fair values.
F-21
<PAGE> 106
FLONETWORK INC.
(FORMERLY MEDIA SYNERGY INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN U.S. DOLLARS)
The weighted-average grant-date fair value of options issued was CDN $0.22,
CDN $0.37, and CDN $1.21 for the years ended July 31, 1998 and 1999 respectively
and the five month period ended December 31, 1999.
For the purposes of the pro forma disclosures required by SFAS No. 123, the
fair value of each option grant is estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED
YEAR ENDED JULY 31, DECEMBER 31,
----------------------------- ------------
1997 1998 1999 1999
------- ------- ------- ------------
<S> <C> <C> <C> <C>
Expected volatility................... 0% 0% 0% 0%
Weighted average risk free interest
rate................................ 3.77% 5.06% 5.00% 4.98%
Expected life of stock options........ 5 years 5 years 5 years 5 years
Expected dividend yield............... 0% 0% 0% 0%
</TABLE>
The total pro forma value of options granted through December 31, 1999 was
computed at approximately the following values:
<TABLE>
<CAPTION>
PRO FORMA VALUE
OPTIONS GRANTED IN OF OPTIONS
PERIOD ENDED GRANTED
- ------------------ ------------------
<S> <C>
July 31, 1997........................................... $ 22,870
July 31, 1998........................................... $ 90,102
July 31, 1999........................................... $ 592,129
December 31, 1999....................................... $1,524,895
</TABLE>
F-22
<PAGE> 107
FLONETWORK INC.
(FORMERLY MEDIA SYNERGY INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN U.S. DOLLARS)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. Had the Company's share
option plans been accounted for under SFAS No. 123, net loss would have been
increased to the following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED FIVE MONTHS ENDED
JULY 31, DECEMBER 31,
----------------------------------- -------------------------
1997 1998 1999 1998 1999
--------- --------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss attributable to common
shareholders:
As reported..................... $(174,640) $(810,942) $(2,429,408) $(767,760) $(2,384,147)
SFAS No. 123 pro forma.......... (180,358) (821,133) (2,508,445) (789,049) (2,574,169)
Basic and diluted loss per share:
As reported..................... $ (0.05) $ (0.22) $ (0.66) $ (0.21) $ (0.58)
SFAS No. 123 pro forma.......... $ (0.05) $ (0.22) $ (0.68) $ (0.21) $ (0.63)
</TABLE>
9. INCOME TAXES
As of December 31, 1999, the Company had net operating loss carryforwards
of approximately $4,898,297, which begin to expire in the year ended December
31, 2000.
Due to the uncertainty regarding the ultimate utilization of the net
operating loss carryforwards, the Company has not recorded any net benefit of
the loss carryforwards and a valuation allowance has been recorded for the
entire amount of the net deferred tax assets.
The difference between the income tax benefit at the Canadian federal
statutory rate of 44.6% and the Company's effective tax rate is due primarily to
recognition of a full valuation allowance to offset the deferred tax assets.
The estimated tax effects of significant temporary differences and
carryforwards that give rise to deferred income tax assets as of December 31,
1999, are as follows:
<TABLE>
<S> <C>
Deferred income tax assets --
Net operating loss carryforwards.......................... $ 2,184,640
Less: valuation allowance................................... (2,184,640)
-----------
$ --
===========
</TABLE>
The Company has recorded a valuation against gross deferred tax assets due
to uncertainties surrounding their realization. The amount of net deferred tax
assets considered realizable, however, could be increased in the future if
estimates of future taxable income are increased.
F-23
<PAGE> 108
FLONETWORK INC.
(FORMERLY MEDIA SYNERGY INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN U.S. DOLLARS)
10. RELATED PARTY TRANSACTION
Amount due to shareholder was non-interest bearing and had no specific
repayment terms. In the fiscal year ended December 31, 1999, the amount has been
repaid in full.
11. CHANGE IN NON-CASH WORKING CAPITAL ITEMS
<TABLE>
<CAPTION>
YEAR ENDED FIVE MONTHS ENDED
JULY 31, DECEMBER 31,
----------------------------------- --------------------------
1997 1998 1999 1998 1999
--------- --------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Accounts receivable........ $(388,197) $ 325,233 $(170,676) $ 49,090 $(657,527)
Unbilled revenue........... -- (1,837) (47,590) (39,832) 49,427
Prepaid and other current
assets................... (36,447) 48,427 (36,365) (9,366) (122,780)
Deferred charges........... -- -- -- -- (344,345)
Accounts payable and
accrued liabilities...... 116,630 98,298 45,237 (26,010) 1,705,163
Deferred revenue........... 99,710 (159,285) 128,575 (8,896) (42,543)
--------- --------- --------- ---------- ---------
$(208,304) $ 310,836 $ (80,819) $ (35,014) $ 587,395
========= ========= ========= ========== =========
</TABLE>
12. SEGMENTED INFORMATION
Prior to the fiscal year ended December 31, 1998, the Company's primary
operating segment was the development, sale and licensing of multimedia consumer
software products. In late fiscal 1997 and throughout 1998, the Company began
developing an e-mail messaging software application, which would allow
businesses to use e-mail to market to and communicate with their customers, for
which version 1.0 was completed in November 1998. In January 1999, the Company
adopted a strategy to offer this software on a hosted basis, and at the same
time discontinued the activities related to the former multimedia consumer
software products business. Accordingly, 1998 and 1999 reflect a transitionary
period for the Company as it proceeded to its current strategic focus. During
this transitionary period the Company did not allocate its operating expenses
between its e-mail services activity and its multimedia consumer software
products activity, and accordingly, the extent to which the Company is able to
report segment profitability is limited to its current presentation in the
statements of operations. The Company has aggregated its Canadian and U.S.
operations in that the services provided to customers, and class of customers
are substantially similar.
