UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ________________
Commission File Number 000-14614
PRINTONTHENET.COM, INC.
(name of small business issuer in its charter)
DELAWARE 59-1270754
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
4491 SOUTH STATE ROAD 7, Suite 214
FT LAUDERDALE, FLORIDA 33314
(Address of principal executive offices)(Zip Code)
(954) 581-4233
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b)
of the Exchange Act:
NONE
Securities registered pursuant to Section 12(g)
of the Exchange Act:
COMMON STOCK, $.001 PAR VALUE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required
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to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes [ ] No [X]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10- KSB or any amendment to
this Form 10-K. [ ]
Issuer's revenues for the fiscal year ended December 31, 1999: $2,503,000.
As of June 7, 2000, the aggregate market value of the voting stock held by
non-affiliates was approximately $3,306,465.
The number of shares outstanding of each of the issuer's classes of common
stock, as of date of this Report: 27,560,456 (one class).
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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TABLE OF CONTENTS
PART I.......................................................................1
Item 1. Description of Business..................................1
Item 2. Properties..............................................10
Item 3. Legal Proceedings.......................................10
Item 4. Submission of Matters to a Vote of Security Holders.....11
PART II.....................................................................11
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...................................11
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operation; Safe Harbor
Statement under the Private Securities Litigation
Reform Act of 1995....................................12
Item 7. Financial Statements....................................15
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................15
PART III....................................................................15
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act...................................15
Item 10. Executive Compensation...................................16
Item 11. Security Ownership of Certain Beneficial
Owners and Management..................................17
Item 12. Certain Relationships and Related Transactions...........17
PART IV.....................................................................19
Item 13. Exhibits and Reports on From 8-K.........................19
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PART I
Item 1. Description of Business
General
We intend to be an Internet based provider of on-line printing services for
small to medium sized businesses and consumers. We offer customers access to a
private customized secure Web site containing a digital catalog of their custom
printed materials, which they can modify, proof and procure from any Internet
enabled personal computer. The Web site employs graphic "on-the-fly" technology,
which enables users to see an image of their print job before submitting a final
order. Our printing services offer customers a one stop shop for addressing
their printing needs while reducing the time and costs associated with ordering
printed business materials as well as reducing the possibility of error in the
printing process. Currently, one of our primary sources of revenue is from
customers of print centers we have recently acquired.
History of the Company
On March 11, 1999, Net Lnnx, Inc., a Pennsylvania corporation ("NLI") acquired
all of the common stock of PrintOnTheNet.Com, Inc. a Delaware corporation
("POTN" or the "Company"). The acquisition was accomplished by merging POTN with
and into NetSub, Inc., a Florida corporation and a wholly owned subsidiary of
NLI. POTN then became a wholly-owned subsidiary of NLI. For accounting purposes
the acquisition has been treated as a recapitalization of POTN with POTN as the
acquiror (reverse acquisition). Shareholders of POTN received 16,500,000 shares
of NLI common stock and 1,000,000 shares of NLI preferred stock (convertible
into an additional 7,207,000 shares of common stock).
On July 26, 1999, NLI was merged into POTN. As a result of the merger, each
share of common stock of NLI was converted into one share of POTN, and each
share of preferred stock of NLI was converted into 7.207 shares of common stock
of POTN. Concurrently, the authorized shares of common stock of POTN was
increased from 20,000,000 shares to 40,000,000 shares, and the number of
authorized shares of preferred stock was increased from 5,000,000 shares to
10,000,000 shares.
On December 20, 1999, in contemplation of a sale of unregistered securities (see
"Recent Developments" below), the POTN Board of Directors approved an amendment
(the "Amendment") to POTN's Restated Certificate of Incorporation to increase
the authorized shares of Common Stock from 40,000,000 to 80,000,000 shares.
Pursuant to Delaware law, shareholder approval was given by written consent of
the holders of a majority of the POTN outstanding shares of Common Stock. On
January 18, 2000, an Information Statement was furnished to the POTN
shareholders who did not vote on the Amendment, solely for the purpose of
informing them in the manner required under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). The Amendment became effective on February 7,
2000.
Recent Developments
On February 16, 2000, the Company, through a placement agent (the "Placement
Agent"), completed the sale of units, consisting of 863,649 shares of the
Company's Series A Convertible
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Preferred Stock (the "February Placement"). The gross proceeds from the February
Placement totaled $3,040,000. The net proceeds from the February Placement,
totaling $2,677,364, were disbursed to the Company. Since that time, the Company
has spent approximately $1.4 million of the net proceeds, leaving a balance of
approximately $1.3 million. Due to the events described below, the balance was
returned by the Company to an escrow account established by the Company and the
placement agent for the benefit of the subscribers of the February Placement.
The Company is currently offering units of its Series B Convertible Preferred
Stock (the "Offering"). A rescission offer (the "Rescission Offer") was made to
subscribers in the February Placement concurrently with this Offering. In June
2000, the Company closed the first tranche of the Offering which resulted in
approximately $7 million being raised for the Company (this amount includes $1.8
million which was reinvested by subscribers in the Rescission offering).
The Company became aware in March 2000 of the existence of certain undisclosed
guaranties of PrintAmerica Interactive, Inc. ("PrintAmerica"), an entity
acquired by the Company in December 1999. See Item 1. Description of Business -
Acquisitions. PrintAmerica had guaranteed up to $7.5 million in obligations of
National Lithographers & Publishers, Inc. ("National Lithographers"), to First
Southern Bank (the "Bank"). National Lithographers is a related party to the
Company through common ownership. These obligations were assumed by the Company
upon its acquisition of PrintAmerica. On January 31, 2000, the Company
independently guaranteed this same indebtedness. The underlying indebtedness
secured by these guaranties was in default and there were insufficient assets of
National Lithographers to satisfy the indebtedness.
The Company also learned that PrintAmerica guaranteed approximately $1.0 million
of other indebtedness. This indebtedness was also in default, and in March 2000
the lender instituted an action in Miami-Dade County Circuit Court to collect
the monies owed to it. PrintAmerica was a defendant in this action as well as
Samuel and Benjamin Rogatinsky (collectively, the "Rogatinskys"), both of whom
were personal guarantors of this indebtedness.
In addition, in conducting the audit of the Company's financial statements for
the year ended December 31, 1999, the Company discovered that the net income of
PrintAmerica was incorrectly reported in the financial statements contained in
the Company's Form 8-K filed in connection with the acquisition of PrintAmerica.
In particular, PrintAmerica reported net income of approximately $96,000
(unaudited) for the nine months ended September 30, 1999 when, in fact,
PrintAmerica had a net loss of approximately $245,000 (unaudited). In addition,
the Company discovered certain misstatements of financial information contained
in the financial statements of the Company for the nine months ended September
30, 1999. The Company is in the process of correcting these financial statements
and may be required to amend its recent Exchange Act filings.
The Company has entered into a settlement agreement with the two lenders to
release it from any obligations under the aforementioned corporate guaranties.
As part of the settlements, the Company purchased 11,111,111 shares of Common
Stock from the Rogatinskys at $.09 per share for an aggregate of $1,000,000. In
addition, the Rogatinskys may sell to the Company that number of shares of
Common Stock required to generate proceeds of Up to $112,500 on or before June
30, 2000 and $142,500 on or before June 30, 2001 at a price per share of the
lesser of $.09 per share or one-half of the then current market price per share.
All proceeds received by the Rogatinskys from the sale of these shares will be
paid to the lenders in connection with the settlements. In connection with the
settlement with the lenders, Benjamin and Samuel Rogatinsky have resigned from
their offices and as directors of the Company.
Additionally, all shares of the Company's Common Stock owned by the Rogatinsky$,
their families and related entities are pledged to the Bank except with respect
to 1,250,000 shares (as described below). The Bank continues to have a first
priority lien on the shares acquired or received by the Company. Merrill Lynch
Business Financial Services, Inc. holds a second priority position with respect
to 1,250,000 shares of the Company's Common Stock owned by the Rogatinskys which
pledge will be released upon the sale of such shares to the Company for $112,500
on or before June 30, 2000.
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In addition, the Bank has released the Company from its guarantees in exchange
for the pledge by the Rogatinskys of all shares of Common Stock owned by them
(approximately 22 million shares, less those shares sold to the Company as
described above) to the Bank. The shares sold back to the Company have been
pledged by the Company, on a non-recourse basis, to the Bank to secure the
underlying obligations, and will be available for liquidation pursuant to the
pledge only after all of the other shares pledged by the Rogatinskys have been
liquidated. Additional shares of Common Stock may be pledged to the Bank upon
the future sale by the Company of securities at a price below $.30 per share,
and if the Company's shares are then trading at less than $.30 per share. All of
the Company's shares pledged to the Bank will be "restricted" from sale
following the date of the settlement, as specifically described below:
(i) After 12 months, that number of shares of pledged stock
which represents, in value, up to 25% of the outstanding
principal balance of the subject indebtedness, may be sold by
the Bank during each 90-day trading period. All such sales of
the pledged Common Stock will be made in an "orderly" fashion,
i.e., daily sales by the Bank may not exceed 5% of the average
daily trading volume of the Common Stock over the preceding 20
business days;
(ii) If, at anytime during the first 12 months, the Company's
Common Stock should trade on a national securities exchange at
an average daily trading volume in excess of 250,000 shares
per day for a 20-day trading period, the Bank may sell during
each 30-day trading period, an amount of shares equal to 20%
of the average daily trading volume for the previous 20
trading days. All such sales will be made in an "orderly"
fashion, i.e., daily sales by the Bank may not to exceed 5% of
the average daily trading volume for the preceding 20 business
days; and
(iii) After nine months, the Bank may sell up to $200,000 of
the pledged Common Stock in order to satisfy interest
payments.
The sale of the pledged Common Stock is subject to a "right of first refusal"
held by the Rogatinskys, then the Company and thereafter the Placement Agent,
and all public sales will be made through the Placement Agent unless the
Placement Agent is unable or unwilling to sell such shares. In such event, the
Bank may sell the pledged Common Stock through a broker of its choice. The Bank
received certain "demand" and "piggyback" registration rights with respect to
the pledged Common Stock. In addition, the Bank was issued two-year warrants to
purchase 5,000,000 shares of the Company's Common Stock at an exercise price of
$.30 per share.
The Company will be required to issue additional common stock at a currently
indeterminate price to the Rogatinskys if in the future (excluding the June 2000
private placement and certain other stock issuances), the Company sells its
common stock at less than $0.30 per share, and if the common stock is trading at
less than $0.30 per share. These shares will be pledged to the Bank as
additional collateral. Once the obligations owed to the Bank have been satisfied
and the pledge is no longer in effect, these additional shares (if any) shall be
returned to the Company.
In connection with these transactions, the Rogatinskys granted to the Board of
Directors an irrevocable proxy to vote all shares of Common Stock of the Company
owned by them following the consummation of the proposed settlements.
