As filed with the Securities and Exchange Commission on August 21, 1997
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
Form SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FRONTLINE COMMUNICATIONS CORPORATION
(Exact name of small business issuer as specified in its charter)
Delaware 7379 13-3950283
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification No.) Identification No.)
One Blue Hill Plaza, 6th Floor
P.O. Box 1548
Pearl River, New York 10965
(914) 623-8553
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
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Stephen J. Cole-Hatchard, Chairman
Frontline Communications Corporation
One Blue Hill Plaza, 6th Floor
P.O. Box 1548
Pearl River, New York 10965
(914) 623-8553
(Name, address and telephone number of agent for service)
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Copies of all communications to:
ROBERT J. MITTMAN, ESQ. ROBERT H. COHEN, ESQ.
Tenzer Greenblatt LLP Morrison Cohen Singer
The Chrysler Building & Weinstein, LLP
405 Lexington Avenue 750 Lexington Avenue
New York, New York 10174 New York, New York 10022
Telephone: (212) 885-5000 Telephone: (212) 735-8680
Facsimile: (212) 885-5001 Facsimile: (212) 735-8708
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Secur-ities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
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CALCULATION OF REGISTRATION FEE
=====================================================================================================================
Proposed Proposed
Maximum Offering Maximum Amount of
Title of Each Class of Amount to Price Per Aggregate Offering Registration
Securities to be Registered be Registered Security (1) Price (1) Fee
- ---------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per
share ........................... 1,150,000(2) $5.00 $5,750,000.00 $1,742.42
- ---------------------------------------------------------------------------------------------------------------------
Warrants, each to purchase one
share of Common Stock ............ 575,000(2) $ .10 $ 57,500.00 $ 17.42
- ---------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per
share, issuable upon exercise of
the Warrants (3) .................. 575,000 $5.50 $3,162,500.00 $ 958.33
- ---------------------------------------------------------------------------------------------------------------------
Underwriter's Warrants, each to
purchase one share of Common
Stock (4) ........................ 100,000 $.001 $ 100.00 (5)
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Common Stock, par value $.01 per
share, issuable upon exercise of
the Underwriter's Warrants (3) . 100,000 $5.50 $ 550,000.00 $ 166.66
- ---------------------------------------------------------------------------------------------------------------------
Underwriter's Warrants, each to
purchase one warrant (4) ......... 50,000 $.001 $ 50.00 (5)
- ---------------------------------------------------------------------------------------------------------------------
Warrants issuable upon exercise of
the Underwriter's Warrants ...... 50,000 $ .11 $ 5,500.00 $ 1.66
- ---------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.01 per
share, issuable upon exercise of
the warrants underlying the
Underwriter's Warrants (3) ...... 50,000 $5.50 $ 275,000.00 $ 83.33
- ---------------------------------------------------------------------------------------------------------------------
Total Registration Fee ........................................................................ $2,969.82
=====================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Assumes the Underwriter's over-allotment option to purchase up to 150,000
additional shares of Common Stock and/or 75,000 Warrants is exercised in
full.
(3) Pursuant to Rule 416, there are also being registered such indeterminable
additional shares of Common Stock as may become issuable pursuant to
anti-dilution provisions contained in the Warrants, the Underwriter's
Warrants and the warrants underlying the Underwriter's Warrants.
(4) Represents warrants to be issued by the Company to the Underwriter at the
time of delivery and acceptance of the securities to be sold by the
Company to the public hereunder.
(5) None, pursuant to Rule 457(g).
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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FRONTLINE COMMUNICATIONS CORPORATION
Cross Reference Sheet Pursuant to Rule 404
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus ......... Forepart of the Registration Statement and Outside
Front Cover of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus ................................. Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary of Information and Risk Factors ......... Prospectus Summary; Risk Factors
4. Use of Proceeds ................................. Use of Proceeds
5. Determination of Offering Price ............... Outside Front Cover Page of Prospectus;
Underwriting
6. Dilution ....................................... Dilution
7. Selling Security Holders ........................ Not Applicable
8. Plan of Distribution ........................... Outside Front Cover Page of Prospectus;
Underwriting
9. Legal Proceedings .............................. Business
10. Directors, Executive Officers, Promoters
and Control Persons ........................... Management
11. Security Ownership of Certain Beneficial
Owners and Management ........................... Principal Stockholders
12. Description of Securities ..................... Outside and Inside Front Cover Pages of Prospectus;
Prospectus Summary; Capitalization; Description of
Securities
13. Interest of Named Experts and Counsel ......... Not Applicable
14. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities .. Not Applicable
15. Organization Within Last Five Years ............ Certain Transactions
16. Description of Business ........................ Business
17. Plan of Operation .............................. Management's Discussion and Analysis of Financial
Condition and Results of Operations
18. Properties .................................... Business
19. Certain Relationships and Related
Transactions .................................... Certain Transactions
20. Market for Common Equity and Related
Stockholder Matters ........................... Risk Factors; Management
21. Executive Compensation ........................ Management
22. Financial Statements ........................... Financial Statements
23. Changes In and Disagreements With
Accountants on Accounting and Financial
Disclosure .................................... Not Applicable
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration becomes effective.
This prospectus shall not constitute an offer to sell or the solicitation of an
offer to buy nor shall there be any sale of these securities in any
jurisdiction in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such
jurisdiction.
PRELIMINARY PROSPECTUS DATED AUGUST 21, 1997
SUBJECT TO COMPLETION
FRONTLINE COMMUNICATIONS CORPORATION
1,000,000 Shares of Common Stock and
Redeemable Warrants to Purchase
500,000 Shares of Common Stock
The Company is offering 1,000,000 shares of Common Stock (the "Common
Stock") and redeemable warrants to purchase 500,000 shares of Common Stock (the
"Warrants"). The Common Stock and Warrants may be purchased separately and will
be separately transferrable immediately upon issuance. Each Warrant entitles
the registered holder thereof to purchase one share of Common Stock at a price
of $5.50, subject to adjustment in certain circumstances, at any time
commencing , 1998 through and including , 2002. The Warrants are
redeemable by the Company at any time commencing , 1998, upon notice of not
less than 30 days, at a price of $.10 per Warrant, provided that (i) the
closing bid quotation of the Common Stock on all 20 trading days ending on the
third day prior to the day on which the Company gives notice (the "Call Date")
has been at least 150% (currently $8.25, subject to adjustment) of the then
effective exercise price of the Warrants and (ii) the Company obtains the
written approval of the Underwriter to such redemption prior to the Call Date.
See "Description of Securities."
Prior to this offering, there has been no public market for the Common
Stock or Warrants and there can be no assurance that any such market will
develop. It is anticipated that the Common Stock and Warrants will be quoted on
the Nasdaq SmallCap Market ("Nasdaq") under the symbols "FCCN" and "FCCNW,"
respectively. For a discussion of the factors considered in determining the
offering prices of the Common Stock and Warrants, see "Underwriting."
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THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE AND INVOLVE SUBSTANTIAL
RISKS AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY
INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK
FACTORS" COMMENCING ON PAGE 6 AND "DILUTION."