F-24
<PAGE> 109
FLONETWORK INC.
(FORMERLY MEDIA SYNERGY INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN U.S. DOLLARS)
The Company sells to customers located in the United States of America, as
well as Canada, and other overseas markets as follows:
<TABLE>
<CAPTION>
YEAR ENDED FIVE MONTHS ENDED
JULY 31, DECEMBER 31,
---------------------------------- -------------------------
1997 1998 1999 1998 1999
---------- -------- -------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
United States............... $ 672,274 $514,877 $684,087 $206,478 $1,086,760
Canada...................... 1,954 93,349 15,360 34,058
Asia Pacific................ 482,262 178,136 -- -- 75,000
Europe...................... -- 53,332 -- -- --
---------- -------- -------- -------- ----------
$1,154,536 $748,299 $777,436 $221,838 $1,195,818
========== ======== ======== ======== ==========
</TABLE>
13. SUBSEQUENT EVENTS
REVERSE COMMON SHARE SPLIT
On December 15, 1999, the Company's Board of Directors approved the
declaration of a 1-for-5 reverse share split of the Company's common shares. All
common share amounts and per share dollar amounts have been adjusted for all
periods presented (Note 8) to reflect the effect of the anticipated 1-for-5
reverse share split to be effected prior to the effective date of the Company's
IPO. Simultaneously with the completion of an IPO, it is expected that all
outstanding preferred shares will be converted into common shares.
AMENDMENT TO EMPLOYEE STOCK OPTION PLAN
On March 13, 2000, the Company's Board of Directors approved changes to the
Company's Employee Stock Option Plan that would automatically increase the
number of common shares reserved for issuance pursuant to the Plan by (a)
400,000 common shares plus (b) an automatic increase on the first day of each
fiscal year beginning on January 1, 2001, equal to the lesser of 700,000 common
shares, 4% of the Company's outstanding common shares on such date or a lesser
amount determined by its board of directors.
F-25
<PAGE> 110
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 111
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 112
(THIS PAGE INTENTIONALLY LEFT BLANK)
<PAGE> 113
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,750,000 SHARES
[FLONETWORK LOGO]
COMMON SHARES
---------------------------------
PROSPECTUS
---------------------------------
SG COWEN
PRUDENTIAL VOLPE TECHNOLOGY
A UNIT OF PRUDENTIAL SECURITIES
WILLIAM BLAIR & COMPANY
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 114
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discounts and commissions payable by the Registrant in connection
with the sale of the common shares being registered. All amounts are estimated
except the SEC registration fee, the NASD filing fees and the Nasdaq National
Marketing listing fee.
<TABLE>
<CAPTION>
AMOUNT
-------
<S> <C>
SEC registration fee........................................ $13,662
NASD filing fee............................................. 6,106
Nasdaq National Marketing listing fee....................... 17,500
Printing and engraving...................................... *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue sky fees and expenses (including legal fees)........... *
Transfer agent fees......................................... *
Miscellaneous............................................... *
-------
Total.................................................. *
</TABLE>
- -------------------------
* to be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subject to the limitations contained in the Business Corporations Act
(Ontario), our by-laws provide that we may indemnify our directors and officers,
our former directors and officers and any person who acts or has acted at our
request as a director or officer of a body corporate of which our company is or
was a shareholder or creditor, from and against all costs, charges and expenses,
including amounts paid to settle an action or satisfy a judgment in a civil,
criminal or administrative action or proceeding to which they are made parties
because they have been directors or officers. Indemnification of a director or
officer under the Business Corporations Act (Ontario) is possible only if it is
shown that the director or officer acted honestly and in good faith with a view
to our best interests, and, in the case of a criminal or administrative action
or proceeding that is enforced by a monetary penalty, the director or officer
had reasonable grounds for believing that his or her conduct was lawful.
We are currently in the process of entering into indemnity agreements with
each of our directors and officers. Each indemnity agreement calls for us to
indemnify the director or officer against all liabilities in connection with any
claim arising out of the individual's status or service as a director or officer
of FloNetwork, other than claims arising from gross negligence or willful
misconduct. Each agreement also calls for us to advance expenses incurred by the
individual in connection with any action with respect to which the individual
may be entitled to indemnification by FloNetwork.
Currently, there is no pending litigation or proceeding where a current or
past director, officer or employee is seeking indemnification, nor are we aware
of any threatened litigation that may result in claims for indemnification.
II-1
<PAGE> 115
We maintain insurance for the benefit of our directors and officers against
liability in their respective capacities as directors and officers. The total
amount of insurance purchased for the directors and officers as a group is $15.0
million. Our directors and officers are not required to pay any premium with
respect to the insurance. The policy contains standard industry exclusions and
no claims have been made under the policy to date.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below in chronological order is a description of the Registrant's
sales of unregistered securities since October 31, 1996. The sales made to
investors were made in accordance with Section 4(2) or Regulation D of the
Securities Act. Sales to all of our employees, directors and officers were
deemed to be exempt from registration under the Securities Act in reliance on
Rule 701 promulgated under Section 3(b) of the Securities Act as transactions
under compensatory benefit plans and contracts relating to compensation as
provided under Rule 701.