As part of the settlement transaction described above, the Company agreed to
purchase a certain printing press which press is expected to be sold at auction
in June 2000. To the extent that there is a shortfall between the purchase price
of the printing press ($225,000) and the amount received at such auction,
Benjamin and Samuel Rogatinsky have agreed to convey additional shares of common
stock of the Company back to the Company to cover such shortfall. The amount of
such additional shares shall be valued at the lesser of $.09 per share or
one-half the then current market price. These additional shares are subject to
the pledge in favor of the Bank described above.
In another transaction related to the settlements, the Company resolved certain
disputes with the sellers of PrintAmerica (Reuben and Shulamit Rogatinsky). The
parties have exchanged mutual releases and the Company has received the
consideration paid for PrintAmerica, i.e., 1 million shares of its common stock.
However, these shares are also subject to the pledge in favor of the Bank.
Description of Services
We are an Internet based provider of on-line printing services for small to
medium sized
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businesses and consumers. We offer customers access to a private customized
secure Web site containing a digital catalog of their custom printed materials,
which they can modify, proof and procure from any Internet enabled personal
computer. The Web site employs graphic "on-the-fly" technology, which enables
users to see an image of their print job before submitting a final order. Our
printing services offer customers a one stop shop for addressing their printing
needs while reducing the time and costs associated with ordering printed
business materials as well as reducing the possibility of error in the printing
process. With our recent acquisition of PrintAmerica, we now control our own
production facilities and will be able to deliver high quality printed materials
in a timely fashion and at competitive prices.
On-line Printing
With our on-line printing services, businesses and consumers can access a
private, customized, secure Web site that contains a digital catalog of all of
their custom-printed materials. Such materials may include business cards,
letterhead, envelopes, announcements, invitations, pads and marketing materials.
We offer a vast array of design templates and type faces. Logos can be scanned
and uploaded to the site where the customer can view the completed materials
almost immediately. Each customer can modify, proof, procure and manage its
printed materials from any Internet-enabled personal computer.
Our Web site employs graphic on-the-fly technology which enables users to see an
image of their print job before submitting a final order. Our system allows
users to enter, proof, update and maintain their information on-line, reducing
errors associated with data reentry, typesetting and the use of outdated
document versions. PrintOnTheNet.com completely eliminates the need to send
markups and proofs back and forth from the customer to the printer.
Through our on-line print shop, we offer small businesses and consumers a single
place to satisfy a variety of their printing needs. We have developed an easy to
use, self-service design and ordering Web site for purchasing professional
quality, mass market printed products. By automating the process and
electronically connecting our on-line print shop to our production facilities,
we significantly reduce the costs and inefficiencies associated with the
traditional printing process.
The PrintOnTheNet.com solution improves efficiency, enhances control and
scalability and increases accuracy. We offer our corporate customers customized
printing programs tailored to their specific needs, including brand control. We
provide a 24 hour - 7 day ordering system, the ability to create corporate
printing guidelines, monitor usage and collect data, together with on-line
editing and proofing. We also give our customers on-line tracking and
management, central management of orders, customer service and enhanced
productivity.
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On-line Digital Publishing - DocuPub
We are currently developing an on-line corporate solution that will enable
businesses, educational institutions and academics to upload, store, manage,
print and ship documents over the Internet. PrintOnTheNet.com's "DocuPub" is
intended to combine document storage, on-line proofing and secure digital rights
technologies with our customers' specific output needs. DocuPub is a free
storage space on the Internet allowing customers to securely organize, store,
publish, share and print any type of document.
To publish a DocuPub document, the author simply uploads the document to
PrintOnTheNet.com as an Adobe Portable Document Format (PDF) file, Microsoft
Word Document, Power Point, Quark Express, or text file. The file is categorized
in accordance with the instructions of the author and a folder is created for
that particular file. All documents sent between the web browser and DocuPub
servers are encrypted using 128-bit SSL - the industry standard in protecting
everything from on-line banking to on-line shopping. Documents are stored on
DocuPub database servers that are not reachable directly from the Internet. Our
Web servers act as a gatekeeper to the documents, limiting access to the user
and those with whom the user chooses to share access. These documents can be
viewed and shared on the Internet without utilizing any additional software and
DocuPub allows the user to access documents from anywhere.
DocuPub documents can be any length and storage on the system is provided at no
charge to customers. The files may be downloaded in electronic format in
accordance with the instructions of the author. In the alternative, we offer
businesses the ability to print, bind and ship as many copies of the document
that are required, to any location. This solution provides businesses with
print-on-demand publishing and distribution of hard copy documentation for their
products, reference and user guides, manuals, training materials and custom
marketing literature. Educational institutions and academics can professionally
publish their own original material, formal academic work, lecture notes,
handouts, problems sets, course syllabi and other material for which they own
the copyright. We intend to introduce DocuPub by the end of the fourth quarter
of 2000.
Digital Variable Data Output
We are developing software that will allow us to assist businesses in gathering
and analyzing customer data on their Web sites. This data will then be available
to be used in the delivery of highly targeted and relevant one-to-one marketing
brochures, e-mail messages or PDF files via the Web. We have applied for a
patent related to this technology.
We understand the value of data mining and analysis in the Internet economy, and
the importance in being able to gather information one day and then generate
traditional and e- marketing materials the very next day. Real-time marketing
systems are a relatively new approach to increasing customer loyalty and value
and has the potential to fundamentally change the way companies think about the
marketing function.
There are a number of market opportunities available both in variable data
printing and variable data electronic media including:
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o On demand printing books;
o Consumer driven "Build-a-Brochure" programs;
o Dynamically created graphic PDF files sent via E-mail;
o E-marketing campaigns for Web sites; and
o Customized marketing messages with real-time E-mail.
We intend to implement real-time marketing applications that will enable
companies who are doing business on the Web to automate and optimize movements
of their customers at every point of interaction on their Web sites. Although
there can be no assurance, we anticipate completing a working prototype of this
software by the end of the fourth quarter of 2000.
Acquisitions
In August 1999, we purchased certain assets and liabilities and the operations
of two South Florida printing companies: Bailey's Printing Plus, Inc.
("Bailey's"), and Ivan's Quick Print, Inc. ("Ivan's").
Bailey's was acquired for a stated purchase price of $175,000. Of that amount,
$25,000 was paid in cash and the remainder was paid by delivery of shares of our
Common Stock having a value equal to $150,000. The Company will have to issue
additional shares or pay additional cash to the selling shareholders of Bailey's
to the extent such shares are worth less than $150,000 on February 23, 2001.
Pursuant to the purchase agreement, we also assumed liabilities of Bailey's in
the approximate amount of $13,000. In addition the Company delivered shares of
its Common Stock having an aggregate value of $23,000 to two business brokers in
connection with this acquisition. Finally, we paid $40,000 to obtain the
agreement of three principals of Bailey's not to compete with POTN for a three
year period, of which $25,000 was paid in cash and the remaining $15,000 was
paid by delivery of a promissory note payable to such principals.
Ivan's was acquired for a stated purchase price of $90,000, of which $15,000 was
paid in cash and the remaining portion of the purchase price was paid by
delivery of shares of our Common Stock having a value equal to $75,000. The
Company will have to issue additional shares or pay additional cash to the
seller to the extent such shares are worth less than $75,000 on August 27, 2001.
In connection with this acquisition, we paid an additional $10,000 in cash to
obtain the agreement of two principals of Ivan's not to compete with POTN for a
three year period.
On December 30, 1999, POTN acquired PrintAmerica Interactive, Inc.
("PrintAmerica") in a transaction (the "Acquisition") in which all of
PrintAmerica's outstanding common stock (1,000 shares) were acquired for one
million shares of unregistered common stock of the Company. In connection with
the Acquisition, the selling shareholders of PrintAmerica executed a non compete
agreement, and also agreed to an 18 month lock up agreement with respect to the
sale or transfer of the Company's common stock. PrintAmerica, which began
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operations in late 1997, provides quick print services in South Florida.
PrintAmerica operates from three production facilities located in South Florida,
and is the culmination of five separate acquisitions of quick print businesses
("Budget Printing & Graphics", "Cloverleaf Printing", "Denny's Printing", "RJ
Menu Company" and "Sun Graphics"). The Acquisition was recorded in a manner
similar to a pooling of interests for accounting purposes since 100% of the
common stock of PrintAmerica was owned by the parents of brothers Benjamin
Rogatinsky and Samuel Rogatinsky, who collectively owned approximately 85% of
the common stock of POTN on the date of the Acquisition. Benjamin Rogatinsky is
the Chief Executive Officer and a Director of POTN, and Samuel Rogatinsky is the
President and a Director of POTN. Additionally, Ben Rogatinsky and Sam
Rogatinsky had served as President and Vice President, respectively, of
PrintAmerica. PrintAmerica was merged into the Company in January 2000.
Our acquisition of PrintAmerica offers several advantages to us:
o We will be able to leverage PrintAmerica's sales staff and customer
base as described below.
o PrintAmerica has made the capital investment for machinery and
equipment and has the systems in place to produce our work product.
o PrintAmerica currently operates two plants and has excess capacity.
PrintAmerica can immediately accommodate our projected workflow and has
the ability to add machinery and equipment as warranted.
o We will control the timeliness and quality of production to a greater
degree than is the case with any third party arrangement.
Marketing
We will utilize a three-pronged approach to marketing:
o Direct In-Person Sales. Our sales force will market directly to small
to medium sized corporations who have a wide variety of printing needs.
Our recent acquisition of PrintAmerica is especially significant with
regard to our plans to market to small to medium sized corporations.
PrintAmerica has a sales staff and maintains a customer base which
includes a number of multi- locational large or mid-sized corporations
such as Alamo, Radisson, Sunglass Hut, Wackenhut and Premiere Beverage,
among others who we intend to target for marketing our private Web
folders. Initial discussions with many of these clients have been met
with support and interest, although there can be no assurance that
these discussions will result in our conducting business with any of
these customers in the future.
o Advertising and Public Relations. Our advertising will emphasize price
and quality in comparison to the competition. We will use direct
advertising to market our Web site to individuals and small businesses.
Alliances with office supply retailers and
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small printers throughout the nation will also help attract small
businesses and individuals to the site. We intend to place items
relating to PrintOnTheNet.com in key publications, both in the computer
and mainstream press.
o Acquisitions. Acquisitions are an important part of our growth
strategy. We intend to pursue an aggressive program of acquisitions. We
will target the heavily saturated quick print market. We will attempt
to buy print shops and consolidate our production in centralized
manufacturing hubs. We will then focus on converting customers of these
traditional suppliers to our on-line printing and publishing services.
We intend to eliminate the overhead associated with maintaining many,
traditional brick-and-mortar locations, thereby allowing us to reduce
pricing for our Internet customers while maintaining profitability.