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
================================================================================
Price Underwriting Proceeds
to Discounts and to
Public Commissions(1) Company (2)
- --------------------------------------------------------------------------------
Per Share ......... $5.00 $.50 $4.50
- --------------------------------------------------------------------------------
Per Warrant ...... $.10 $.01 $.09
- --------------------------------------------------------------------------------
Total (3) ......... $5,050,000 $505,000 $4,545,000
================================================================================
(1) The Company has agreed to pay to the Underwriter a 3% nonaccountable
expense allowance, to sell to the Underwriter warrants (the "Underwriter's
Warrants") to purchase up to 100,000 shares of Common Stock and/or 50,000
warrants and to retain the Underwriter as a financial consultant. The
Company has also agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting expenses, including the nonaccountable expense allowance
in the amount of $151,500 ($174,225 if the Underwriter's over-allotment
option is exercised in full), estimated at $651,500, payable by the
Company.
(3) The Company has granted to the Underwriter an option, exercisable within 45
days from the date of this Prospectus, to purchase up to an additional
150,000 shares of Common Stock and/or 75,000 additional Warrants on the
same terms set forth above, solely for the purpose of covering
over-allotments, if any. If the Underwriter's over-allotment option is
exercised in full, the total price to public, underwriting discounts and
commissions and proceeds to Company will be $5,807,500, $563,075 and
$5,226,750, respectively. See "Underwriting."
The shares of Common Stock and Warrants are being offered, subject to
prior sale, when, as and if delivered to and accepted by the Underwriter and
subject to approval of certain legal matters by counsel and to certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify
the offering and to reject any order in whole or in part. It is expected that
delivery of certificates representing the Common Stock and Warrants will be
made against payment therefor at the offices of the Underwriter, 100 Quentin
Roosevelt Blvd., Garden City, New York, on or about , 1997.
------------------
Rockefeller Securities Group, Inc.
The date of this Prospectus is , 1997
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS, ON
NASDAQ, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE, WHICH STABILIZE, MAINTAIN
OR OTHERWISE AFFECT THE PRICES OF THE COMMON STOCK AND WARRANTS. SPECIFICALLY,
THE UNDERWRITER MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR
AND PURCHASE SHARES OF COMMON STOCK AND WARRANTS IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the
more detailed information and financial statements appearing elsewhere in this
Prospectus. Each prospective investor is urged to read this Prospectus in its
entirety. Unless otherwise indicated, all information in this Prospectus gives
effect to a reorganization in May 1997 (the "Reorganization") pursuant to which
(i) each of Hobbes & Co., LLC ("Hobbes"), INET Communications Company, LLC
("INET") and Sara Girl & Co., LLC ("Sara Girl") (collectively, the "Predecessor
Companies") transferred all of their assets, subject to all of their
liabilities, to the Company, (ii) Messrs. Nicko Feinberg and Stephen J.
Cole-Hatchard, officers, directors and principal stockholders of the Company,
and Mr. Michael Char, a principal stockholder and former officer and director
of the Company, exchanged their respective interests in the Predecessor
Companies for promissory notes in the aggregate principal amount of $372,137
and (iii) each of the Predecessor Companies dissolved, and assumes no exercise
of the Underwriter's over-allotment option to purchase an additional 150,000
shares of Common Stock and/or 75,000 additional warrants. See "Certain
Transactions" and "Underwriting."
The Company
Frontline Communications Corporation (the "Company") is an Internet
service provider that offers "dial-up" Internet access primarily to individual
subscribers. The Company provides subscribers with direct access to a wide
range of Internet applications and resources, including electronic mail, world
wide web sites and regional and local information and data services. The
Company believes that its low subscriber to modem ratio, its technical and
customer support and ancillary services position the Company to capitalize on
the emerging and expanding markets for Internet services.
In recent years, the Internet has experienced a rapid increase in the
number of users. Industry sources estimate that the number of online households
in the United States was approximately 9.6 million at the end of 1995, 13.6
million at the end of 1996, and project that the number of online households
will exceed 35.2 million by the year 2000. The Company believes that increasing
penetration of computers and modems into households and businesses, the growth
of the informational, entertainment and commercial resources of the Internet
and the increasing availability of user-friendly navigational tools that enable
easier access to the Internet's resources will continue to contribute favorably
to the growth of the Internet.
The Company's telecommunications network is currently comprised of leased
high-speed data lines and ten points-of-presence ("POPs") serving suburban
areas in Rockland, Orange, Dutchess, Sullivan, Putnam, Ulster and Westchester
counties in New York and Bergen county in New Jersey. These POPs permit
subscribers in these areas to access the Internet through a local telephone
call. The Company currently supports 14.4, 28.8 and 36.6 Kbps modems at each of
its POPs and has X2 56K and ISDN technologies at most of its POPs. The Company
has approximately 1,150 subscribers as of the date of this Prospectus. Pursuant
to its currently proposed plan of operation, the Company will seek to establish
up to twenty-four additional POPs during the twelve months following the
consummation of this offering.
The Company's objective is to expand its network of POPs rapidly into
selected geographic markets. The Company currently anticipates that it will
initially seek to achieve significant penetration in suburban markets in the
greater New York metropolitan area, including Morris and Passaic counties in
New Jersey, and Fairfield and New Haven counties in Connecticut. The Company
intends to target suburban markets with attractive demographic characteristics
similar to the Company's existing POPs. To achieve its goal, the Company will
seek to cluster POPs for operational efficiency and to share certain marketing,
financial, customer service and management personnel. The Company will also
seek to capitalize on demand for Internet access by offering subscriber service
which combines the capabilities typically provided by large companies with the
flexibility and responsiveness of a small Internet service provider.
Since its inception, the Company has engaged in only limited operations
and has not yet generated meaningful revenues. The Company requires the
proceeds of this offering to fully implement its proposed
3
plan of operation. The Company expects to incur substantial up-front expenses
in connection with establishing additional POPs, engaging in marketing
activities and hiring executive, technical, marketing and other personnel,
which will result in losses for the foreseeable future. There can be no
assurance the Company will be able to successfully implement its business
plans. See "Risk Factors."
The Company was incorporated under the laws of the State of Delaware in
February 1997 under the name Easy Street Online, Inc. as successor to the
business of the Predecessor Companies, limited liability companies organized in
May and August 1995 and July 1996 to own and operate POPs. Unless otherwise
indicated, all references in this Prospectus to the Company include the
Predecessor Companies. See "Certain Transactions."
The Company's executive offices are located at One Blue Hill Plaza, 6th
Floor, P.O. Box 1548, Pearl River, New York 10965, and its telephone number is
(914) 623-8553. The Company's home page is located on the World Wide Web at
www.fcc.net.
The Offering
Securities offered ...... 1,000,000 shares of Common Stock and Warrants to
purchase 500,000 shares of Common Stock. See
"Description of Securities."
Common Stock to be outstanding
after the offering(1)... 2,660,000 shares
Warrants
Number to be outstanding
after the offering(2) 500,000 Warrants
Exercise terms ......... Exercisable for a period of four years commencing
, 1998, each to purchase one share of Common
Stock at a price of $5.50, subject to adjustment in
certain circumstances. See "Description of
Securities -- Redeemable Warrants."
Expiration date .... , 2002.