On November 12, 1996 and April 16, 1997, in reliance on Section 4(2) of the
Securities Act, we sold an aggregate of 2,880,000 class A preferred shares to
McLean Watson. We sold 1,530,000 of the shares for $0.226 per share and
1,350,000 of the shares for $0.257 per share (for a total consideration of
$692,521). In November 1996, we effected a three-for-one share split resulting
in 8,640,000 class A preferred shares outstanding. In November 1998, we
exchanged all outstanding class A preferred shares for class B preferred shares
on a one-for-one basis. As a result, McLean Watson held a total of 8,640,000
class B preferred shares.
On March 30, 1998, we issued a promissory note in the principal amount of
$692,521 to McLean Watson. On October 20, 1998 we issued two promissory notes in
the aggregate principal amount of $207,756 to McLean Watson and Ventures West VI
Limited Partnership. On November 20, 1998 and June 30, 1999, in reliance on
Section 4(2) of the Securities Act, the principal amounts of these notes, as
well as additional advances of $1,385,042 from Bank of Montreal Capital
Corporation, $1,233,380 from Ventures West VI Limited Partnership, and $290,166
from McLean Watson, were converted into an aggregate of 550,000 class A
preferred shares.
Also on November 20, 1998, in reliance on Section 4(2) of the Securities
Act, McLean Watson SOFTECH exchanged warrants to purchase an aggregate of
800,000 common shares it acquired on March 30, 1998, for warrants to purchase
400,000 common shares at an exercise prices of $1.281 per share and warrants to
purchase 400,000 common shares at an exercise price of $0.416 per share.
On September 15, 1999, in reliance on Section 4(2) of the Securities Act,
we issued 2,650,423 class C preferred shares to CNET, Inc. at a price of $0.3972
per share for a total subscription price of $1,052,748. We also provided CNET
with an irrevocable option to purchase the number of common shares equal to 5%
of all issued and outstanding common shares on a fully diluted basis.
On November 24, 1999, in reliance on Rule 506 of the Securities Act, we
issued 12,033,983 units, each consisting of one of our class D preferred shares
and one warrant to purchase 0.10 common shares, at a price per unit of $1.24647,
for a total purchase price of $15,000,000. These shares and warrants were issued
to McLean Watson, Bank of Montreal Capital Corporation, Ventures West VI Limited
Partnership, CNET, Telepeak Investments Limited, Ontario Teachers Pension Plan
Board, CG Asian-American Fund, L.P., Princeton Global Fund, L.P., Kit Wong and
other venture capitalists.
On November 30, 1999 and December 8, 1999, in reliance on Section 4(2) of
the Securities Act, we issued an aggregate 2,471,329 common shares to McLean
Watson, Ventures West VI Limited Partnership and Bank of Montreal Capital
Corporation upon the exercise of warrants originally issued in connection with
the issuance of Class A preferred shares on November 30, 1998 and June 30, 1999.
Upon the exercise of these warrants, we received total net proceeds of $865.
II-2
<PAGE> 116
On December 30, 1999, in reliance on Rule 701 of the Securities Act, we
issued an aggregate 69,644 common shares to Lan Wong, an employee of the
Company, and Bill Marsh, a consultant to the Company, upon the exercise by such
employees and consultants of options under our Share Incentive Plan. We received
total proceeds of $1,112 from the exercise of these options.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement
**3.1 Articles of Incorporation of Media Synergy Inc., as amended,
dated November 24, 1999
*3.2 Restatement of Articles of Incorporation of the Registrant
to be filed after the effective date of this initial public
offering
**3.3 Bylaw No. 1 of the Registrant dated August 4, 1993
**3.4 Bylaw No. 2 of the Registrant dated August 4, 1993
**3.5 Bylaw No. 1 of the Registrant, as amended, dated December
15, 1999, which will be effective upon the completion of
this public offering
**4.1 Specimen of Common Share certificate
**5.1 Opinion of Blake, Cassels & Graydon LLP
**10.1+ Email Services Agreement between the Registrant and CNET,
Inc. dated July 19, 1999
**10.2+ Email Services Agreement between the Registrant and Impower
Inc., dated October 25, 1999
**10.3 Office Lease Agreement between The Manufacturers Life
Insurance Company and the Registrant dated December 5, 1996
**10.4 Amendment of Office Lease Agreement between The
Manufacturers Life Insurance Company and the Registrant
dated August 10, 1999
**10.5 Amendment of Office Lease Agreement between The
Manufacturers Life Insurance Company and the Registrant
dated September 15, 1999
**10.6 Sublease between Alliance for Converging Technologies Corp.
and the Registrant dated June 23, 1999
**10.7 Consent by Landlord to Sublease, between The Manufacturers
Life Insurance Company, Alliance for Converging Technologies
Corp. and the Registrant, undated
**10.8 Lease between Cranbrook Realty Investment Fund, L.P. and the
Registrant dated October 10, 1999
**10.9 Lease between Frank J. Gilbride II, Trustee and the
Registrant dated September 30, 1999
**10.10 Co-Location Letter Agreement between Teleglobe
Communications Services Inc. and the Registrant dated August
6, 1999
**10.11 Co-Location Letter Agreement between UUNet Canada Inc. and
the Registrant dated November 23, 1999
**10.12 CNET Option Agreement between the Registrant and CNET, Inc.
dated September 15, 1999
**10.13 Employment Agreement between the Registrant and Eric Goodwin
dated July 1, 1999
*10.14 Employment Agreement between the Registrant and Paul Chen
dated July 1, 1999, as amended
**10.15 Employment Agreement between the Registrant and Craig
Rennick dated August 24, 1998 as amended May 6, 1999 and
October 7, 1999
</TABLE>
II-3
<PAGE> 117
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
**10.16 Share Incentive Plan
**10.17 Share Purchase Plan
**10.18 Registration Rights Agreement between the Registrant and its
Shareholders dated November 24, 1999
**10.19 Second Amended and Restated Shareholders' Agreement between
the Registrant and its Shareholders dated November 24, 1999
**10.20 Non-Statutory Stock Option Agreement between the Registrant
and Eric Goodwin dated July 1, 1999.