Web Site and Operational Developments
We have purchased our own dedicated servers and have contracted with an off-site
location to house and maintain the servers for a fee. We have also recently
contracted with UUNET to install a direct T1 connection, with a full T1 backup
brought to our in-house server facility. We have 24-hour support and redundant
backup systems. Programmers and graphic artists familiar with Web site design
have been hired to establish and update the open and secure platforms as
required.
Production is conducted through PrintAmerica. PrintAmerica currently has excess
capacity that can immediately accommodate our projected work flow. All shipping
is handled by PrintAmerica. Shipping is completed from PrintAmerica production
facilities directly to consumers via United States Postal Service, as well as
United Parcel Service and Federal Express for additional charges. International
shipping is handled on a case-by-case basis.
Competition
We compete with both traditional and on-line printing businesses. The existing
printing market is established, mature and intensely competitive. Competition is
largely based on price, quality, range of services offered, distribution
capabilities, customer service and technology. We expect competition to increase
due to the lack of significant barriers to entry for on-line business generally
and the presence of excess capacity in the printing industry. As we expand the
scope of our product and service offerings, we may compete with a greater number
of companies across a wide range of printing and publishing services. Our
ability to generate significant revenue from sales will depend on our ability to
differentiate ourselves through the goods and prices we provide and our
timeliness of delivery.
The U.S. short-run, mass market printing industry is highly fragmented, with an
estimated 30,000 to 40,000 local and regional printers. These printers are
mostly independent. Many of these printers have long-term established
relationships with their customers and provide geographic proximity as well as a
range of services such as photocopying which are not available on-line.
We face substantial challenges in convincing businesses to consider alternatives
to their traditional printer. In addition, printers typically have extensive
local sales forces that
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regularly canvass and solicit businesses in the areas they serve. Commercial
printers compete primarily on product pricing, product and service quality and,
to a lesser extent, on innovation in printing technologies and techniques. To
attract new customers and retain our existing customers, we must compete
effectively in each of these areas.
The market for on-line printing services is new, rapidly evolving and highly
competitive. A number of companies have recently started offering
Internet-enabled printing services to consumers and to the small office/home
office market. Among the services these companies offer are on-line design and
ordering of personalized stationery, business cards and other office staples. We
also face competition from selected traditional print vendors who have developed
on-line Web sites that permit customers to create, proof and order popularly
printed items directly on-line. We may in the future also face direct
competition from other companies that may develop and market integrated
Internet-based business printing services similar to ours.
The level of competition is likely to increase as current competitors improve
their offerings and as new participants enter the market or as industry
consolidation develops. Many of our current and potential competitors have
longer operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than us and may
enter into strategic or commercial relationships with larger, more established
and well-financed companies. Some of our competitors may be able to enter into
these strategic or commercial relationships on more favorable terms.
Additionally, these competitors have research and development capabilities that
may allow them to develop new or improved services that may compete with the
services we market. New technologies and the expansion of existing technologies
may increase competitive pressures on us. Increased competition may result in
reduced operating margins as well as loss of market share and brand recognition.
We also face direct competition from a variety of other organizations, including
existing office supply chains, procurement brokers, stationery houses, design
houses, advertising specialty and print brokers and photo and gift operations.
Some of these are in the process of developing their own on-line print
solutions. We also face competition from the increasing sophistication of
desktop printers which may lessen the need for professional offset and
thermographical printing. In addition, companies with which we do not presently
directly compete may become competitors in the future, either through the
expansion of our technology and services or through their product development in
the area of on-line print shops or through acquisitions.
We also face substantial competition from printing services brokers -- companies
that contract with businesses to select and procure printing services from a
variety of printers. Brokers are able to offer customers a relatively wide
variety of products and services, and are often able to obtain favorable pricing
for their customers by soliciting bids from a variety of printers. Like local
and regional printers, printing services brokers often have long-standing
customer relationships and extensive local direct sales resources.
We believe that the Company has a number of competitive advantages over other
companies providing printing services on the Web, and indeed other Web-based
retail and wholesale businesses in general:
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Control of Production. With the recent acquisition of PrintAmerica, we now
control all aspects of production. We believe that with our ability to manage
the timing of production and the quality of product, we will be able to enhance
our operating margins.
Existing Customer Base and Sales Force. We have an existing and active customer
base to which we can market our services. With the recent acquisition of
PrintAmerica, current customers now include parts of Alamo, Radisson, Sunglass
Hut, Wackenhut and Premiere Beverage, among others.
Pricing. We believe that with our ability to control both the technology and the
printing process, our margins will be better managed and our prices reduced.
Delivery. With the ownership of our production and shipping facilities, we will
be better able to control the scheduling of work and the delivery of product.
Employees
As of March 31, 2000, we employ 37 persons full time as support staff.
Reports to Security Holders
The public may read and copy any materials that we have on file with the
Securities and Exchange Commission ("SEC") at the SEC's Public Reference Room at
450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain
information on the operation of the Public Reference Room by calling SEC at
1-800-SEC-0330.
Item 2. Properties
Our facilities consist of our principal office located at 4491 State Road 7,
Suite 214, Fort Lauderdale, Florida 33314 which consists of approximately 2,400
leased square feet and three production facilities aggregating 34,000 square
feet.
Item 3. Legal Proceedings
In light of the omission by the Company of the existence of several corporate
guaranties in both its Private Placement Memorandum dated January 20, 2000, and
used in the February Placement and the Company's filings with the Securities and
Exchange Commission, including the financial statements of PrintAmerica, Inc.
("PrintAmerica") contained therein, the Company may be subject to claims based
on certain securities laws violations. Such actions may be brought by federal
authorities, state authorities and certain persons who bought or sold the
Company's securities during the relevant time period. No action has been
commenced in this regard.
The Company is aware of certain claims made by National Lithographers, Inc.
(currently the subject to an assignment for the benefit of creditors) for
payment of certain accounts payable totaling approximately $288,500. We
understand that there may be significant offsets held by the Company against
these claims, and that the Company may have additional defenses
10
<PAGE>
to any collection action brought against it for payment of these amounts. No
action has been commenced in this regard.
There were certain corporate guaranties assumed by the Company by virtue of
PrintAmerica's merger into it. PrintAmerica had guaranteed up to $7.5 million in
obligations of National Lithographers & Publishers, Inc., to First Southern
Bank. On January 31, 2000, the Company independently guaranteed this same
indebtedness. The underlying indebtedness secured by these guaranties was in
default. The Company has entered into a settlement agreement with First Southern
Bank releasing it from any obligations under the aforementioned corporate
guaranties. See Item 1. Description of Business - Recent Developments.
The Company has recently settled an action instituted in Miami-Dade County
Circuit Court in March 2000. The action arose from a corporate guarantee of
PrintAmerica of approximately $1 million of certain indebtedness owed to Merrill
Lynch Business Financial Services, Inc. ("Merrill Lynch"). Merrill Lynch had
instituted the action to collect the monies owed to it. See Item 1. Description
of Business - Recent Developments.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of our Security Holders during the fourth
quarter of the fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
The Company's Common Stock is currently traded on the over-the-counter. On July
30, 1999, in connection with the merger of Net Lnnx, Inc. and PrintonTheNet.com,
Inc., the Company's stock symbol changed from NLNX to POTN. The following table
sets forth the high and low sales prices for the Company's Common Stock for each
quarter within the two years ended December 31, 1999 as reported by the
over-the-counter quotations. These prices do not reflect retail mark-ups,
mark-downs or commissions and may not represent actual transactions.
1998 (as Net Lnnx, Inc.) High Low
---- ---- ---
January 1 through March 31, 1998 0.750 0.250
April 1 through June 30, 1998 0.813 0.250
July 1 through September 30, 1998 1.938 0.375
October 1 through December 31, 1998 0.656 0.250
1999 (Net Lnnx, Inc. through July 30)
----
11
<PAGE>
January 1 through March 31, 1999 2.875 0.125
April 1 through June 30, 1999 2.125 1.375
July 1 through September 30, 1999 2.500 0.625
October 1 through December 31, 1999 1.563 0.406
Holders
The number of record holders of the Company's Common Stock as of March 31, 2000
was approximately 2,080.
Dividends
The Company has never paid a cash dividend on its Common Stock and anticipates
that for the foreseeable future any earnings will be retained for use in its
business and, accordingly, does not anticipate the payment of cash dividends.
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations; Safe Harbor Statement under the Private
Securities Litigation Reform Act of 1995
The "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included herein should be read in conjunction with the Consolidated
Financial Statements of POTN and subsidiaries, as of December 31, 1999, and the
related notes to the Consolidated Financial Statements, along with the
Consolidated Financial Statements of POTN and subsidiaries as of December 31,
1998, and the related Notes to Consolidated Financial Statements. Such
Consolidated Financial Statements included (i) the historical accounts of POTN
from January 27, 1999 (date incorporated) through December 31, 1999, and (ii)
the historical accounts of PrintAmerica for the years ended December 31, 1999
and 1998. All significant intercompany balances and transactions have been
eliminated. The Company's Financial Statements have been prepared in accordance
with generally accepted accounting principles in the United States and have been
audited by the Company's independent accountants.
The financial information in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" refers to the continuing operations of the
Company.
Results of Operations
Sales. The Company's sales increased 62.1% to $2.5 million during 1999, from
$1.5 million during 1998. During 1999, the Company realized an entire year of
sales relating to two acquisitions made in March 1998 and an acquisition made in
April 1998. Additionally, the Company made an acquisition in May 1999 and two
acquisitions in August 1999 further contributing to the significant increase in
sales from 1998 to 1999.
Cost of Sales. Cost of Sales increased to $1,722,000 (68.8% of sales) during
1999 versus
12
<PAGE>
$1,010,000 (65.4% of sales) during 1998. The increase in cost of sales as a
percentage of sales is attributable to increased paper, labor and other
production costs.
Selling and Advertising Expenses. Selling and advertising expenses increased to
$150,000 (6.0% of sales) during 1999 versus $51,000 (3.3% of sales) during 1998.
The increase from 1998 to 1999 is attributable to increased efforts in
advertising and marketing the Company.
Software Development Expenses. Software development expenses were $401,000
(16.0% of sales) during 1999. Such costs relate to development of the Company's
web site, which is still under construction. The Company did not incur any such
costs during 1998.
General and Administrative Expenses. General and administrative expenses
increased to $1.6 million (64.6% of sales) during 1999 versus $425,000 (27.5 %
of sales) during 1998. The increase from 1998 to 1999 is attributable to several
factors, including (i) professional fees and other costs associated with being a
publicly traded company and (ii) increased infrastructure costs incurred in
readying the Company for future growth both internally and through acquisitions,
and relating to implementation of the web site.
Interest. Interest expense increased to $163,000 during 1999, from $28,000
during 1998. The increase from 1998 to 1999 is due to an overall increase in
short and long term debt and capital lease obligations relating to acquired
companies and purchases of equipment.
Net Income (Loss). During 1999 the Company had a net loss of $1.5 million, or
$.06 basic and diluted loss per share, compared to net income of $25,000, or
$.03 basic and diluted earnings per share during 1998.