Redemption ............ Redeemable by the Company at any time commencing
, 1998, upon notice of not less than 30 days, at
a price of $.10 per Warrant, provided that (i) the
closing bid quotation of the Common Stock on all 20
trading days ending on the third day prior to the
day on which the Company gives notice has been at
least 150% (currently $8.25, subject to adjustment)
of the then effective exercise price of the Warrants
and (ii) the Company obtains the written consent of
the Underwriter to such redemption prior to the Call
Date. The Warrants will be exercisable until the
close of business on the date fixed for redemption.
See "Description of Securities -- Redeemable
Warrants."
Use of Proceeds ...... The Company intends to use the net proceeds of
this offering for the acquisition of subscriber
bases; the establishment of additional POPs;
marketing and advertising; repayment of
indebtedness; and the balance for working capital
and general corporate purposes. See "Use of
Proceeds."
Risk Factors ......... The securities offered hereby are highly
speculative and involve substantial risks and
immediate substantial dilution and should not be
purchased by investors who cannot afford the loss of
their entire investment. See "Risk Factors" and
"Dilution."
Proposed NASDAQ
symbols ............... Common Stock -- FCCN
Warrants -- FCCNW
4
- ------------
(1) Does not include (i) 500,000 shares of Common Stock reserved for issuance
upon exercise of the Warrants; (ii) an aggregate of 150,000 shares of
Common Stock reserved for issuance upon exercise of the Underwriter's
Warrants and the warrants included therein; (iii) 260,000 shares of Common
Stock reserved for issuance upon exercise of outstanding options under the
Company's 1997 Stock Option Plan (the "Plan"); and (iv) 240,000 shares of
Common Stock reserved for issuance upon exercise of options available for
future grant under the Plan. See "Management -- 1997 Stock Option Plan,"
and "Underwriting."
(2) Does not include any Warrants referred to in clause (ii) of Note 1 above.
Summary Financial Information
The summary financial information set forth below is derived from and
should be read in conjunction with the financial statements, including the
notes thereto, appearing elsewhere in this Prospectus.
Statement of Operations Data:
Five Months
ended May 31,
Year Ended ----------------------------------
December 31, 1996 1996 1997
------------------- ------------ -------------------
Revenues ..................... $ 98,699 $ 16,234 $ 110,566
Net loss ..................... (54,206) (25,551) (251,495)(1)
Net loss per share ............ (.03) (.01) (.14)(1)
Weighted average number of shares
outstanding .................. 1,816,000 1,816,000 1,816,000
Balance Sheet Data:
May 31, 1997
-------------------------------
Actual As Adjusted(2)
------------- ---------------
Working capital (deficit) ............ $ (82,954) $3,810,546
Total assets ........................ 485,538 3,978,901
Total liabilities .................. 492,564 120,427
Accumulated deficit .................. (313,626) (313,626)
Stockholders' equity (deficit) ...... (7,026) 3,886,474
- ------------
(1) Includes non-recurring compensation expense of $205,000. See Combined
Financial Statements.
(2) Gives effect to the sale of the Common Stock and Warrants offered hereby
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
5
RISK FACTORS
The securities offered hereby are highly speculative and involve
substantial risks. Prospective investors should carefully consider the
following risk factors before making an investment decision.
Recent Organization; Early Stage Company. The Company was organized in
February 1997 as successor to the business of the Predecessor Companies and is
in an early stage of development. Accordingly, the Company has a limited
operating history upon which an evaluation of its performance and prospects can
be made. The Company is subject to all of the risks, uncertainties, expenses,
delays, problems and difficulties frequently encountered in the establishment
of a new business in a rapidly evolving industry characterized by intense
competition and an increasing and substantial number of new market entrants and
new Internet products and services. See "Business."
Proposed Plan of Operation. The Company's proposed plan of operation and
prospects will be largely dependent upon the Company's ability to successfully
establish and equip additional POPs on a timely and cost effective basis; hire
and retain skilled management, technical, marketing and other personnel; and
attract and retain significant numbers of subscribers. The Company has limited
experience in commercializing new Internet products and services and there is
limited information available concerning the potential performance or market
acceptance of the Company's POPs. There can be no assurance that the Company
will be able to successfully implement its business plan or that unanticipated
expenses, problems or technical difficulties will not occur which would result
in material delays in its implementation. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Limited Revenues; Losses. The Company has not yet generated any meaningful
revenues, and will not generate any meaningful revenues until after the Company
establishes additional POPs and attracts and retains a significant number of
subscribers, which the Company does not anticipate will occur until several
months following the consummation of this offering, if at all. For the period
from May 1, 1995 (inception) to May 31, 1997, the Company incurred a cumulative
net loss of approximately $313,626. Since May 31, 1997, the Company has
incurred losses and anticipates that it will continue to incur significant
losses until, at the earliest, the Company generates sufficient revenues to
offset the substantial up-front expenditures and operating costs associated
with establishing additional POPs and attracting and retaining a significant
subscriber base. There can be no assurance that the Company will be able to
attract and retain a sufficient number of subscribers to generate meaningful
revenues or achieve profitable operations. See Combined Financial Statements.
Dependence on Offering Proceeds; Possible Need for Additional
Financing. The capital requirements relating to implementation of the Company's
business plan will be significant. The Company is dependent on the proceeds of
this offering or other financing in order to fully implement its proposed plan
of operation. Based on currently proposed plans and assumptions relating to the
implementation of its business plans (including the timetable of, and costs
associated with, establishing additional POPs), the Company believes that the
proceeds of this offering will be sufficient to satisfy its contemplated cash
requirements for at least twelve months following the consummation of this
offering. In the event that the Company's plans change, its assumptions change
or prove to be inaccurate or if the proceeds of this offering prove to be
insufficient to implement its business plans, the Company would be required to
seek additional financing sooner than currently anticipated. There can be no
assurance that the proceeds in this offering will be sufficient to permit the
Company to implement its proposed business plan or that any assumptions
relating to the implementation of such plan will prove to be accurate. To the
extent that the proceeds of this offering are not sufficient to enable the
Company to generate meaningful revenues or achieve profitable operations, the
inability to obtain additional financing will have a material adverse effect on
the Company. There can be no assurance that any such financing will be
available to the Company on commercially reasonable terms, or at all. See "Use
of Proceeds" and "Management's Discussion and Analysis of Financial Condition
and Results of Operation."
Limited Number of POPs; Geographic Concentration; Uncertainty of Network
Expansion. There are currently ten POPs in operation, only three of which have
been in operation for more than one year, and all of which are in the greater
New York metropolitan area. Consequently, the results achieved to date by the
Company's POPs may not be indicative of the prospects or market acceptance of a
larger number of POPs, particularly in
6
wider and more geographically dispersed areas with varied demographic
characteristics. The process of identifying suitable sites and establishing
additional POPs is lengthy and network installation typically requires six to
eight weeks to complete from the time a lease for a new POP is entered into.
There can be no assurance that the Company will be successful in identifying
suitable sites or in establishing additional POPs. Unforeseen events, including
failure to obtain and install telephone lines and network equipment on a timely
and cost-effective basis, could materially delay the Company's plans in target
markets. The Company has relatively limited experience in establishing POPs and
has limited financial and other resources. There can be no assurance that the
Company will be able, for financial or other reasons, to successfully expand
its network or that any expansion will not be subject to unforeseen delays and
costs. See "Business -- Network Infrastructure."