10.21 Engagement Letter dated as of March 6, 2000 between the
Registrant and SG Cowen Securities Corporation
**21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
**23.2 Consent of Blake, Cassels & Graydon LLP (included in Exhibit
5.1)
23.3 Consent of Hale and Dorr LLP
**24.1 Powers of Attorney (included on signature page)
</TABLE>
- -------------------------
* to be filed by Amendment
** previously filed
+ Confidential treatment to be requested as to portions of such exhibits
(b) Financial Statement Schedules.
None.
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 to 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 hereunder, the Registrant will, unless in the opinion of counsel the
matter has been settled by the controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the act 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 Act, 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 Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
II-4
<PAGE> 118
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of Prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-5
<PAGE> 119
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Toronto, Ontario, Canada,
on this 3rd day of April, 2000.
FLONETWORK INC.
By: *
------------------------------------
Eric Goodwin
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and/or officers of FloNetwork hereby
severally constitute and appoint Eric Goodwin, Chief Executive Officer, and
Wilson Lee, Chief Financial Officer, and each of them individually, with full
powers of substitution and resubstitution, our true and lawful attorneys, with
full powers to them and each of them to sign for us, in our names and in the
capacities indicated below, the Registration Statement on Form F-1 filed with
the Securities and Exchange Commission, and any and all amendments to said
Registration Statement (including post-effective amendments), and any
registration statement filed pursuant to Rule 462(b) under the Securities Act of
1933, as amended, in connection with the registration under the Securities Act
of 1933, as amended, of equity securities of the Company, and to file or cause
to be filed the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as each of them might or could
do in person, and hereby ratifying and confirming all that said attorneys, and
each of them, or their substitute or substitutes, shall do or cause to be done
by virtue of this Power of Attorney.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated on this 3rd day of April, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S)
--------- --------
<S> <C>
* Chief Executive Officer and Director
(Principal Executive Officer)
- -----------------------------------------------------
Eric Goodwin
/s/ WILSON LEE Chief Financial Officer
--------------------------------------------------- (Principal Financial and Accounting
Wilson Lee Officer)
* Director
- -----------------------------------------------------
John Eckert
* Director
- -----------------------------------------------------
Paul Chen
</TABLE>
II-6
<PAGE> 120
<TABLE>
<CAPTION>
SIGNATURE TITLE(S)
--------- --------
<S> <C>
* Director
- ---------------------------------------------------
John Hayter
* Director
- ---------------------------------------------------
Edward Anderson
* Director
- ---------------------------------------------------
Kit Wong
* Director
- ---------------------------------------------------
John MacDonald
</TABLE>
AUTHORIZED REPRESENTATIVE
Pursuant to the requirements of Section 6(a) of the Securities Act of 1933,
as amended, the undersigned has signed this Registration Statement solely in the
capacity of the duly authorized representative of FloNetwork US, Inc. in the
United States, on this 3rd day of April, 2000.