Liquidity and Capital Resources
Net cash used in operating activities was $538,000 during 1999. The significant
1999 components include decreased cash of $1.5 million resulting from the net
loss (which was offset by non cash depreciation and amortization expenses of
$168,000), increased cash of $737,000 resulting from increases in accounts
payable and accrued expenses (such increases resulted primarily from
significantly higher general and administrative expenses), and increased cash of
$119,000 resulting from an increase in amounts due to affiliates.
During 1999 net cash used for investing activities was $465,000, of which
$315,000 was attributable to purchases of property and equipment and $150,000
was attributable to certain businesses acquisitions.
During 1999 net cash provided by financing activities was $1,003,000, the more
significant components of which included $904,000 provided by stockholder loans
(net of repayments),
13
<PAGE>
$100,000 received from the sale of warrants, $75,000 from capital contributions
from stockholders, and offset by $108,000 in repayments of notes payable.
At December 31, 1999, the Company had long term notes payable and capital lease
obligations of $634,000.
At December 31, 1999, the Company had a capital deficiency of approximately
$954,000, and a working capital deficit (current assets minus current
liabilities) of $2.1 million. Current liabilities include stockholder loans of
$977,000 that were contributed to capital in June 2000. In February 2000 the
Company raised approximately $1.4 million (net of offering costs) in a private
placement equity offering, and in June 2000 the Company raised approximately $7
million (net of offering costs) in a private placement equity offering (this
amount includes $1.8 million which was reinvested by subscribers in the
Rescission offering). See Item 1. Description of Business - Recent Developments.
The Company believes that such proceeds will be sufficient to fund the Company's
operations through June 2001.
Forward Looking Statements
Except for historical information contained herein, certain matters discussed
herein are forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. All
statements, other than statements of historical facts, that address future
activities, events or developments, including such things as future revenues,
product development, market acceptance, responses from competitors, capital
expenditures (including the amount and nature thereof), business strategy and
measures to implement strategy, competitive strengths, goals, expansion and
growth of POTN and its subsidiaries' business and operations, plans, references
to future success and other such matters, are forward-looking statements. The
words "anticipates," "believes," "estimates," "expects," "plans," "intends,"
"should," "seek," "will," and similar expressions are intended to identify these
forward-looking statements, but are not the exclusive means of identifying them.
These statements are based on certain historical trends, current conditions and
expected future developments as well as other factors we believe are appropriate
in the circumstances. However, whether actual results will conform to our
expectations and predictions is subject to a number of risks and uncertainties
that may cause actual results to differ materially, our success or failure to
implement our business strategy, our ability to market successfully our on-line
printing and publishing concept, changes in consumer demand, changes in general
economic conditions, the opportunities (or lack thereof) that may be presented
to and pursued by us, changes in laws or regulations, changes in technology, the
rate of acceptance of the Internet as a commercial vehicle, competition in the
Internet printing and publishing business and other factors, many of which are
beyond our control. Consequently, all of the forward-looking statements made in
this Report are qualified by these cautionary statements and there can be no
assurance that the actual results we anticipate will be realized or, even if
substantially realized, that they will have the expected consequences to or
effects on us or our business or operations. We assume no obligation to update
publicly any forward-looking statements, whether as a result of new information,
future events or otherwise.
14
<PAGE>
Item 7. Financial Statements
Immediately following the signature page in this Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Previously reported on Form 8-K dated March 26, 1999 and on Form 8-K dated
December 22, 1999.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
Our executive officers and directors are as follows:
NAME AGE POSITION
---- --- --------
Neal J. Polan 49 Chief Executive Officer/Director
Robert Priddy 53 Chairman of the Board
Management
A brief description of the key management of the Company is as follows:
Neal J. Polan founded Insight Management Corp. ("IMC") in 1983 and Insight
Capital Partners LLC ("ICP" and, with IMC, the "Insight Companies") in 1995. IMC
is an investment management firm, specializing in the reorganization and
strategic acquisition of small to middle market companies. ICP provides
financial advisory services to middle market companies. As a principal and
executive officer of the Insight Companies, over the last two years, Mr. Polan
has been involved in several Internet companies. In addition, from October 1999
through March 2000, Mr. Polan served on the Board of Directors of, and was
Director of Strategic Planning for, Adatom.com (Nasdaq SmallCap: ADTM), an
e-commerce infrastructure Internet company. From 1997 to October 1999, Mr. Polan
served as the Chairman and Chief Executive Officer of HealthCore Medical
Solutions (which merged with Adatom.com in October 1999), a healthcare company
that marketed and administered a healthcare benefits program targeted at small
and middle market businesses. From 1996 to 1998, Mr. Polan was a principal and
managing director of National Financial Companies LLC, a middle market merchant
bank specializing in early stage companies. Mr. Polan was also a founder, and
from 1992 to 1994 President and a director, of Sterling Vision, Inc., a company
that acquired the assets of Sterling Optical from Federal bankruptcy court in
1992. Sterling Vision, Inc. (Nasdaq: ISEE) completed a successful initial public
offering in 1995.
Robert Priddy is an investor and principal of RMC Capital, LLC, an investment
company which he founded in 1998, and a member of the Board of Directors and a
Partner of the Placement Agent. Previously, Mr. Priddy was Chairman and Chief
Executive Officer of
15
<PAGE>
ValuJet, Inc. (now AirTran Holdings, Inc.) from its inception in 1992 until
1997, as well as the founder of Florida Gulf Airlines, a subsidiary of Mesa
Airlines, where he was President from 1991 to 1993. From 1988 to 1991, he served
as President and Chief Executive Officer of Air Midwest, Inc., a regional
airline headquartered in Wichita, Kansas. Mr. Priddy was also one of the
founders of Atlantic Southeast Airlines, a regional airline headquartered in
Atlanta, Georgia, where he served as Vice President and Chief Financial Officer
from 1979 to 1987. In addition, he is a member of the Board of Directors of
several companies related to the Placement Agent.
The Company currently intends to appoint additional members to its Board of
Directors.
Item 10. Executive Compensation
Compensation
The following table sets forth information about the compensation paid or
accrued by the Company to the Company's named executive officers, for the last
three completed fiscal years:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Annual Compensation Awards
--------------------------- ------
Name and Securities Underlying
Principal Position Year Salary Bonus Options
------------------ ---- ----------- ----- ---------------------
<S> <C> <C> <C> <C>
Benjamin Rogatinsky 1999 $ 48,750(1) --- ---
Chief Executive Officer 1998 39,000(2) --- ---
1997 --- --- ---
Samuel Rogatinsky 1999 $ 48,750(1) --- ---
President 1998 39,000(2) --- ---
1997 --- --- ---
</TABLE>
-------------------
(1) Includes $29,250 salary paid by PrintAmerica Interactive, Inc.
(2) Represents salary paid by PrintAmerica Interactive, Inc.
Compensation of Directors
The Company reimburses members of the Board of Directors for their expenses
incurred in connection with their services as directors.
16
<PAGE>
Compensation of Officers - Employment Agreements
The Company and Mr. Polan have entered into an employment agreement following
the closing of the Offering. In connection with his employment thereunder, Mr.
Polan will receive five-year warrants to purchase approximately 7,673,000 shares
of Common Stock, exercisable at $.10 per share. These warrants will vest over a
three year period.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information with respect to beneficial ownership
of our Common Stock by each person who beneficially owns more than five (5%)
percent of our Common Stock as of the date of this Report, including shares
owned by its executive officers and directors. Unless otherwise indicated, we
believe all persons in the table have sole voting and investment power for all
shares beneficially owned by them.
Name and Address of Percent of Class
Title of Class Beneficial Owners(1) No. of Shares (%)(2)
-------------- -------------------- ------------- ----------------
Common Stock Benjamin Rogatinsky 5,705,270 20.7
Common Stock Samuel Rogatinsky 5,705,269 20.7
Common Stock Neal J. Polan(3) 5,639,445 17.0
Common Stock First Southern Bank(3) 5,000,000 15.4
-------------------
(1) Beneficial ownership is based on information provided to us, and the
beneficial owner has no obligation to inform us of or otherwise report any
changes in beneficial ownership. Except as indicated, and subject to community
property laws when applicable, the persons and entities named in the table above
have sole voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them. Except as otherwise indicated, each of such
persons may be reached through the Company's offices at 4491 South State Road 7,
Suite 214, Fort Lauderdale, Florida 33314.
(2) Based on 27,560,456 shares of common stock outstanding as of the date
hereof; does not include certain warrants issued to the Placement Agent (and its
affiliates), Neal J. Polan (and his designees) and Robert Priddy which are
exerciseable more than 60 days from the date of this Report. See Item 12.
Certain Relationships and Related Transactions.
(3) Represent warrants to purchase shares of Common Stock which are currently
exerciseable.
(4) Does not include warrants to purchase 13,548,600 shares of Common Stock
issued to the Placement Agent which are currently exercisable.
Item 12. Certain Relationships and Related Transactions
Purchase of Warrants by Polan and Priddy
On April 18, 2000, Neal J. Polan purchased from the Company five year warrants
to purchase 4,000,000 shares of Common Stock, exercisable for $.10 per share
commencing on September 30, 2000. The purchase price for such warrants was
$40,000. Mr. Polan also purchased warrants for an additional 1,000,000 shares
17
<PAGE>
of Common Stock on these same terms prior to the completion of its current
Offering.
Mr. Priddy purchased two and one-half (2.5) units in the Company's February
Placement which units will be converted into the Units sold in the current
Offering. In addition, on April 18, 2000, Mr. Priddy purchased from the Company
five year warrants to purchase 3,000,000 shares of Common Stock exercisable for
$.10 per share commencing on September 30, 2000. The purchase price for such
warrants was $30,000.
The warrants issued to Messrs. Polan and Priddy provide for registration rights
with respect to the shares of Common Stock issuable upon exercise thereof.
Relationship With The Placement Agent
The Placement Agent is acting as placement agent in connection with the sale of
the securities in the Offering. In connection therewith, the Company has agreed
to pay the Placement Agent 10% of the excess of the gross proceeds received from
the sale of Units in the Offering over $3,040,000 (the amount raised in the
February Placement). In addition, the Placement Agent will receive warrants to
purchase that number of shares of Common Stock equal to (a) 19.3% of the shares
of Common Stock underlying the Preferred Stock included in the first $7,500,000
of Units sold in the Offering, and (b) 30% of the shares of Common Stock
underlying the Preferred Stock included in the Units sold in excess of
$7,500,000 in the Offering. These warrants provide for registration rights with
respect to the shares of Common Stock issuable upon exercise thereof. If any
Units included in the Over-Allotment Option are sold, the Placement Agent will
receive additional fees and warrants.
Furthermore, the Placement Agent and certain of its associates, including Robert
Priddy, purchased up to 15 ($1,500,000) Units in the Offering (in addition to
the conversion of approximately $600,000 of units purchased in the February
Placement into the Units offered in this Offering).