Dependence on Sole Suppliers and Manufacturers; Possible Service
Interruptions and Equipment Failures. The Company is currently dependent on a
sole supplier to provide Internet access via leased telecommunications lines on
a cost-effective and continuous basis. The Company has not entered into an
interconnect agreement with such supplier. Although the Company believes that
it currently has sufficient access to telecommunications networks on favorable
terms and believes that its relationship with such supplier is satisfactory,
any increase in rates charged by such supplier would materially adversely
affect the Company's operating margins. Failure to obtain continuing access to
such networks would also have a material adverse effect on the Company,
including possibly requiring the Company to significantly curtail or cease its
operations. The Company also is dependent on third-party manufacturers of
hardware components. Certain components used by the Company in providing its
networking services are generally acquired from only one source, including high
performance routers manufactured by Cisco Systems, Inc. and remote access
servers manufactured by U.S. Robotics, Inc. The Company has not entered into
agreements with any equipment manufacturer and purchases equipment components
pursuant to purchase orders placed from time to time in the ordinary course of
business. Although the Company believes that network equipment is currently
available from numerous sources, failure by manufacturers to deliver quality
products on a timely basis or the inability to develop alternative sources if
and as required, could result in delays which could materially adversely affect
the Company's business and limit the Company's ability to expand its
operations.
In addition, the Company's operations require that its POPs and its
third-party telecommunications networks operate on a continuous basis. It is
possible that the Company's POPs and third-party telecommunications networks
may from time to time experience service interruptions or equipment failures.
Service interruptions and equipment failures resulting in material delays would
adversely affect subscriber confidence as well as the Company's business
operations and reputation. See "Business -- Internet Access Providers and
Suppliers."
New Industry; Uncertainty of Market Acceptance; Limited Marketing, Service
and Support Capabilities. The Internet connectivity services industry is
characterized by a limited operating history and a high rate of business
failures. Because the market is relatively new and current and future
competitors are likely to introduce competing Internet connectivity and/or
online services and products, it is difficult to predict the rate at which the
market will grow or at which new or increased competition will result in market
saturation. The novelty of the market for Internet access services may
adversely affect the Company's ability to retain new subscribers who may be
unfamiliar with the Internet and more likely to discontinue the Company's
services after an initial trial period. Any significant decline in demand for
Internet connectivity services or in the computer industry generally or in
particular target markets would have a material adverse effect on the Company's
business and prospects. The Company's success will be largely dependent upon
the Company's ability to continually attract and retain additional subscribers
and replace terminating subscribers. To date, the Company has relied entirely
on the efforts of its executive officers for the marketing of its services.
Full scale marketing of the Company's services to individuals may require
reliance on third party distribution channels, such as retail stores, catalogs,
book publishers and computer hardware and software vendors. There can be no
assurance that the Company will be able to successfully develop or maintain
relationships with these parties. The successful implementation of the
Company's business plans will also require the Company to expand customer
service and support capabilities necessary to satisfy customer requirements.
The Company currently has limited marketing experience and limited marketing,
service, customer support and other resources. There can be no assurance that
the Company will be able to successfully expand its marketing activities or
customer service or support capabilities, or that the Company's efforts will
result in initial or continued market acceptance for the Company's Internet
access services. See "Business -- Marketing and Sales."
7
Subscriber Attrition. The Company's operating results will be
significantly affected by subscriber attrition rates. Subscribers may
discontinue service without penalty at any time, and there can be no assurance
that subscribers will continue to purchase services from the Company or that
the Company will not be subject to significant subscriber attrition. The
Company has historically experienced a subscriber attrition rate of less than
20%. Significant levels of subscriber attrition in the future would have a
material adverse effect on the Company's operating results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Competition. The market for Internet access services is highly
competitive. There are no substantial barriers to entry, and the Company
expects that competition will intensify in the future. The Company believes
that its ability to compete successfully will be significantly affected by
numerous factors, including price, ease of use, reliability, customer support,
geographic coverage and industry and general economic trends (particularly
unfavorable economic conditions adversely affecting consumer discretionary
spending). The Company's competitors include many large companies that have
substantially greater market presence and financial, technical, marketing and
other resources than the Company, including (i) international, national and
regional commercial Internet service providers, such as Performance Systems
International, Inc., Bolt Beranek & Newman, Inc. and UUNET Technologies, Inc.;
(ii) established on-line services companies that currently offer Internet
access, such as America Online, Inc., CompuServe Incorporated, Prodigy Services
Company, Earthlink and Delphi Internet Services; (iii) computer hardware and
software and other technology companies, such as IBM and Microsoft Corp.; (iv)
national long distance carriers, such as AT&T Corp., MCI Communications Corp.
and Sprint Corp.; (v) regional telephone companies; and (vi) cable operators,
such as Tele-Communications, Inc. New competitors, including large computer
hardware and software, media, cable and telecommunications companies, have
increased their focus on the Internet access market. Increased competition has
resulted and could continue to result in significant price competition, which
in turn could result in significant price reductions. In addition, increased
competition for new subscribers could result in increased sales and marketing
expenses and related subscriber acquisition costs, which could materially
adversely affect the Company's potential profitability. There can be no
assurance that the Company will be able to offset the effects of any such
competition or resulting price reductions through an increase in the number of
its subscribers, higher revenue from enhanced services or cost reductions or
that the Company will have the financial resources, technical expertise or
marketing and support capabilities to compete successfully. See "Business --
Competition."
Capacity Constraints; System Failure and Security Risks. The Company's
operations will depend upon the capacity, reliability and security of its
network infrastructure. The Company currently has limited network capacity and
will be required to continually expand its network infrastructure to
accommodate significant numbers of users and increasing amounts of information
they may wish to access. Expansion of the Company's network infrastructure will
require significant financial, operational and management resources. There can
be no assurance that the Company will be able to expand its network
infrastructure to meet potential demand on a timely basis, at a commercially
reasonable cost, or at all. Failure by the Company to expand its network
infrastructure on a timely basis would have a material adverse effect on the
Company. The Company's operations will also be dependent on the Company's
ability to protect its computer equipment against damage from fire, power loss,
telecommunications failures and similar events. The Company's network
infrastructure will be vulnerable to computer viruses, break-ins and similar
disruptions from unauthorized tampering with the Company's computer systems.
Computer viruses or problems caused by third parties could lead to material
interruptions, delays or cessation in service to consumers. Inappropriate use
of the Internet by third parties could also potentially jeopardize the security
of confidential information stored in the computer systems of consumers.
Security and privacy concerns of consumers may limit the Company's ability to
develop a significant subscriber base. See "Business -- Network
Infrastructure."
Technological Change. The market for Internet access is characterized by
rapidly changing technology, evolving industry standards, emerging competition
and frequent new software and service introductions. There can be no assurance
that the Company can successfully identify new product and service
opportunities as they arise and develop and bring new products and services to
market in a timely manner or that software, services or technologies developed
by others will not render the Company's services or technologies
noncompetitive, obsolete or less marketable. The Company currently does not
have any proprietary applications software. The Company's business is also
subject to fundamental changes in the way Internet access services are
delivered.
8
Currently, Internet services are accessed primarily by computers and are
delivered by telephone lines. To the extent that the Internet becomes
increasingly accessible by screen-based telephones, television or other
consumer electronic devices or customer requirements change the way Internet
access is provided, the Company may be required to acquire or develop new
technology or modify its existing technology to accommodate these developments.