FloNetwork US Inc., a California
corporation
By: *
------------------------------------
Regina Brady
Vice President
By: /s/ WILSON LEE
----------------------------------
Wilson Lee
Attorney-in-fact
II-7
<PAGE> 121
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement
**3.1 Articles of Incorporation of the Registrant, as amended,
dated November 24, 1999
*3.2 Restatement of Articles of Incorporation of the Registrant
to be filed after the effective date of this initial public
offering
**3.3 Bylaw No. 1 of the Registrant dated August 4, 1993
**3.4 Bylaw No. 2 of the Registrant dated August 4, 1993
**3.5 Bylaw No. 1 of the Registrant, as amended, dated December
15, 1999, effective upon the completion of this public
offering
**4.1 Specimen of Common Share certificate
**5.1 Opinion of Blake, Cassels & Graydon LLP
**10.1+ Email Services Agreement between the Registrant and CNET,
Inc. dated July 19, 1999
**10.2+ Email Services Agreement between the Registrant and Impower
Inc., dated October 25, 1999
**10.3 Office Lease Agreement between The Manufacturers Life
Insurance Company and the Registrant dated December 5, 1996
**10.4 Amendment of Office Lease Agreement between The
Manufacturers Life Insurance Company and the Registrant
dated August 10, 1999
**10.5 Amendment of Office Lease Agreement between The
Manufacturers Life Insurance Company and the Registrant
dated September 15, 1999
**10.6 Sublease between Alliance for Converging Technologies Corp.
and the Registrant dated June 23, 1999
**10.7 Consent by Landlord to Sublease, between The Manufacturers
Life Insurance Company, Alliance for Converging Technologies
Corp. and the Registrant, undated
**10.8 Lease between Cranbrook Realty Investment Fund, L.P. and
Media Synergy Software Corporation dated October 10, 1999
**10.9 Lease between Frank J. Gilbride II, Trustee and the
Registrant dated September 30, 1999
**10.10 Co-Location Letter Agreement between Teleglobe
Communications Services Inc. and the Registrant dated August
6, 1999
**10.11 Co-Location Letter Agreement between UUNet Canada Inc. and
the Registrant dated November 23, 1999
**10.12 CNET Option Agreement between the Registrant and CNET, Inc.
dated September 15, 1999
**10.13 Employment Agreement between the Registrant and Eric Goodwin
dated July 1, 1999
*10.14 Employment Agreement between the Registrant and Paul Chen
dated July 1, 1999, as amended
**10.15 Employment Agreement between the Registrant and Craig
Rennick dated August 24, 1998 as amended May 6, 1999 and
October 7, 1999
**10.16 Share Incentive Plan
**10.17 Share Purchase Plan
**10.18 Registration Rights Agreement between the Registrant and its
Shareholders dated November 24, 1999
**10.19 Second Amended and Restated Shareholders' Agreement between
Registrant and its Shareholders dated November 24, 1999
</TABLE>
<PAGE> 122
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
**10.20 Non-Statutory Stock Option Agreement between the Registrant
and Eric Goodwin dated July 1, 1999
10.21 Engagement Letter dated as of March 6, 2000 between the
Registrant and SG Cowen Securities Corporation.
**21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
**23.2 Consent of Blake, Cassels & Graydon LLP (included in Exhibit
5.1)
23.3 Consent of Hale and Dorr LLP
**24.1 Powers of Attorney (included on signature page)
</TABLE>
- -------------------------
* to be filed by Amendment
** previously filed
+ confidential treatment to be requested as to portions of such exhibits
<PAGE> 1
EXHIBIT 10.21
March 3, 2000
FloNetwork Inc.
260 King Street East
Toronto, Ontario, Canada
M5A 1K3
Gentlemen:
This letter will confirm our understanding that SG Cowen Securities Corporation
("SG Cowen") has been engaged to act as financial advisor to FloNetwork Inc.
(the "Company"), in connection with the Company's general financial strategy and
planning.
1. FINANCIAL ADVISORY SERVICES
In its capacity as financial advisor and at the Company's request, SG
Cowen will provide the Company with general financial advice and
assistance.
2. TERM
SG Cowen's engagement shall terminate twelve (12) months from the date of
this Agreement, unless extended in writing by SG Cowen and the Company.
Either SG Cowen or the Company may terminate this Agreement at any time on
10 days prior written notice. A "Residual Period" shall extend for twelve
(12) months from the date of termination or expiration of this Agreement.
Within 15 days of the termination or expiration of this Agreement, SG
Cowen shall provide the Company with a written list of SG Cowen Parties as
defined below.
Nothing contained in this Agreement will require the Company to accept the
terms of any proposal or to negotiate with any person. The Company has the
right in its sole discretion to reject any Transaction regardless of the
terms proposed.
3. FEES
<PAGE> 2
FloNetwork Inc.
March 3, 2000
Page 2
The Company agrees to pay SG Cowen as compensation for its services under
this engagement the following cash fees net of any value-added taxes paid
or payable hereunder:
a. RETAINER FEE. A non-refundable Retainer Fee of U.S. $50,000 shall be
payable upon execution of this Agreement. The Retainer Fee shall be
credited against any Transaction Fees or Break-Up Fees payable as
described below.
b. TRANSACTION FEE. If a Transaction is consummated, or a definitive
agreement with respect to the Transaction is executed, during the term
of this Agreement or if during the Residual Period with a party that
SG Cowen had contacted or with whom it had had discussions on behalf
of the Company in connection with a Transaction with the prior
approval of the Company (a "SG Cowen Party"), SG Cowen shall be paid a
Transaction Fee, payable in U.S. dollars, at the closing of the
Transaction equal to:
(i.) for Transactions that close prior to the effectiveness of the
registration statement filed with the Securities and Exchange
Commission in connection with the initial public offering of
the Company's common stock (the "Effective Time"), six tenth
of one percent (0.6%) of amount of aggregate consideration (as
defined below) up to U.S. $300 million, plus one percent
(1.0%) of amount of aggregate consideration in excess of U.S.
$300 million; or
(ii.) for Transactions that close after the Effective Time, one
percent (1.0%) of the amount of aggregate consideration.
For an Acquisition Transaction, SG Cowen shall only be entitled to the
Transaction Fee if SG Cowen provides services in connection therewith
at the request of the Company (it being understood that the Company
shall be entitled to retain any investment banker or no investment
banker to provide services to it in connection with an Acquisition
Transaction).
<PAGE> 3
FloNetwork Inc.
March 3, 2000
Page 3
If the Company enters into discussions during the Residual Period for
a Transaction which SG Cowen would be entitled to a Transaction Fee SG
Cowen shall provide the services contemplated hereby in connection
with such Transaction, if the Company requests such services and
provides sufficient and reasonable notice to SG Cowen.
c. BREAK-UP FEE. If, following or in connection with the termination,
abandonment or failure to occur of any proposed Transaction (as to
which SG Cowen would otherwise have been entitled to fees hereunder),
and during the term of this Agreement or during the Residual Period,
the Company is entitled to receive a break-up, termination, "topping,"
expense reimbursement or similar fee or payment (including, without
limitation, any judgment for damages or amount in settlement of any
dispute as a result of such termination, abandonment or failure to
occur), the Company shall pay SG Cowen a cash fee, payable promptly
following the Company's receipt of such fee, payment, judgment or
amount, equal to 25% of the aggregate amount of all fees, payments,
judgments or amounts received.