In connection with investment banking and advisory services provided by the
Placement Agent to the Company, in December 1999, the Company sold to the
Placement Agent and certain of its affiliates for $100,000 five year warrants
(the "Advisory Warrants") to purchase 6,000,000 shares of Common Stock at an
exercise price of $.10 per share. The Advisory Warrants are exercisable
commencing December 31, 2000.
On April 18, 2000, Com Vest Capital Partners, LLC, an affiliate of the Placement
Agent, purchased from the Company five-year warrants to purchase 8,000,000
shares of Common Stock exercisable for $.10 per share commencing on September
30, 2000. The purchase price for such warrants was $80,000. As a result of the
closing of the Offering, the Placement Agent has the right to designate three
out of seven directors to the Company's Board.
18
<PAGE>
The Placement Agent was also granted a right of first refusal with respect to
certain future financings and is a party to an advisory agreement with the
Company entitling it to certain fees for assisting the Company with certain
transactions.
In connection with its services as placement agent in the February Placement,
upon the closing of such placement, the Placement Agent received (i) a
commission of $212,800 (7% of the aggregate purchase price of the securities
sold in such placement), and (ii) a structuring fee of $91,200 (3% of the
aggregate purchase price of the securities sold in such placement). In addition,
the Placement Agent and certain persons associated with the Placement Agent
received Agent's Warrants to purchase 10% of the shares of Preferred Stock
underlying the Units sold in the February Placement at an exercise price of
$3.52 per share. These Agent's Warrants were be canceled upon the closing of the
Offering.
Related Party Transactions
Certain transactions involving PrintAmerica are "related party transactions."
These transactions are discussed in detail in our Report on Form 8-K filed on
January 14, 2000.
Prior to December 1999, we obtained human resource services and leased our
employees from National Payroll Services, Inc., an entity owned by Benjamin and
Samuel Rogatinsky.
PART IV
Item 13. Exhibits and Reports on From 8-K.
(a) Exhibits. The following exhibits are filed with or incorporated by reference
into this report. The exhibits which are marked by a single asterisk (*) were
previously filed as a part of, and are hereby incorporated by reference from the
Company's Form DEF 14A, as filed with the Securities and Exchange Commission on
July 12, 1999. The exhibits which are marked by a double asterisk (**) were
previously filed as part of, and are hereby incorporated by reference from the
Company's Form 8-K as filed with the Securities and Exchange Commission on
August 8, 1999. The exhibit numbers correspond to the exhibit numbers in the
referenced documents.
2.1* Agreement and Plan of Merger by and between Net Lnnx, Inc. and
PrintOnTheNet.com, Inc.
3.1(a)* Restated Certificate of Incorporation of PrintOnTheNet.com, Inc.
3.1(b) Certificate of Designations and Preferences.
3.2* Bylaws of PrintOnTheNet.com, Inc.
10.1* PrintOnTheNet.com, Inc. 1999 Stock Incentive Plan.
10.2 Debt Modification, Assumption and Settlment Agreement, dated as of May
19, 2000, by and among National Lithographers & Publishers, Inc.,
PrintOnTheNet.com, Inc., National Payroll Services, Inc., National
Holding
19
<PAGE>
Company, Inc., Michele Rogatinsky, Benjamin Rogatinsky, Samuel
Rogatinsky, Reuben and Shulamit Rogatinsky, the Rogatinsky Family
Trust, Royal Industries & Distribution, Inc., 299 Holdings, Inc. and
First Southern Bank.
10.3 Stock Purchase Agreements, dated as of June 8, 2000, by and between
Benjamin Rogatinsky and PrintOnTheNet.com, Inc.
10.4 Stock Purchase Agreements, dated as of June 8, 2999, by and between
Samuel Rogatinsky and PrintOnTheNet.com, Inc.
10.5 Employment Agreement dated June 8, 2000 by and between
PrintOnTheNet.com, Inc. and Neal J. Polan.
21 Subsidiaries of the registrant.
23.1a Independent Auditors' Consent of Richard A. Eisner & Co.
23.1b Independent Auditors' Consent of Esteban Brown CPA, PA
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
None
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
PRINTONTHENET.COM, INC.
Date: June 15, 2000 By: /s/ Neal J. Polan
--------------------------------
Chief Executive Officer,
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
Name Title Date
---- ----- ----
Robert Norris CFO June 15, 2000
21
<PAGE>
PRINTONTHENET.COM, INC. AND SUBSIDIARIES
Contents
Page
Consolidated Financial Statements
Independent auditors' report December 31, 1999 F-2
Independent auditor's report December 31, 1998 F-3
Balance sheet as of December 31, 1999 F-4
Statements of income (loss) for the years ended December 31, 1999
and 1998 F-5
Statements of stockholders' equity (capital deficiency) for the
years ended December 31, 1999 and 1998 F-6
Statements of cash flows for the years ended December 31, 1999
and 1998 F-7
Notes to financial statements F-8
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of PrintOnTheNet.Com, Inc.
We have audited the accompanying consolidated balance sheet of
PrintOnTheNet.Com, Inc. and subsidiaries as of December 31, 1999, and the
related consolidated statements of income (loss), stockholders' equity (capital
deficiency) and cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements enumerated above present
fairly, in all material respects, the financial position of PrintOnTheNet.Com,
Inc. and subsidiaries as of December 31, 1999, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
Richard A. Eisner & Company, LLP
New York, New York
April 7, 2000
With respect to Note G
June 8, 2000
With respect to Note L
May 19, 2000
With respect to the last paragraph of Note A, and Notes M[2] and M[3]
June 5, 2000
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of PrintAmerica Interactive, Inc.
I have audited the consolidated statements of income, stockholders' equity and
cash flows of PrintAmerica Interactive, Inc. (a Florida corporation) and
subsidiary for the year ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. My responsibility
is to express an opinion on these consolidated financial statements based on my
audit.
I conducted this audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
PrintAmerica Interactive, Inc. and subsidiary for the year ended December 31,
1998, in conformity with generally accepted accounting principles.
Esteban Brown CPA, PA
Miami, Florida
December 17, 1999
With respect to Notes G and L
June 8, 2000
F-3
<PAGE>
PRINTONTHENET.COM, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1999
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Due from factor $ 43,000
Accounts receivable, net of allowance for doubtful accounts of $25,000 14,000
Inventories 154,000
-----------
Total current assets 211,000
Property and equipment, net of accumulated depreciation and amortization of $97,000 822,000
Goodwill and other intangible assets, net of accumulated amortization of $139,000 936,000
Other assets 32,000
-----------
$ 2,001,000
===========
Liabilities and CAPITAL DEFICIENCY
Current liabilities:
Notes payable, current portion $ 148,000
Capital lease obligations, current portion 30,000
Bank overdraft 25,000
Accounts payable 831,000
Accrued expenses 132,000
Due to affiliate 178,000
Stockholder loans 977,000
-----------
Total current liabilities 2,321,000
Notes payable - noncurrent portion 516,000
Capital lease obligations - noncurrent portion 118,000
-----------
2,955,000
-----------
Commitments and contingencies
Capital deficiency:
Preferred stock, $.001 par value, 10,000,000 shares authorized, none issued
Common stock, $.001 par value, 80,000,000 shares authorized, 27,560,456
shares
issued and outstanding 28,000
Additional paid-in capital 539,000
Accumulated deficit (1,521,000)
-----------
(954,000)
-----------
$ 2,001,000
===========
</TABLE>
See notes to financial statements
F-4
<PAGE>
PRINTONTHENET.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Loss)
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Sales $ 2,503,000 $ 1,544,000
Cost of sales 1,722,000 1,010,000
------------ ------------
Gross profit 781,000 534,000
Selling and advertising expenses 150,000 51,000
Software development expenses 401,000
General and administrative expenses 1,616,000 425,000
------------ ------------
Income (loss) from operations (1,386,000) 58,000
Interest expense (163,000) (28,000)
------------ ------------
Income (loss) before income taxes (1,549,000) 30,000
(Provision) benefit for income taxes 2,000 (5,000)
------------ ------------
Net income (loss) $ (1,547,000) $ 25,000
============ ============
Net income (loss) per common share:
Basic and diluted $ (0.06) $ 0.03
============ ============
Weighted average shares outstanding 25,230,000 1,000,000
============ ============
</TABLE>
See notes to financial statements
F-5
<PAGE>
PRINTONTHENET.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Capital Deficiency)
<TABLE>
<CAPTION>
Common Stock
------------------------- Additional Retained
Number of Paid-In Earnings
Shares Amount Capital (Deficit) Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1998 1,000,000 $ 1,000 $ 36,000 $ 1,000 $ 38,000
Cash contributions by principal stockholders 56,000 56,000
Services contributed by an affiliated entity 12,000 12,000
Net income 25,000 25,000
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1998 1,000,000 1,000 104,000 26,000 131,000
Common stock issued to founders of the
Company 23,707,000 24,000 24,000
Cash contributions by principal stockholders 75,000 75,000
Common stock issued to Net Lnnx, Inc.
stockholders 2,634,000 3,000 (3,000) 0
Common stock issued in connection with
acquisitions 204,000 248,000 248,000
Common stock issued for services 15,000 15,000 15,000
Sale of warrants 100,000 100,000
Net loss (1,547,000) (1,547,000)
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1999 27,560,000 $ 28,000 $ 539,000 $(1,521,000) $ (954,000)
=========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements
F-6
<PAGE>
PRINTONTHENET.COM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(1,547,000) $ 25,000
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization 168,000 62,000
Provision for bad debts 25,000
Issuance of common stock for services 15,000
Services contributed by an affiliated entity 12,000
Deferred income taxes (2,000) 2,000
Changes in:
Due from factor 2,000 (45,000)
Accounts receivable (19,000) 59,000
Inventories (27,000) (117,000)
Prepaid expenses 5,000 (5,000)
Other assets (26,000) (6,000)
Accounts payable 618,000 29,000
Accrued expenses 119,000 11,000
Due to affiliate 131,000 46,000
----------- -----------
Net cash (used in) provided by operating activities (538,000) 73,000
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (315,000) (104,000)
Net cash payments for acquisitions (150,000) (40,000)
----------- -----------
Net cash used in investing activities (465,000) (144,000)
----------- -----------
Cash flows from financing activities:
Bank overdraft 11,000 15,000
Capital contributions by principal stockholders 75,000 56,000
Proceeds from stockholder loans (net of repayments) 904,000 73,000
Principal repayments on notes payable (108,000) (82,000)
Principal repayments on capital lease obligations (3,000)
Proceeds from issuance of common stock 24,000
Proceeds from sale of warrants 100,000
----------- -----------
Net cash provided by financing activities 1,003,000 62,000
----------- -----------
Net increase (decrease) in cash and cash equivalents 0 (9,000)
Cash and cash equivalents - beginning of year 0 9,000
----------- -----------
Cash and cash equivalents - end of year $ 0 $ 0
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the years for:
Interest $ 163,000 $ 28,000
Supplemental schedule of noncash investing and financing activities:
Capital lease obligations $ 151,000
Notes issued to acquire property and equipment $ 80,000
</TABLE>
See notes to financial statements
F-7
<PAGE>
PRINTONTHENET.COM, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1999
NOTE A - THE COMPANY AND BASIS OF PRESENTATION
PrintOnTheNet.Com, Inc. ("POTN" or the "Company"), formerly known as Net Lnnx,
Inc. ("Net Lnnx"), provides printing services for small to medium sized
businesses and consumers in the South Florida region. The Company intends to
provide the same printing services through the Internet and is currently
developing its website and the related software. Customers will have access to a
private customized secure website containing a digital catalog of their custom
printed materials, with which they can modify and proofread their orders using
any Internet enabled personal computer. These orders will be printed at the
Company's printing facilities.