Technological advances include compression, full-motion video, and integration
of video, voice, data and graphics. The pursuit of these technological advances
may require substantial time and expense, and there can be no assurance that
the Company will succeed in adapting its Internet service business to alternate
access devices and conduits. See "Business -- Network Infrastructure."
Risks Associated with Expansion and Acquisitions. The Company intends to
use the proceeds of this offering to expand its operations through internal
growth and acquisition. The Company plans to establish additional POPs, attract
significant numbers of additional subscribers, expand its work force and expand
its presence in selected geographic markets. To successfully manage growth, the
Company will be required to continue to implement and improve its operating
systems, train and manage its employees, monitor operations, control costs and
maintain effective quality controls. The Company has limited experience in
effectuating rapid expansion and in managing operations which are
geographically dispersed, and there can be no assurance that the Company will
be able to successfully expand its operations or manage growth. The Company
intends to pursue opportunities by making selective acquisitions of subscriber
bases. While the Company from time to time evaluates possible acquisition
opportunities, as of the date of this Prospectus, the Company has no plans,
agreements, commitments, understandings or arrangements with respect to any
such acquisition. There can be no assurance that the Company will ultimately
effect any acquisition, that it will be able to successfully integrate into its
operations any subscriber base which it may acquire or that the Company will
not incur significant amortization expense associated with attrition of newly
acquired subscriber bases.
The Company may determine, depending upon the opportunities available to
it, to seek additional debt or equity financing to fund the cost of acquiring
subscriber bases. To the extent that the Company finances an acquisition with
equity securities, any such issuance of equity securities would result in
dilution to the interests of the Company's stockholders. Additionally, to the
extent that the Company incurs indebtedness or issues debt securities in
connection with any acquisition, the Company will be subject to risks
associated with incurring substantial indebtedness, including the risks that
interest rates may fluctuate and cash flow may be insufficient to pay principal
and interest on any such indebtedness. See "Use of Proceeds" and "Business --
Company Strategy."
Potential Litigation. In June 1997, Michael Char, a founder, principal
stockholder and former officer and director of the Company, indicated that he
disagreed with other members of management with respect to various business
matters. The Company has been unsuccessful in resolving such disagreements or
in negotiating a settlement with Mr. Char and, after a prolonged absence, in
August 1997, the Company removed Mr. Char as a director and terminated his
employment. While the Company does not believe that Mr. Char has any
meritorious claims against the Company or members of management, there can be
no assurance that Mr. Char will not institute an action against the Company
seeking substantial damages. Any such claims, with or without merit, can be
time consuming, costly and difficult to defend and, if successful, could have a
material adverse effect on the Company. See "Business -- Legal Proceedings."
Government Regulation; Potential Liability for Content. Recently enacted
federal, state and local legislation aimed at limiting the use of the Internet
to transmit certain content and materials could result in significant potential
liability to Internet service providers. These types of legislative actions
present the potential for increased focus and attempts to impose liability upon
Internet access providers for information disseminated through their systems.
The adoption or strict enforcement of any such laws or regulations may limit
the growth of the Internet, which could in turn decrease the demand for the
Company's services and increase the Company's cost of doing business. Inasmuch
as the applicability to the Internet of the existing laws governing issues such
as property ownership, libel and personal privacy is uncertain, any such new
legislation or regulation or the application of existing laws and regulations
to the Internet could have an adverse effect on the Company's business and
prospects. Changes in the regulatory environment relating to the Internet
connectivity industry, including regulatory changes which directly or
indirectly affect telecommunication costs or increase the likelihood or scope
of competition from local and regional telephone companies or others, could
also have an adverse effect on the Company's business and prospects. See
"Business."
9
Limited Intellectual Property Protection. The Company relies on a
combination of copyright and trademark laws, trade secrets, software security
measures, license agreements and nondisclosure agreements to protect its
proprietary information. The Company currently has no registered copyrights or
patents or patent applications pending. It may be possible for unauthorized
third parties to copy aspects of, or otherwise obtain and use, the Company's
proprietary information without authorization. In addition, there can be no
assurance that any confidentiality agreements between the Company and its
employees or any license agreements with its customers will provide meaningful
protection for the Company's proprietary information in the event of any
unauthorized use or disclosure of such proprietary information. See "Business."
Dependence on Key Personnel; Limited Management; Need for Qualified
Management and Other Personnel. The success of the Company will be dependent on
the personal efforts of Nicko Feinberg, Chief Information Officer and Vice
President of Technology, Stephen J. Cole-Hatchard, Chairman, Chief Executive
Officer and President, and other key personnel. The loss of the services of
such individuals could have a material adverse effect on the Company's business
and prospects. The Company intends to obtain "key-man" insurance on the life of
each of Messrs. Feinberg and Cole-Hatchard in the amount of $1,000,000. Mr.
Cole-Hatchard currently serves on a part-time basis, and the Company has only
three full-time employees in addition to its executive officers. The success of
the Company is largely dependent upon its ability to hire and retain additional
qualified management, marketing, technical, financial and other personnel,
including a full-time President. Competition for qualified personnel is
intense, and there can be no assurance that the Company will be able to hire or
retain additional qualified personnel. Any inability to attract and retain
qualified management and other personnel will have a material adverse effect on
the Company. See "Business -- Employees" and "Management."
Broad Discretion in Application of Proceeds; Benefits to Related
Parties. Approximately $951,500 (24.4%) of the estimated net proceeds of this
offering has been allocated to working capital and general corporate purposes.
Accordingly, the Company's management will have broad discretion as to the
application of such proceeds. The Company also intends to use $163,537,
$141,800 and $126,800, respectively, of the net proceeds of this offering to
repay outstanding principal amount of indebtedness to Messrs. Char, Feinberg
and Cole-Hatchard. Additionally, a portion of the proceeds of this offering
allocated to working capital may be used to pay the salaries of executive
officers (which is anticipated to be approximately $320,000 during the twelve
months following this offering) to the extent operating cash flow is
insufficient for such purpose. See "Use of Proceeds" and "Certain
Transactions."
Control by Current Stockholders. Upon consummation of this offering, the
Company's current stockholders will beneficially own, in the aggregate,
approximately 62.4% of the outstanding shares of Common Stock (assuming no
exercise of the Warrants). Accordingly, such persons, acting together, will be
in a position to control the Company, elect all of the Company's directors,
cause an increase in the authorized capital or the dissolution, merger or sale
of the assets of the Company, and generally to direct the affairs of the
Company. See "Management" and "Principal Stockholders."
No Dividends. To date, the Company has not paid any cash dividends on its
Common Stock and does not expect to declare or pay dividends on the Common
Stock in the foreseeable future. See "Description of Securities -- Dividend
Policy."
Limitation on Liability. The Company's Certificate of Incorporation
includes provisions to limit, to the full extent permitted by Delaware Law, the
personal liability of directors of the Company for monetary damages arising
from a breach of their fiduciary duties as directors. As a result of such
provisions in the Certificate of Incorporation, stockholders may be unable to
recover damages against the directors of the Company for actions taken by them
which constitute negligence, gross negligence or a violation of certain of
their fiduciary duties, which may reduce the likelihood of stockholders
instituting derivative litigation against directors and may discourage or deter
stockholders from suing directors for breaches of their duty of care, even
though such an action, if successful, might otherwise benefit the Company and
its stockholders. See "Management -- Indemnification of Directors and
Officers."