Unless otherwise specified in this Agreement, compensation which is
payable to SG Cowen pursuant to this Agreement shall be paid by the
Company to SG Cowen at the closing of a Transaction, except that
compensation attributable to that part of the aggregate consideration
which is contingent upon the occurrence of some future event shall be paid
by the Company to SG Cowen at the receipt of such aggregate consideration.
In the event the Transaction involves less than all of the voting
securities or assets of the Company or Target (as defined herein), as the
case may be, but 50% or more of such securities or assets, aggregate
consideration shall be calculated as if all such securities or assets were
being acquired, and in any event the Transaction shall be deemed
consummated upon the acquisition of a majority of the securities or assets
to be acquired pursuant to such Transaction.
4. OUT-OF-POCKET EXPENSES
<PAGE> 4
FloNetwork Inc.
March 3, 2000
Page 4
The Company shall, upon request, reimburse SG Cowen for travel and all
other reasonable out-of-pocket expenses (including the reasonable fees and
disbursements of SG Cowen's counsel, if any) incurred in connection with
the engagement; provided that in no event shall such expenses exceed
$25,000 without the Company's prior written consent, which consent shall
not be unreasonably withheld.
5. CERTAIN DEFINITIONS
TRANSACTION. A "Transaction" shall mean an "Acquisition Transaction"
and/or a "Sale Transaction."
An "Acquisition Transaction" shall mean one or a series of transactions
whereby, directly or indirectly, control of or a material interest in an
entity (the "Target") or any of its businesses or assets are transferred
to or combined with the Company or any person or one or more persons
formed by or affiliated with the Company (collectively, an "Acquisition
Affiliate"), including, without limitation, a disposition or exchange of
capital stock or assets, a merger or consolidation, a tender or exchange
offer, a leveraged buyout, or the formation of a joint venture or
partnership or any similar transaction.
A "Sale Transaction" shall mean one or a series of transactions whereby,
directly or indirectly, control of or a material interest in the Company
or any of its businesses or assets are transferred to or combined with
that of any person or one or more persons formed by or affiliated with
such person (collectively, the "Purchaser"), including, without
limitation, a disposition or exchange of capital stock or assets, a merger
or consolidation, a tender or exchange offer, a leveraged buyout, or the
formation of a joint venture or partnership or any similar transaction.
AGGREGATE CONSIDERATION. For purposes hereof, the term "aggregate
consideration" means the total amount of cash and the fair market value
(on the date of payment) of all other consideration paid or payable
(including amounts paid into escrow) by (i) (in the case of an Acquisition
Transaction) an Acquisition Affiliate or any other person to the Target or
<PAGE> 5
FloNetwork Inc.
March 3, 2000
Page 5
its securityholders in connection with the Transaction (or any related
transaction), including amounts paid or payable in respect of convertible
securities, warrants, stock appreciation rights, options or similar
rights, whether or not vested, plus the principal amount of all
indebtedness for borrowed money as set forth in the most recent
consolidated balance sheet of the Target prior to consummation of the
Transaction or, in the case of a purchase of assets, all indebtedness for
borrowed money assumed by the Acquisition Affiliate or any other person
and/or (ii) (in the case of a Sale Transaction) a Purchaser or any other
person to the Company or its securityholders in connection with the
Transaction (or any related transaction), including amounts paid or
payable in respect of convertible securities, warrants, stock appreciation
rights, options or similar rights, whether or not vested, plus the
principal amount of all indebtedness for borrowed money as set forth in
the most recent consolidated balance sheet of the Company prior to
consummation of the Transaction or, in the case of a sale of assets, all
indebtedness for borrowed money assumed by the Purchaser or any other
person.
Aggregate consideration shall also include (A) (in the case of an
Acquisition Transaction) the aggregate amount of any dividends or other
distributions declared by the Target after the date hereof, other than
normal quarterly cash dividends, and, in the case of a sale of assets, the
net value of any current assets not sold by the Target and (B) (in the
case of a Sale Transaction) the aggregate amount of any dividends or other
distributions declared by the Company after the date hereof, other than
normal quarterly cash dividends, and, in the case of a sale of assets, the
net value of any current assets not sold by the Company.
The fair market value of any securities (whether debt or equity) or other
property shall be determined as follows:
a. the value of securities that are freely tradable in an established
public market will be determined on the basis of the average closing
market prices on the fifteen trading days prior to the closing of the
Transaction; and
<PAGE> 6
FloNetwork Inc.
March 3, 2000
Page 6
b. the value of securities that are not freely tradable or have no
established public market, and the value of aggregate consideration
that consists of other property, shall be the fair market value as
determined in good faith by SG Cowen and the Company.
6. INFORMATION
The Company will furnish, or cause to be furnished, to SG Cowen (and will
request that any potential Target and Purchaser furnish SG Cowen) such
information as SG Cowen reasonably believes appropriate to its engagement
hereunder (all such information, the "Information"), and the Company
represents that all such Information furnished by it will be accurate and
complete in all material respects at the time furnished. The Company will
notify SG Cowen promptly after becoming aware of it of any change that may
be material in such Information.
It is understood that SG Cowen will be entitled to rely on and use the
Information and other information that is publicly available without
independent verification, and will not be responsible in any respect for
the accuracy, completeness or reasonableness of all such Information or to
conduct any independent verification or any appraisal or physical
inspection of properties or assets.