On March 11, 1999, a wholly-owned subsidiary of Net Lnnx, a Pennsylvania
corporation, merged with and into POTN, a Florida corporation formed on January
27, 1999, and POTN was the surviving corporate entity. Pursuant to the merger,
Net Lnnx issued an aggregate of 16,500,000 shares of its common stock and
1,000,000 shares of its preferred stock in exchange for all the common stock of
POTN. Each share of preferred stock was convertible into 7.207 shares of common
stock. The merger was accounted for as a recapitalization (reverse acquisition)
with POTN as the acquirer for financial reporting purposes since POTN's
stockholders owned approximately 90% of the merged entity. Net Lnnx was an
inactive public corporation with no significant assets or liabilities on the
date of acquisition.
On July 26, 1999, Net Lnnx was merged into its wholly-owned subsidiary, POTN.
Pursuant to the merger, each share of common stock of Net Lnnx was converted
into one share of POTN, and each share of preferred stock of Net Lnnx was
converted into 7.207 shares of common stock of POTN, resulting in the issuance
of 26,341,000 shares of common stock.
On December 30, 1999, the Company acquired PrintAmerica Interactive, Inc.
("PrintAmerica") for 1,000,000 shares of common stock. The acquisition was
recorded at the historical cost of PrintAmerica's assets and liabilities in a
manner similar to a pooling of interests for accounting purposes since
PrintAmerica was owned by the parents of the Company's two principal
stockholders who collectively owned approximately 86% of the common stock of
POTN on the date of the acquisition. PrintAmerica was merged into POTN in
January 2000.
The accompanying financial statements include (i) the historical accounts of
POTN from January 27, 1999 (date incorporated) through December 31, 1999, and
(ii) the historical accounts of PrintAmerica and its wholly owned subsidiary
Denny Printing, Corp. for the years ended December 31, 1999 and 1998. All
significant intercompany balances and transactions have been eliminated.
The Company has sustained recent operating losses and such losses are expected
to continue. At December 31, 1999, the Company had a substantial working capital
deficiency and lacked the resources to repay its indebtedness including amounts
owed under guarantees. In February and June 2000, the Company completed two
private placements of its convertible preferred stock and realized aggregate net
proceeds of approximately $6,128,000 (Note M). Management believes that such
proceeds will be sufficient to fund the Company's operations through June 2001.
Further, the Company negotiated a settlement and obtained releases of the
guarantees described in Note L.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
[1] Due from factor:
The Company has a factoring agreement (the "Agreement") with First
Southern Bank (the "Bank") whereby the Company sells eligible accounts
receivable to the Bank. The Bank charges a service fee of 3.25% of the
face amount of each invoice, and holds back 10% (the "holdback"), pending
collection by the Bank of the invoice amount. When the invoice is
collected by the Bank, the holdback is remitted to the Company. At the
Bank's discretion, accounts receivable remaining uncollected past ninety
days are subject to repurchase by the Company. The Bank is secured and
has filed a UCC financing statement covering all accounts receivable,
inventory, and all other intangible and tangible assets of the Company,
including the holdback, which amounted to $43,000 at December 31, 1999.
F-8
<PAGE>
PRINTONTHENET.COM, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1999
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[1] Due from factor: (continued)
As of December 31, 1999, the Company had sold $512,000 of accounts
receivable which the Company could be obligated to repurchase if the
underlying accounts receivable were not collected by the Bank. In March
2000, the Agreement was terminated and the Company repurchased all
uncollected accounts receivable previously sold to the Bank amounting to
$346,000.
[2] Inventory:
Inventory is stated at the lower of cost or market and consists of raw
materials and work-in-process. Cost is computed on a first-in, first-out
basis.
[3] Property and equipment:
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related
assets (3 to 20 years). Leasehold improvements are amortized over the
shorter of (a) the term of the lease or (b) the useful life of the
improvements.
[4] Long-lived assets:
The Company reviews long-lived assets for impairment whenever events or
changes in business circumstances indicate that the carrying amount of
the assets may not be fully recoverable. The Company performs
undiscounted cash flows analysis to determine if an impairment exists. If
an impairment is determined to exist, any related impairment loss is
calculated based on fair value. No such losses have been recorded.
[5] Software development expenses:
The Company accounts for software development costs in accordance with
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use". Through December 31, 1999, all
such costs have been expensed.
[6] Revenue recognition:
Revenue from the sale of printed business materials is recognized upon
shipment of product to the customer.
[7] Advertising:
The Company expenses advertising costs as incurred. For the years ended
December 31, 1999 and 1998, advertising expenses were approximately
$47,000 and $1,000, respectively.
[8] Income taxes:
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized.
F-9
<PAGE>
PRINTONTHENET.COM, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1999
NOTE B - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
[9] Concentrations of credit risks:
The Company reviews the credit histories of potential customers prior to
extending credit and maintains allowances for potential credit losses.
The Company had one customer who accounted for approximately 17% of sales
in 1999 (the customer accounted for less than 10% in 1998). The Company
maintains its cash and cash equivalents in bank accounts in amounts,
which, at times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts.
[10] Net earnings (loss) per share:
Basic earnings (loss) per common share is computed using the weighted
average number of common shares outstanding during the period. Diluted
loss per common share for 1999 is based only on the weighted average
number of common shares outstanding during the period as the inclusion of
stock options and warrants would have been antidilutive.
[11] Use of estimates in the preparation of financial statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
[12] Stock-based compensation:
The Company has adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). The
provisions of SFAS No. 123 allow companies to either expense the
estimated fair value of employee stock options or to continue to follow
the intrinsic value method set forth in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"),
but disclose the pro forma effects on net income (loss) had the fair
value of the options been expensed. The Company has elected to continue
to apply APB 25 in accounting for its employee stock option incentive
plans. See Note I to the financial statements for further information.
NOTE C - ACQUISITIONS
On December 30, 1999, POTN acquired PrintAmerica in a transaction (the
"Acquisition") in which all of PrintAmerica's outstanding common stock was
acquired for 1,000,000 shares of the Company's common stock. In connection with
the Acquisition, the sellers executed a noncompete agreement. PrintAmerica,
which began operations in the second half of 1997, provides quick print services
in South Florida. PrintAmerica operates from three production facilities located
in South Florida, and is the culmination of five separate acquisitions of quick
print businesses.
The Acquisition was recorded at historical cost in a manner similar to a pooling
of interests for accounting purposes since 100% of the common stock of
PrintAmerica was owned by the parents of Benjamin Rogatinsky and Samuel
Rogatinsky (the "Rogatinskys"), who were the principal officers and collectively
owned approximately 89% of the common stock of POTN on the date of acquisition.
In addition, the Rogatinskys served as officers of PrintAmerica. Accordingly,
the consolidated financial statements include the results of operations of
PrintAmerica for all periods presented.
F-10
<PAGE>
PRINTONTHENET.COM, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1999
NOTE C - ACQUISITIONS (CONTINUED)
During 1999, the Company purchased certain assets and liabilities and the
operations of three South Florida printing companies: Bailey's Printing Plus,
Inc. ("Bailey's"), Ivan's Quick Print, Inc. ("Ivan's"), and Sun Graphics, Inc.
("Sun Graphics"). The transactions are summarized as follows:
<TABLE>
<CAPTION>
Total Bailey's Ivan's Sun Graphics
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Acquisition date August, 1999 August, 1999 May, 1999
Common shares issued to:
Seller 186,054 120,000 66,054
Broker 18,320 18,320
Value of common shares issued to:
Seller (1) $225,000 $150,000 $ 75,000
Broker 23,000 23,000
Cash paid to seller 150,000 50,000 25,000 $ 75,000
Notes payable issued to seller 280,000 15,000 265,000
Liability assumed 13,000 13,000
-------- -------- -------- --------
$691,000 $251,000 $100,000 $340,000
======== ======== ======== ========
</TABLE>
(1) Additional cash or shares are payable to the sellers of Bailey's and
Ivan's if the value of the shares issued to such sellers are worth less
than $150,000 and $75,000 on February 23, 2001 and August 27, 2001,
respectively.
The 1999 acquisitions were accounted for under the purchase method resulting in
the following aggregate allocation of purchase price:
Property, plant and equipment $ 45,000
Inventory 2,000
Noncompete agreements 75,000
Goodwill 569,000
-----------
Total purchase price $ 691,000
===========
F-11
<PAGE>
PRINTONTHENET.COM, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1999
NOTE C - ACQUISITIONS (CONTINUED)
During 1998, the Company purchased certain assets and liabilities and the
operations of two South Florida printing companies: RJ Menu Company ("RJ Menu"),
and Cloverleaf Printing, Inc. ("Cloverleaf") and all of the shares of common
stock of Denny Printing Corp. ("Denny"). The transactions are summarized as
follows:
Total Denny RJ Menu Cloverleaf
-------- -------- -------- --------
Acquisition date April, 1998 March, 1998 March, 1998
Cash paid $ 55,000 $ 30,000 $ 25,000
Notes payable issued 321,000 70,000 100,000 $151,000
-------- -------- -------- --------
$376,000 $100,000 $125,000 $151,000
======== ======== ======== ========
The 1998 acquisitions were accounted for under the purchase method resulting in
the following aggregate allocation of purchase price:
Cash $ 15,000
Accounts receivable 63,000
Inventory 6,000
Property, plant and equipment 236,000
Noncompete agreements 75,000
Goodwill 212,000
Assumption of debt and trade payables (231,000)
-----------
Total purchase price $ 376,000
===========
The following table represents unaudited consolidated pro forma information as
if the acquisitions had occurred at the beginning of the periods presented. The
pro forma data is presented for illustrative purposes only and is not
necessarily indicative of the combined results of operations of future periods
or the results that actually would have occurred had the acquisitions occurred
at the beginning of the periods presented.