Immediate and Substantial Dilution. This offering involves an immediate
and substantial dilution of $3.54 per share (70.8%) between the net tangible
book value per share after the offering and the initial public offering price
per share. See "Dilution."
10
Shares Eligible for Future Sale. Upon consummation of this offering, the
Company will have 2,660,000 shares of Common Stock outstanding (assuming no
exercise of the Warrants or outstanding options), of which the 1,000,000 shares
of Common Stock offered hereby will be freely tradable without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"). All of the remaining 1,660,000 shares of Common Stock
outstanding are "restricted securities," as that term is defined under Rule 144
promulgated under the Securities Act and will become eligible for sale,
pursuant to Rule 144, on various dates commencing February 1998, subject to the
contractual restrictions described below. The holders of all of such shares,
other than 320,000 shares held by Michael Char and 200,000 shares issued in
connection with a private placement in May 1997, have agreed not to sell such
shares for a period of twelve months from the date of this Prospectus without
the Underwriter's prior written consent. The holders of 200,000 shares issued
in the private placement have agreed not to sell such shares for a period of
six months from the date of this Prospectus. The Company has granted certain
demand and "piggy-back" registration rights to the Underwriter with respect to
the securities issuable upon exercise of the Underwriter's Warrants. No
prediction can be made as to the effect, if any, that sales of shares of Common
Stock or even the availability of such shares for sale will have on the market
prices prevailing from time to time. The possibility that substantial amounts
of Common Stock may be sold in the public market may adversely affect the
prevailing market price for the Common Stock and could impair the Company's
ability to raise capital through the sale of its equity securities. See "Shares
Eligible for Future Sale" and "Underwriting."
No Assurance of Public Market; Arbitrary Offering Price; Possible
Volatility of Market Price of Common Stock and Warrants; Underwriter's
Potential Influence on the Market. Prior to this offering, there has been no
public trading market for the Common Stock or Warrants. There can be no
assurance that a regular trading market for the Common Stock or Warrants will
develop after this offering or that, if developed, it will be sustained.
Moreover, the initial public offering prices of the Common Stock and the
Warrants and the exercise price of the Warrants have been determined by
negotiations between the Company and the Underwriter and, as such, are
arbitrary in that they do not necessarily bear any relationship to the assets,
book value or potential earnings of the Company or any other recognized
criteria of value and may not be indicative of the prices that may prevail in
the public market. The market prices of the Company's securities following this
offering may be highly volatile. Factors such as the Company's operating
results and announcements by the Company or its competitors may have a
significant impact on the market price of the Company's securities. In
addition, in recent years, the stock market has experienced a high level of
price and volume volatility and market prices for the stock of many companies
have experienced wide price fluctuations which have not necessarily been
related to the operating performance of such companies. Although it has no
obligation to do so, the Underwriter intends to make a market in the Common
Stock and Warrants and may otherwise effect transactions in the Common Stock
and Warrants. If the Underwriter makes a market in the Common Stock or
Warrants, such activities may exert a dominating influence on the market and
such activity may be discontinued at any time. The prices and liquidity of the
Common Stock and Warrants may be significantly affected to the extent, if any,
that the Underwriter participates in such market. See "Underwriting."
Possible Delisting of Securities from Nasdaq System; Risks Relating to
Low-Priced Stocks. It is currently anticipated that the Company's Common Stock
and Warrants will be eligible for listing on Nasdaq upon the completion of this
offering. In order to continue to be listed on Nasdaq, however, the Company
must maintain $2,000,000 in total assets, a $200,000 market value of the public
float and $1,000,000 in total capital and surplus. In addition, continued
inclusion requires two market makers and a minimum bid price of $1.00 per
share; provided, however, that if the Company falls below such minimum bid
price, it will remain eligible for continued inclusion on Nasdaq if the market
value of the public float is at least $1,000,000 and the Company has $2,000,000
in capital and surplus. Nasdaq has recently proposed new maintenance criteria
which, if implemented, would eliminate the foregoing exception to the minimum
bid price requirement and require, among other things, $2,000,000 in net
tangible assets, $1,000,000 market value of the public float and adherence to
certain corporate governance provisions. The failure to meet these maintenance
criteria in the future may result in the delisting of the Company's securities
from Nasdaq, and trading, if any, in the Company's securities would thereafter
be conducted in the non-Nasdaq over-the-counter market. As a result of such
delisting, an investor could find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, the Company's securities. In
addition, if the Common Stock were to become delisted from trading on Nasdaq
and the trading price of the Common Stock were to fall below $5.00 per share on
the date the Company's securities were
11
delisted, trading in such securities would also be subject to the requirements
of certain rules promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), which require additional disclosure by
broker-dealers in connection with any trades involving a stock defined as a
penny stock (generally, any non-Nasdaq equity security that has a market price
of less than $5.00 per share, subject to certain exceptions). Such rules
require the delivery, prior to any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated therewith,
and impose various sales practice requirements on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). For these types of transactions, the broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transaction prior to sale. The
additional burdens imposed upon broker-dealers by such requirements may
discourage broker-dealers from effecting transactions in the Company's
securities, which could severely limit the market price and liquidity of such
securities and the ability of purchasers in this offering to sell their
securities of the Company in the secondary market.
Potential Adverse Effect of Warrant Redemption. The Warrants are subject
to redemption by the Company at any time commencing on , 1998, upon notice
of not less than 30 days, at a price of $.10 per Warrant, provided that the
closing bid quotation of the Common Stock on all 20 trading days ending on the
third day prior to the day on which the Company gives notice has been at least
150% (currently $8.25, subject to adjustment) of the then effective exercise
price of the Warrants and the Company obtains the written consent of the
Underwriter to such redemption prior to the Call Date. Redemption of the
Warrants could force the holders to exercise the Warrants and pay the exercise
price at a time when it may be disadvantageous for the holders to do so, to
sell the Warrants at the then current market price when they might otherwise
wish to hold the Warrants, or to accept the redemption price, which is likely
to be substantially less than the market value of the Warrants at the time of
redemption. See "Description of Securities -- Redeemable Warrants."
Possible Inability to Exercise Warrants. The Company intends to qualify
the sale of the securities offered hereby in a limited number of states.
Although certain exemptions in the securities laws of certain states might
permit the Warrants to be transferred to purchasers in states other that those
in which the Warrants were initially qualified, the Company will be prevented
from issuing Common Stock in such states upon the exercise of the Warrants
unless an exemption from qualification is available or unless the issuance of
Common Stock upon exercise of the Warrants is qualified. The Company may decide
not to seek or may not be able to obtain qualification of the issuance of such
Common Stock in all of the states in which the ultimate purchasers of the
Warrants reside. In such a case, the Warrants held by purchasers will expire
and have no value if such Warrants cannot be sold. Accordingly, the market for
the Warrants may be limited because of these restrictions. Further, a current
prospectus covering the Common Stock issuable upon exercise of the Warrants
must be in effect before the Company may accept Warrant exercises. There can be
no assurance the Company will be able to have a prospectus in effect when this
Prospectus is no longer current, notwithstanding the Company's commitment to
use its best efforts to do so. See "Description of Securities -- Redeemable
Warrants."