SG Cowen will assume that all financial forecasts have been reasonably
prepared and reflect the best then currently available estimates and
judgments of the Company's or the potential Target's or Purchaser's
management as to the expected future financial performance of the Company
or any potential Target or Purchaser.
7. DISCLOSURE
The Company acknowledges that all advice given by SG Cowen in connection
with its engagement hereunder is for the benefit and use of the Board of
Directors of the Company in considering the Transaction. The Company
agrees that no such advice shall be used for any other purpose or be
disclosed, reproduced, disseminated, quoted or referred to at any time, in
any manner or for any purpose, nor shall any public references to SG Cowen
be made by or on behalf of the Company, in each
<PAGE> 7
FloNetwork Inc.
March 3, 2000
Page 7
case without SG Cowen's prior written consent, which consent shall not be
unreasonably withheld except as may be required to comply with law.
SG Cowen shall not make any representation or deliver any material to any
person without the prior consent of the Company.
8. NO THIRD PARTY BENEFICIARIES
The Company acknowledges and agrees that SG Cowen has been retained to act
as financial advisor to the Company, and not as an advisor to or agent of
any other person, and that the Company's engagement of SG Cowen is not
intended to confer rights upon any person not a party to this Agreement
(including shareholders, employees or creditors of the Company) as against
SG Cowen or its affiliates, or their respective directors, officers,
employees or agents.
9. INDEPENDENT CONTRACTOR
SG Cowen shall act as an independent contractor under this Agreement, and
any duties arising out of its engagement shall be owed solely to the
Company.
10. INDEMNIFICATION
The Company and SG Cowen agree to the provisions with respect to the
Company's indemnity of SG Cowen and other matters set forth in Schedule I,
the terms of which are incorporated herein in their entirety.
11. PUBLICITY
The Company acknowledges that upon completion of a Transaction, SG Cowen
may, at its own expense, place an announcement in such newspapers and
periodicals as it may choose, stating that SG Cowen has acted as financial
advisor to the Company in connection with such Transaction.
12. AMENDMENTS AND SUCCESSORS
This Agreement may not be waived, amended, modified or assigned, in any
way, in whole or in part, including by operation of law, without the prior
written consent of the Company and SG Cowen. The provisions of
<PAGE> 8
FloNetwork Inc.
March 3, 2000
Page 8
this Agreement shall inure to the benefit of and be binding upon the
successors and assigns of the Company and SG Cowen.
13. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between SG Cowen and the
Company, and supersedes any prior agreements and understandings, with
respect to the subject matter of this Agreement. The Company acknowledges
that the execution of this Agreement or any act of SG Cowen under this
Agreement does not constitute a commitment by SG Cowen or any of its
affiliates to provide any type of financing or to purchase any type of
securities.
14. NO BROKERS
The Company acknowledges and agrees that there are no brokers, agents,
representatives or other parties that have an interest in compensation
paid or payable to SG Cowen hereunder.
15. TERMINATION & EXPIRATION
Upon termination or expiration, this Agreement shall have no further force
or effect, except that the provisions concerning the Company's obligations
to SG Cowen and certain related persons provided in Schedule I, the
Company's obligation to pay SG Cowen fees and expenses as described in
this Agreement, the status of SG Cowen as an independent contractor, the
limitation on to whom SG Cowen shall owe any duties, governing law, choice
of forum, successors and assigns, and waiver of the right to trial by jury
shall survive any such termination or expiration of this Agreement.
16. GOVERNING LAW AND JURISDICTION
This letter and any claim or dispute of any kind or nature whatsoever
arising out of or in any way relating to this Agreement, directly or
indirectly (including any claim concerning advice provided pursuant to
this Agreement), shall be governed by and construed in accordance with the
laws of the State of New York. Any rights to trial by jury with respect
to any claim or proceeding related to, or arising out of, this agreement
are waived by SG Cowen and the Company.
<PAGE> 9
FloNetwork Inc.
March 3, 2000
Page 9
We are pleased to accept this engagement and look forward to working with the
Company. Please confirm that the foregoing is in accordance with your
understanding by signing and returning to us the enclosed duplicate of this
letter, which shall thereupon constitute a binding Agreement.
Very truly yours,
SG COWEN SECURITIES CORPORATION
By: /s/ Georges Azzam
-------------------------------
Georges Azzam
Managing Director
Agreed as of the date hereof
FLONETWORK INC.
By: /s/ Eric Goodwin
-------------------------------
Name:
Title:
<PAGE> 10
SCHEDULE I
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The Company agrees to indemnify SG Cowen, each controlling person and
each of their respective directors, officers, employees, agents, affiliates and
representatives (each of the foregoing, an "Indemnified Party") and hold each of
them harmless against any and all losses, claims, damages, expenses,
liabilities, joint or several (collectively, "Liabilities") to which the
Indemnified Parties may become subject arising in any manner out of or in
connection with the letter agreement to which this Schedule I is attached (the
"Letter Agreement"), unless it is finally judicially determined that the
Liabilities resulted primarily from the gross negligence or willful misconduct
of an Indemnified Party. The Company further agrees to reimburse each
Indemnified Party immediately upon request for all expenses (including
attorneys' fees and expenses) as they are incurred in connection with the
investigation of, preparation for, defense of, or providing evidence in, any
commenced or threatened action, claim, proceeding or investigation (including,
without limitation, usual and customary per diem compensation for any
Indemnified Party's involvement in discovery proceedings or testimony), in
connection with or as a result of either SG Cowen's engagement or any matter
referred to in the Letter Agreement whether or not SG Cowen is a party to such
proceeding. The Company also agrees that no Indemnified Party shall have any
liability (whether direct or indirect, in contract or tort or otherwise) to the
Company or its securityholders or creditors related to or arising out of the
engagement of SG Cowen pursuant to, or the performance by SG Cowen of the
services contemplated by, the Letter Agreement, unless it is finally judicially
determined that such liability resulted primarily from the gross negligence or
willful misconduct of SG Cowen. The Company and SG Cowen will promptly notify
the other party in writing of the assertion against it or any other person of
any claim or the commencement of any action, proceeding or investigation
relating to or arising out of any matter referred to in the Letter Agreement,
including an Indemnified Party's services thereunder; provided that SG Cowen's
failure to notify will not affect the Indemnified Parties' right to
indemnification except to the extent the Company is materially prejudiced
thereby.