Year Ended
December 31,
----------------------------
1999 1998
------------ ------------
(unaudited)
Revenue $ 3,218,000 $ 3,143,000
============ ============
Net loss (1,601,000) (46,000)
============ ============
Loss per common share:
Basic and diluted $ (0.06) $ 0.00
============ ============
Shares used in computing loss
per common share:
Basic and diluted 25,364,000 25,359,000
============ ============
F-12
<PAGE>
PRINTONTHENET.COM, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1999
NOTE D - PROPERTY AND EQUIPMENT
A summary of property and equipment as of December 31, 1999 is as follows:
Estimated
Useful Life - Years
-------------------
Manufacturing equipment $ 527,000 10 - 20
Office equipment 116,000 3 - 10
Vehicles 10,000 5
Leasehold improvements 266,000 10
-----------
919,000
Less accumulated depreciation and
amortization (97,000)
-----------
$ 822,000
===========
Included in property and equipment is equipment under capital leases amounting
to $151,000 at December 31, 1999. Accumulated depreciation for equipment under
capital leases was $8,000 as of December 31, 1999.
Depreciation expense was $83,000 and $14,000 for the years ended December 31,
1999 and 1998, respectively, of which $4,000 and $0 was attributable to
equipment under capital leases.
NOTE E - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill $ 900,000
Covenants not to compete 175,000
-------------
1,075,000
Less accumulated amortization (139,000)
-------------
Intangibles, net $ 936,000
=============
Goodwill and covenants not to compete are being amortized over ten years and
periods from three to five years, respectively. Amortization expense was $85,000
and $48,000 for the years ended December 31, 1999 and 1998, respectively.
F-13
<PAGE>
PRINTONTHENET.COM, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1999
NOTE F - NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL LEASE
[1] Notes Payable:
Notes payable at December 31, 1999 consists of the following:
Acquisition Notes:
Note dated August 25, 1999 issued by POTN to acquire
Bailey's. Face value of $15,000, monthly principal
and interest payment of $1,000 (interest at 6.5%)
payable through February 2001. $ 12,000
Note dated May 5, 1999, issued by PrintAmerica to
acquire Sun Graphics. Face value of $265,000, monthly
principal and interest payment of $3,000 (interest at
7%) based on a 10 year amortization period with a
final balloon payment of $100,000 in May 2006. 254,000
Note dated August 28, 1997 issued by PrintAmerica to
acquire Kram Printing, Inc. Face value of $125,000,
with monthly principal and interest payment of $3,000
(interest at 7%) payable through September 2002. 74,000
Note dated April 13, 1998, issued by PrintAmerica to
acquire Denny. Face value of $70,000, monthly
principal and interest payment of $1,000 (interest at
6.5%) payable through April 2003. 49,000
Note dated March 16, 1998, issued by PrintAmerica to
acquire RJ Menu. Face value of $100,000, monthly
principal and interest payment of $1,000 (interest at
6.5%) payable through March 2005. 79,000
Note dated March 16, 1998, issued by PrintAmerica to
acquire Cloverleaf. Face value of $151,000, monthly
principal and interest payment of $2,000 (interest at
6.5%) based on a ten-year amortization period.
Additional principal payments of $25,000 in April
2000, $25,000 in April 2001, and a final balloon
payment of $46,000 in April 2002. 131,000
All of the above notes are collateralized by a first lien on the assets
acquired in the respective acquisitions.
Equipment Notes:
Note dated October 24, 1998 issued for purchase of
equipment. Face value of $52,000, monthly principal
and interest payment of $1,000 (interest at 10%)
payable through August 2002, collateralized by
manufacturing equipment. 38,000
Note dated April 24, 1998 issued to First Southern
Bank for purchase of equipment. Face value of
$28,000, monthly principal and interest payment of
$1,000 (interest at 10%) payable through March 2000,
collateralized by manufacturing equipment. 14,000
Assumption of note in connection with the acquisition
of Bailey's, monthly principal and interest payment
of $1,000 (interest at 10%) payable through October
2002. 13,000
----------
664,000
Less current portion (148,000)
----------
Long-term debt $ 516,000
==========
At December 31, 1999, aggregate maturities of notes payable were as
follows:
2000 $ 148,000
2001 140,000
2002 142,000
2003 46,000
2004 43,000
Thereafter 145,000
-----------
$ 664,000
===========
F-14
<PAGE>
PRINTONTHENET.COM, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1999
NOTE F - NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL LEASE (CONTINUED)
[2] Obligations Under Capital Leases:
Obligations under capital leases are stated on the accompanying
consolidated balance sheet at the present value of future minimum lease
payments. Included in obligations under capital leases is $119,000
payable to First Southern Bank. This obligation is not part of the
settlement discussed in Note L. Interest rates on capital leases range
between 9.4% and 26.9%.
Future minimum payments under capital lease obligations as of December
31, 1999 are as follows:
Amount
-----------
2000 $ 51,000
2001 33,000
2002 28,000
2003 28,000
2004 25,000
Thereafter 33,000
-----------
198,000
Less amount representing interest (50,000)
-----------
148,000
Less current portion (30,000)
-----------
$ 118,000
===========
NOTE G - STOCKHOLDER LOANS
Through December 31, 1999, the Rogatinskys funded the Company's operations with
personal loans including amounts borrowed through National Holding Company,
Inc.'s ("National Holding", affiliated with the Company through common
ownership) account with Merrill Lynch Business Financial Services, Inc.
("Merrill Lynch"). These loans were interest free and had no fixed due date.
PrintAmerica had co-guaranteed the National Holding debt to Merrill Lynch. On
March 15, 2000, Merrill Lynch initiated a lawsuit against National Holding and
the guarantors demanding repayment of the loans. In June 2000, all amounts due
from the Company to the Rogatinskys pursuant to such loans were contributed to
the capital of the Company, and the lawsuit was settled and the guarantees
released (see Note L).
F-15
<PAGE>
PRINTONTHENET.COM, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1999
NOTE H - INCOME TAXES
The provision (benefit) for income taxes shown in the consolidated statements of
operations consists of the following:
Year Ended
December 31,
-------------------
1999 1998
------- -------
Current:
Federal $ 2,000
State 1,000
-------
Total current provision 3,000
-------
Deferred:
Federal $(1,000) 1,000
State (1,000) 1,000
------- -------
Total deferred provision (benefit) (2,000) 2,000
------- -------
$(2,000) $ 5,000
======= =======
The difference between the income tax expense (benefit) and the amounts
calculated using the federal income tax rate of 34% for 1999 and 15% for 1998,
is summarized as follows:
Year Ended
December 31,
-----------------------
1999 1998
--------- ---------
Tax (benefit) expense at federal statutory rate $(527,000) $ 4,000
State income tax (benefit) expense, net of
federal tax effect (58,000) 1,000
Increase in valuation allowance 578,000
Other 5,000
--------- ---------
$ (2,000) $ 5,000
========= =========
Significant components of the Company's deferred tax assets and liabilities at
December 31, 1999 and 1998 are as follows:
Year Ended
December 31,
-----------------------
1999 1998
--------- ---------
Intangible assets $ 24,000 $ 5,000
Depreciation (26,000) (7,000)
Allowance for doubtful accounts 9,000
Net operating loss 571,000
Valuation allowance (578,000)
--------- ---------
$ 0 $ (2,000)
========= =========
F-16
<PAGE>
PRINTONTHENET.COM, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1999
NOTE H - INCOME TAXES (CONTINUED)
The Company provided a valuation allowance against the full amount of the net
deferred tax asset since the likelihood of realization cannot be determined. The
Company has a tax operating loss carryforward of approximately $1,518,000
expiring through the year 2019.
NOTE I - STOCK INCENTIVE PLANS AND WARRANTS
Net Lnnx had 75,000 stock options outstanding under the Net Lnnx 1997 Restricted
Stock Plan as of the date of the merger with POTN. These options expired in
November 1999, and no further options were granted under this plan.
On July 26, 1999, the Board of Directors authorized, and the stockholders
approved, the 1999 Stock Incentive Plan (the "Plan"). Under the Plan, employees,
consultants and advisors may receive awards of nonqualified options and
incentive options, stock appreciation rights or restricted stock. A maximum of
4,000,000 shares of common stock are subject to the Plan. The Plan terminates on
July 26, 2009 unless terminated sooner by the Company. The exercise price of
incentive options granted under the Plan shall in no event be less than 100% of
the fair market value of the Company's common stock on the date of grant (110 %
of fair market value if granted to an employee who owns 10% or more of the
voting common stock of the Company on the date of grant).
As of December 31, 1999, no stock appreciation rights had been granted under the
Plan, and an incentive option to purchase 125,000 shares of Common Stock,
vesting in four equal annual installments beginning on November 22, 2000, was
granted to the Company's Chief Financial Officer. In addition, 15,000 restricted
shares of common stock were issued in August 1999 pursuant to the Plan for
services.
The Company applies APB 25 in accounting for stock options and, accordingly,
recognizes compensation expense for the difference between the fair value of the
underlying common stock and the exercise price of the option at the date of
grant. The effect of applying SFAS No. 123 on pro forma net loss is not
necessarily representative of the effects on reported net income or loss for
future years due to, among other things, (i) the vesting period of the stock
options and (ii) the fair value of additional stock options in future years. Had
compensation cost for the Company's stock option plan been determined based upon
the fair value of the option at the grant date of the award under the plan
consistent with the methodology prescribed under SFAS No. 123, the Company's net
loss for the year ended December 31, 1999 would have been approximately
$1,551,000 or $0.06 per share. The weighted average fair value of the option
granted is estimated at $0.84 per share, on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: dividend yield 0%, volatility of 180%, risk-free interest rate of
6.19% and expected life of five years.
Additional information with respect to the stock option activity is presented
below:
Weighted
Weighted- Average
Average Remaining
Exercise Contractual
Shares Price Life
------- -------- ----------
Option outstanding at beginning of year 75,000 $ 0.687
Option granted 125,000 0.875
Option forfeited (75,000) (0.687)
------- --------
Option outstanding at end of year 125,000 $ 0.875 3.875 years
======= ========
Option exercisable at end of year 0
=======
F-17
<PAGE>
PRINTONTHENET.COM, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1999
NOTE I - STOCK INCENTIVE PLANS AND WARRANTS (CONTINUED)
On December 20, 1999 the Company sold to an investment banking firm for $100,000
warrants (the "Advisory Warrants") to purchase 6,000,000 shares of common stock
of the Company at an exercise price of $.10 per share for services rendered in
connection with the private placement offering of the Company's securities in
February 2000.
NOTE J - COMMITMENTS AND CONTINGENCY
[1] Commitments:
The Company has non-cancelable operating leases (including leases with
related parties) for use of its office and printing facilities and
various equipment. Certain of these leases require payment of various
expenses as additional rent. Certain leases contain renewal options and
escalation clauses.
In January 2000, the Company entered into a lease for office space, which
was modified in April 2000 to reduce the leased space.