12
USE OF PROCEEDS
The net proceeds to the Company from the sale of the securities offered
hereby are estimated to be $3,893,500 ($4,477,525 if the Underwriter's
over-allotment option is exercised in full). The Company expects to use the net
proceeds during the twelve months following this offering approximately as
follows:
Approximate
Approximate Percentage of
Application of Proceeds Dollar Amount Dollar Amount
- ----------------------- --------------- --------------
Acquisition of subscriber bases(1) ..................... $1,250,000 32.1%
Establishment of additional POPs(2) ..................... 750,000 19.3
Marketing and advertising(3) ........................... 500,000 12.8
Repayment of indebtedness(4) ........................... 442,000 11.4
Working capital and general corporate purposes(5) ...... 951,500 24.4
----------- ------
Total ............................................... . $3,893,500 100.0%
=========== ======
- ------------
(1) Represents anticipated costs to acquire subscriber bases. As of the date of
this Prospectus, the Company has no plans, agreements, commitments,
understandings or arrangements with respect to any such acquisition. See
"Business -- Company Strategy."
(2) Represents anticipated costs associated with the establishment of up to
twenty-four additional POPs, including the cost of equipment, telephone
lines and initial rent, the cost of adding subscriber capacity to existing
POPs and salaries for up to ten additional technical and support
personnel. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Plan of Operation."
(3) Includes costs associated with advertising in local newspapers and trade
publications, fees for independent marketing consultants and the salaries
for up to three marketing and sales personnel. See "Business -- Marketing
and Sales."
(4) Represents aggregate amounts to be used to repay outstanding principal and
estimated accrued interest through October 1, 1997 to Messrs. Char,
Feinberg and Cole-Hatchard, principal stockholders of the Company.
Approximately $375,000 of such indebtedness is repayable on the earlier of
(i) the consummation of this offering or (ii) May 30, 1999 (May 1, 1998 in
the case of $163,537 principal amount of indebtedness payable to Mr.
Char), bears interest at the rate of 8% per annum and was incurred in
connection with the Reorganization in May 1997. Included in such
indebtedness is $21,737 and $35,000, respectively, of advances made to the
Company by Messrs. Char and Cole-Hatchard to establish additional POPs.
The balance of such indebtedness represents a $60,000 advance made by Mr.
Cole-Hatchard in August 1997 for the purchase of network equipment, which
bears interest at the rate of 9.25% per annum and is repayable on the
earlier of (i) the consummation of this offering or (ii) May 1, 1999. See
"Certain Transactions."
(5) Working capital may be used, among other things, to pay salaries of the
Company's executive officers (which is anticipated to be approximately
$320,000 during the twelve months following the offering), rent, trade
payables, professional fees and other operating expenses.
If the Underwriter exercises its over-allotment option in full, the
Company will realize additional net proceeds of $584,025, which will be added
to the Company's working capital.
Based on currently proposed plans and assumptions relating to the
implementation of its business plans, the Company believes that the proceeds of
this offering will be sufficient to satisfy its contemplated cash requirements
for at least twelve months following the consummation of this offering. In the
event that the Company's plans change, its assumptions change or prove to be
inaccurate or if the proceeds of this offering otherwise prove to be
insufficient to implement its business plans, the Company may find it necessary
or desirable to reallocate a portion of the proceeds within the above described
categories, use proceeds for other purposes, seek additional financing or
curtail its operations. There can be no assurance that any additional financing
will be available to the Company on acceptable terms, or at all.
13
Proceeds not immediately required for the purposes described above will be
invested principally in United States government securities, short-term
certificates of deposit, money market funds or other short-term interest
bearing investments.
DILUTION
The difference between the initial public offering price per share of
Common Stock and the net tangible book value per share after this offering
constitutes the dilution to investors in this offering. Net tangible book value
per share of Common Stock is determined by dividing the net tangible book value
of the Company (total tangible assets less total liabilities) by the number of
shares of Common Stock outstanding.
As of May 31, 1997, the Company had a negative net tangible book value of
($35,026) or ($.02) per share of Common Stock. After giving effect to the sale
of the securities offered hereby (less underwriting discounts and commissions
and estimated expenses of this offering), the pro forma net tangible book value
of the Company as of May 31, 1997 would have been $3,886,474 or $1.46 per
share, representing an immediate increase in net tangible book value of $1.48
per share of Common Stock to existing stockholders and an immediate dilution of
$3.54 per share to new investors. The following table illustrates this dilution
to new investors on a per share basis:
Initial public offering price ................................. $5.00
Net tangible book value before offering .................. ($ .02)
Increase attributable to investors in this offering ...... 1.48
------
Net tangible book value after offering ........................ 1.46
------
Dilution to new investors ....................................... $3.54
======
The following table sets forth, with respect to existing stockholders and
new investors in this offering, a comparison of the number of shares of Common
Stock issued by the Company, the percentage of ownership of such shares, the
total cash consideration paid, the percentage of total cash consideration paid
and the average price per share.
Shares Purchased Total Cash Consideration
----------------------- ------------------------
Average
Price
Number Percent Amount Percent Per Share
----------- --------- ------------ --------- ----------
Existing stockholders ...... 1,660,000 62.4% $ 414,600 7.7% $ .25
New Investors ............... 1,000,000 37.6 $5,000,000 92.3 5.00
--------- ------ ----------- ------
Total ................. . 2,660,000 100.0% $5,414,600 100.0%
========= ====== =========== ======
The above tables assume no exercise of the Underwriter's over-allotment
option. If such option is exercised in full, the new investors will have paid
$5,750,000 for 1,150,000 shares of Common Stock, representing approximately
93.3% of the total consideration for 40.9% of the total number of shares of
Common Stock outstanding.
The above tables assume no exercise of outstanding stock options or
warrants. As of the date of this Prospectus, there are outstanding stock
options to purchase an aggregate of 260,000 shares of Common Stock at an
exercise price of $2.00 per share. To the extent that stock options are
exercised, there will be further dilution to new investors. See "Management --
1997 Stock Option Plan," "Description of Securities" and "Underwriting."
14
CAPITALIZATION
The following table sets forth the capitalization of the Company as of May
31, 1997, on an actual basis, and as adjusted to give effect to the sale of the
securities offered hereby and the anticipated application of the estimated net
proceeds therefrom:
May 31, 1997
----------------------------
Actual As Adjusted
------------- ------------
Short term debt ....................................... $ 372,137 $ --
========== ==========
Stockholders' equity (deficit):
Preferred Stock, $.01 par value, 1,000,000 shares
authorized, no shares issued and outstanding ...... $ -- $ --
Common stock, $.01 par value, 10,000,000 shares
authorized, 1,660,000 shares outstanding, 2,660,000
as adjusted(1) .................................... 16,600 26,600
Additional paid-in-capital ........................ 295,000 4,178,500
Stock subscriptions receivable ..................... (5,000) (5,000)
Accumulated deficit ................................. (313,626) (313,626)
---------- ----------
Total stockholders' equity (deficit) .................. (7,026) 3,886,474
---------- ----------
Total capitalization ................................. ($ 7,026) $3,886,474
========== ==========
(1) Does not include (i) 500,000 shares of Common Stock reserved for issuance
upon exercise of the Warrants; (ii) an aggregate of 150,000 shares of
Common Stock reserved for issuance upon exercise of the Underwriter's
Warrants and the warrants included therein; (iii) 260,000 shares of Common
Stock reserved for issuance upon exercise of outstanding options under the
Plan; and (iv) 240,000 shares of Common Stock reserved for issuance upon
exercise of options available for future grant under the Plan. See
"Management -- 1997 Stock Option Plan," and "Underwriting."