If any such claim, action, proceeding or investigation shall be brought
against an Indemnified Party, and SG Cowen shall notify the Company, the Company
shall be entitled to participate therein and, to the extent that it wishes,
assume the defense thereof with counsel reasonably satisfactory to SG Cowen.
After notice from the Company to SG Cowen of its election to assume the defense
of such claim, action, proceeding or investigation, the Company shall not be
liable to the Indemnified Party under the indemnification provisions of the
Letter Agreement for any legal or other expenses subsequently incurred by the
Indemnified Parties in connection with the defense thereof other than reasonable
costs of investigation; provided, however, that the Indemnified Parties shall
have the right to retain separate counsel, but the fees and expenses of such
counsel shall be at the expense of the Indemnified Parties, unless (i) the
employment of such counsel has been specifically authorized in writing by the
Company, (ii) the Company has failed to assume the defense and employ counsel as
required above, or (iii) the named parties to any such action (including any
impleaded
<PAGE> 11
parties) include both (a) the Indemnified Parties and (b) the Company, and the
Indemnified Parties shall have reasonably determined that the defenses available
to them are not available to the Company and/or may not be consistent with the
best interests of the Company or the Indemnified Parties (in which case the
Company shall not have the right to assume the defense of such action on behalf
of the Indemnified Parties); it being understood, however, that the Company
shall not, in connection with any one such action or separate, substantially
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys for the Indemnified
Parties, which firm shall be designated in writing by SG Cowen.
The Company agrees that, without an Indemnified Party's prior written
consent, which consent shall not be unreasonably withheld, it will not settle,
compromise or consent to the entry of any judgment in any commenced or
threatened claim, action, proceeding or investigation in respect of which
indemnification could be sought under the indemnification provisions of the
Letter Agreement (whether or not SG Cowen or any other Indemnified Party is an
actual or potential party to such claim, action, proceeding or investigation)
unless (a) such settlement, compromise or consent includes an unconditional
release of SG Cowen and each Indemnified Party from all liability arising from
such claim, action, proceeding or investigation, and (b) the parties to the
settlement, compromise or consent agree that the terms of such settlement,
compromise or consent shall remain confidential to the extent permitted by law.
The Company and SG Cowen agree that if any indemnification or
reimbursement sought pursuant to the preceding paragraph is for any reason
unavailable or insufficient to hold it harmless (except by reason of the gross
negligence or willful misconduct of an Indemnified Party) then, whether or not
SG Cowen is the person entitled to indemnification or reimbursement, the Company
and SG Cowen shall contribute to the Liabilities for which such indemnification
or reimbursement is held unavailable in such proportion as is appropriate to
reflect (a) the relative benefits to the Company on the one hand, and SG Cowen
on the other hand, in connection with the transaction to which such
indemnification or reimbursement relates, (b) the relative fault of the parties,
and (c) other equitable considerations; provided, however, that in no event
shall the amount to be contributed by SG Cowen exceed the fees actually received
by SG Cowen under the Letter Agreement. The Company agrees that for the purposes
of this paragraph the relative benefits to the Company and any Indemnified Party
of the contemplated transaction (whether or not such transaction is consummated)
shall be deemed to be in the same proportion that the aggregate cash
consideration and value of securities or any other property payable,
exchangeable or transferable (or contemplated to be payable, exchangeable or
transferable) in such transaction bears to the fees paid or payable to SG Cowen
under the Letter Agreement.
- --------------------------------------------------------------------------------
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of FloNetwork Inc. on
Form F-1 of our report dated January 24, 2000 (except for Note 13 and Note 8
for which the date is yet to be determined) appearing in the Prospectus,
which is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected
Consolidated Financial Data" and "Experts" in such Prospectus.
/s/ Arthur Andersen LLP
---------------------
ARTHUR ANDERSEN LLP
April 3, 2000
<PAGE> 1
EXHIBIT 23.3
HALE AND DORR LLP
Counsellors At Law
60 State Street, Boston, Massachusetts 02109
TEL 617-526-6000 * FAX 617-526-5000
April 3, 2000
FloNetwork Inc.
260 King Street East
Toronto, Ontario, Canada M5A 1K3
Re: REGISTRATION STATEMENT ON FORM F-1
Ladies and Gentlemen:
We hereby consent to the use of our name in the Registration Statement
on Form F-1 (the "Registration Statement") and in the related Prospectus under
the caption "Legal Matters," and to the filing of this consent with the
Securities and Exchange Commission (the "Commission") as an exhibit to the
Registration Statement. In giving such consent, we do not hereby admit that we
are in the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Commission.
Very truly yours,
/s/ Hale and Dorr LLP
HALE AND DORR LLP