Minimum future rental payments for each of the next five years and
thereafter under non-cancelable operating leases having remaining terms
in excess of one year are:
Amount
-----------
2000 $ 240,000
2001 230,000
2002 169,000
2003 152,000
2004 143,000
Thereafter 606,000
-----------
$ 1,540,000
Rent and equipment lease expense for the years ended December 31, 1999
and 1998 under various operating leases amounted to $190,000 and $47,000,
respectively.
[2] Contingency:
Neither the private placement memorandum provided to investors in the
February 2000 offering of the Company's securities nor documents filed
with the Securities and Exchange Commission related to the PrintAmerica
merger, disclosed the existence of the corporate guarantees of certain
obligations of affiliated entities (Note L). The Company may be subject
to claims based on alleged securities laws violations and such actions
may be initiated by the federal authorities, state authorities or certain
persons who bought or sold the Company's securities during the relevant
time period. The Company has offered the investors in the February 2000
private placement, the right to rescind their investment (see Note M[1]).
NOTE K - RELATED PARTY TRANSACTIONS
The Company has two lease agreements with US Property Management, Inc. ("US
Property", a related party through common ownership) for two of its facilities.
Total rent expense related to these leases was $127,000 and $12,000 during the
years ended December 31, 1999 and 1998, respectively. US Property did not
require the Company to pay the 1998 amount, which was credited to paid-in
capital. In addition, the Company paid US Property $201,000, for leasehold
improvements.
F-18
<PAGE>
PRINTONTHENET.COM, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1999
NOTE K - RELATED PARTY TRANSACTIONS (CONTINUED)
During the years ended December 31, 1999 and 1998, the Company purchased
$163,000 and $78,000, respectively, of printing materials and printing services
from National Lithographers & Publishers, Inc. ("National Lithographers") and
$16,000 and $28,000 from Royal Industries, Inc., (both related parties through
common ownership). In addition, the Company provided $39,000 and $31,000 of
printing services to National Lithographers during the same periods. At December
31, 1999, the net amount due to National Lithographers was $178,000.
The Company leased its employees from National Payroll Services, Inc., (a
related party through common ownership). The amounts charged for salaries, wages
and the related employment taxes and other benefits totaled $856,000 and
$523,000 for the years ended December 31, 1999 and 1998, respectively.
The Company paid consulting fees of $36,000 and $41,000 to a relative of the
Rogatinskys during the years ended December 31, 1999 and 1998, respectively.
The Company's Chief Financial Officer has a financial interest in the note
issued pursuant to the Cloverleaf acquisition due to his equity interest in
Cloverleaf.
NOTE L - GUARANTEES AND LITIGATION MATTERS
Subsequent to its merger with PrintAmerica, the Company became aware that
PrintAmerica had co-guaranteed up to $7,500,000 in obligations of National
Lithographers to First Southern Bank (the "Bank"). In January 2000, the Company
guaranteed this same indebtedness to the Bank. The underlying indebtedness
secured by these guarantees is in default and there are insufficient assets of
National Lithographers to satisfy the debt. The Bank has instituted proceedings
against National Lithographers to collect the amount owed.
PrintAmerica had also co-guaranteed the obligations of National Holding (parent
of National Lithographers) to Merrill Lynch. On March 15, 2000, National
Holding's indebtedness to Merrill Lynch of approximately $1,045,000 was in
default and Merrill Lynch instituted a lawsuit against the borrowers and all the
guarantors to collect the amount owed.
On May 19, 2000, the Company, the Rogatinskys, Merrill Lynch and the Bank
negotiated a settlement and the Company obtained a release from the guarantees
and dismissal of the Merrill Lynch action as against the Company. Pursuant to
the settlement:
(a) All shares of POTN common stock owned by the Rogatinskys, their families
and related entities are pledged to the Bank and the Company was assigned
a second priority lien on the same (except with respect to 1,250,000
shares (as described below)). The Bank continues to have a first priority
lien on the shares acquired or received by the Company in (b), (c) and
(d) below. Merrill Lynch holds a second priority position with respect to
1,250,000 shares of the Company's stock owned by the Rogatinskys which
pledge will be released upon the sale of such shares to the Company for
$112,500 on June 30, 2000 (see (c) below).
(b) The Company purchased 11,111,111 shares of its common stock for
$1,000,000 ($0.09 per share) from the Rogatinskys. The proceeds received
by the Rogatinskys from the sale of these shares were paid to Merrill
Lynch and the Bank.
F-19
<PAGE>
PRINTONTHENET.COM, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1999
NOTE L - GUARANTEES AND LITIGATION MATTERS (CONTINUED)
(c) The balance owed to Merrill Lynch is to be satisfied personally by the
Rogatinskys. Further, on or before each of June 30, 2000 and June 30,
2001, the Rogatinskys at their option may sell to the Company that number
of shares required to generate proceeds of up to $112,500 on June 30,
2000, and $142,500 on June 30, 2001 ($255,000 in the aggregate). Such
proceeds are to be paid directly to Merrill Lynch. The price per share
with respect to each such sale will be the lower of $0.09 per share, or
one-half of the then current market price per share.
(d) The Company purchased a printing press from National Lithographers (and
obtained an assignment of lien from Merrill Lynch), which was being used
at National Lithographers, for $225,000. Should the Company sell the
press and receive net proceeds of less than $225,000, the Rogatinskys are
obligated to (i) transfer to the Company, such additional number of
shares of POTN common stock at the lesser of $0.09 per share, or one-half
of the then current market price per share to make up any shortfall, or
(ii) under certain circumstances, sell enough shares to generate proceeds
sufficient to pay the shortfall.
(e) The Company will be required to issue additional common stock at a
currently indeterminate price to the Rogatinskys if in the future
(excluding the May 2000 private placement and certain other stock
issuances), the Company sells its common stock at less than $0.30 per
share, and if the common stock is trading at less than $0.30 per share.
These shares will be pledged to the Bank as additional collateral.
(f) The Company issued to the Bank two-year warrants to purchase 5,000,000
shares of the Company's common stock at $0.30 per share.
(g) The shares pledged to the Bank are initially restricted from sale
following the date of settlement. Such shares may be liquidated by the
Bank pursuant to terms of the settlement agreement. The Company has a
right of first refusal with respect to the sale of the pledged common
stock, which right is subordinate to an identical one held by the
Rogatinskys.
(h) All of the shares issued in connection with the acquisition of
PrintAmerica (Note C) will be returned to the Company.
(i) The Rogatinskys have resigned as officers and directors of the Company.
(j) All amounts payable by the Company pursuant to stockholder loans (Note G)
were contributed to the capital of the Company.
NOTE M - SUBSEQUENT EVENTS
[1] February 2000 private placement:
In February 2000, the Company raised approximately $2,677,000 (net of
offering costs of $363,000) in a private placement offering of units.
Each unit was sold for $100,000 and consisted of 28,409 shares of Series
A Convertible Preferred Stock (each share is convertible into 10 shares
of common stock) having a liquidation value of $3.52 per share. An
aggregate of 863,633 shares of Series A Convertible Preferred Stock were
issued. The placement agent, Commonwealth Associates, L.P.
("Commonwealth") received fees of 10% of the gross proceeds,
reimbursement of certain expenses, and warrants to purchase 86,363 shares
of Series A Convertible Preferred Stock at an exercise price of $3.52 per
share. In addition, in December 1999, Commonwealth purchased from the
Company for $100,000 warrants to purchase 6,000,000 shares of common
stock at an exercise price of $0.10 per share. These warrants expire in
December 2005. In March 2000, upon recognition that certain co-guarantees
(see Note L) had not been disclosed in the private placement memorandum
circulated for this offering, the Company offered rescission
F-20
<PAGE>
PRINTONTHENET.COM, INC. AND SUBSIDIARIES
Notes to Financial Statements
December 31, 1999
NOTE M - SUBSEQUENT EVENTS (CONTINUED)
[1] February 2000 private placement: (continued)
to the subscribers of the units. The Company also returned approximately
$1,277,000 of unexpended funds into an escrow account for the benefit of
the subscribers. An aggregate of $840,000 was returned pursuant to the
rescission offer.
[2] June 2000 private placement:
In June 2000, the Company raised approximately $4,291,000 (net of
offering costs of $613,000) in a second private placement offering of
units. Each unit was sold for $100,000 and consisted of 50,000 shares of
Series B Convertible Preferred Stock (each share is convertible into 20
shares of common stock) having a liquidation value of $2.00 per share. An
aggregate of 70,200,000 shares of Series B Convertible Preferred Stock
were issued. All subscribers to the February 2000 private placement were
offered the option to convert their investment into this offering.
Commonwealth received fees of 10% of the gross proceeds in excess of
$3,040,000 and warrants to purchase 13,548,600 shares of common stock at
an exercise price of $0.10 per share. In addition, in April and May 2000,
Commonwealth, its affiliates and the Company's newly appointed Chief
Executive Officer purchased from the Company for $160,000 five-year
warrants to purchase 16,000,000 shares of common stock at an exercise
price of $0.10 per share.
[3] Employment agreements:
In May and June 2000, the Company entered into employment agreements with
its Chief Executive Officer ("CEO") and with each of the Rogatinskys. The
CEO's agreement is for an initial term of five years with an annual
salary of $200,000 for the first year and 10% increments thereafter. The
agreement also provides for annual bonuses, stock option grants and
certain other benefits. Additionally, the CEO was granted warrants to
purchase 7,673,333 shares of the Company's common stock at $0.10 per
share. The warrants vest in twelve equal quarterly installments
commencing August 2000. The agreements with the Rogatinskys are for a one
year period and provides each with an annual salary of $85,000.
In addition, the Company intends to enter into an employment agreement
with its Chief Financial Officer. The agreement will provide for an
annual salary of $100,000 and for the issuance of an option to purchase
500,000 shares of the Company's common stock at $0.10 per share.
F-21
<PAGE>
Exhibit Index
Exhibit
No. Exhibit Description
------- -------------------
3.1(b) Certificate of Designations and Preferences.
10.2 Debt Modification, Assumption and Settlment Agreement, dated as of May
19, 2000, by and among National Lithographers & Publishers, Inc.,
PrintOnTheNet.com, Inc., National Payroll Services, Inc., National
Holding Company, Inc., Michele Rogatinsky, Benjamin Rogatinsky, Samuel
Rogatinsky, Reuben and Shulamit Rogatinsky, the Rogatinsky Family
Trust, Royal Industries & Distribution, Inc., 299 Holdings, Inc. and
First Southern Bank.
10.3 Stock Purchase Agreements, dated as of June 8, 2000, by and between
Benjamin Rogatinsky and PrintOnTheNet.com, Inc.
10.4 Stock Purchase Agreements, dated as of June 8, 2999, by and between
Samuel Rogatinsky and PrintOnTheNet.com, Inc.
10.5 Employment Agreement dated June 8, 2000 by and between
PrintOnTheNet.com, Inc. and Neal J. Polan.
21 Subsidiaries of the registrant.
23.1 Consent of Richard A. Eisner & Co.
27 Financial Data Schedule.