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
Overview
The Company was organized in February 1997 as successor to the business of
the Predecessor Companies and is in an early stage of development. The
Company's financial statements include the accounts of the Company and the
Predecessor Companies.
The Company's revenues are derived primarily from providing Internet
access services to individuals and to a lesser extent to business subscribers.
Revenues are comprised principally of recurring revenues from the Company's
customer base, non-recurring start-up fees for X2 56K and leased line
connections and from various ancillary services. The Company charges
subscription fees which are billed monthly or quarterly, in advance, typically
pursuant to pre-authorized credit card accounts. For the five months ended May
31, 1997, sales to individuals accounted for approximately 81.5% of the
Company's revenues. The Company's subscribers do not incur hourly usage fees.
Monthly subscription service revenue is recognized over the period in
which services are provided. Service revenues derived from dedicated access
services, which require the use of Company provided installation of equipment
at a subscriber's location, are recognized when the service is commenced. Fee
revenues for ancillary services are recognized as services are performed.
The Company has not yet generated any meaningful revenues, and will not
generate any meaningful revenues until after the Company establishes additional
POPs and attracts and retains a significant number of subscribers, which the
Company does not anticipate will occur until several months following the
consummation of this offering, if at all. For the period from May 1, 1995
(inception) to May 31, 1997, the Company incurred a cumulative net loss of
approximately $313,626 (after giving effect to non-recurring compensation
expense of $205,000). Since May 31, 1997, the Company has incurred losses and
anticipates that it will continue to incur significant losses until, at the
earliest, the Company generates sufficient revenues to offset the substantial
up-front expenditures and operating costs associated with establishing
additional POPs and attracting and retaining a significant subscriber base.
There can be no assurance that the Company will be able to attract and retain a
sufficient number of subscribers to generate meaningful revenues or achieve
profitable operations.
The Company's operating results will be significantly affected by
subscriber attrition rates. Subscribers may discontinue service without penalty
at any time, and there can be no assurance that subscribers will continue to
purchase services from the Company or that the Company will not be subject to
significant subscriber attrition. The Company has historically experienced a
subscriber attrition rate of less than 20%. Significant levels of subscriber
attrition in the future would have a material adverse effect on the Company's
operating results.
Acceleration in the growth of the Company's subscriber base or changes in
usage patterns among subscribers may increase operating costs. Acceleration in
the growth of the subscriber base could require the Company to hire additional
personnel and increase the Company's expenses related to marketing, network
infrastructure and customer support sooner than anticipated. An increase in
peak time usage or an overall increase in usage by subscribers could adversely
affect the Company's ability to consistently meet the demand for its access
services. As a result, the Company may be required to hire additional personnel
and increase expenses related to network infrastructure capacity with minimal
corresponding increases in revenue on a per subscriber basis.
Plan of Operation
The Company's proposed plan of operation and prospects will be largely
dependent upon the Company's ability to successfully establish and equip
additional POPs on a timely and cost effective basis; hire and retain skilled
management, technical, marketing and other personnel; and attract and retain
significant numbers of subscribers.
The Company's telecommunications network is currently comprised of leased
high-speed data lines and ten POPs. Pursuant to its currently proposed plan of
operation, the Company will seek to establish up to twenty-four additional POPs
during the twelve months following the consummation of this offering. The
number of POPs
16
will be dependent upon, among other things, market acceptance and demand in
target geographic markets and the technical effectiveness of alternative
delivery technologies. Certain new network services known as "display virtual
private networks" may permit the Company to establish a presence in particular
geographic markets without establishing additional POPs by permitting the
Company to connect its existing POPs to such networks. See "Business--Network
Infrastructure."
The Company anticipates that the average cost to acquire and install
equipment (consisting of a router, access server and communications hub) and
telephone lines in each POP will be approximately $13,000. The Company expects
to expand the capacity of its network through POP expansion at existing
locations. The Company's POPs, as initially configured, accommodate up to
approximately 160 subscribers. The Company expects that the average cost to
upgrade a POP to accommodate each additional 160 subscribers will be
approximately $8,500. The Company's existing network configuration has capacity
for up to approximately 3,000 subscribers.
The Company currently has three full-time employees in addition to its
executive officers. Depending upon the level of its business activity, the
Company anticipates that it will use a portion of the proceeds of this offering
to hire up to three additional employees over the next twelve months to market
the Company's access services to potential subscribers. The Company also
intends to hire up to ten additional technical and support personnel during the
twelve months following the offering.
Results of Operations
The Company commenced operations in late 1995 and established four POPs
during 1996. The Company had approximately 700 subscribers at December 31,
1996. Revenues for the five months ended May 31, 1997 were $110,566, compared
to $16,234 for the prior comparable period. The increase was primarily
attributable to "dial-up" customer growth at the Company's Nyack and Goshen,
New York POPs. At May 31, 1997 and May 31, 1996, the Company had ten and two
POPs, respectively. The Company had approximately 1,100 and 200 subscribers,
respectively, at May 31, 1997 and May 31, 1996. For the five months ended May
31, 1997, the Company's Nyack and Goshen, New York POPs accounted for
approximately 92.5% of the Company's revenues. Six POPs were established in
April and May 1997. Such POPs have not yet contributed significantly to revenue
growth.
Cost of revenues for 1996 were $67,582, or approximately 68.5% of
revenues, approximately $42,000 of which related to communications expense for
the installation of customer dial-up lines and high speed T-1 line access to
the Internet. Cost of revenues for the five months ended May 31, 1997 were
$67,707, or approximately 61.2% of revenues, as compared to $14,831, or 91.4%,
for the prior comparable period. The increase in cost of revenues was due to
communications expense, depreciation and personnel costs for maintaining
equipment and were directly related to volume increases in revenue. The Company
expects these costs to increase in absolute dollars as additional POPs are
established.
Operating expenses for 1996 were $81,220, or 82.3% of revenues,
approximately $40,400 of which related to advertising and payroll. Operating
expenses for the five months ended May 31, 1997 (excluding a non-recurring
non-cash charge of $205,000) were $85,680 or 77.5% of revenues, compared to
$29,327 or 181% of revenues, for the five months ended May 31, 1996. The
increase in operating expenses was attributable to payroll, rent and
professional fees. Payroll increases were directly related to volume increases
in revenues. Rent increases were attributable to the addition of new POPs and
the establishment of larger administrative space. Management anticipates future
increases in operating expenses for advertising, rent, payroll, depreciation
and professional fees.
Interest expense for the five months ended May 31, 1997 was $3,174 or 2.9%
of revenues, as compared to $907, or 5.6% of revenues for the prior comparable
period. Interest expense relates primarily to financing the purchase of
computer hardware. Interest expense for the year ended December 31, 1996 was
$6,677.
For the year ended December 31, 1996 and the five months ended May 31, 1996
and May 31, 1997, the Company incurred net losses of $54,206, $25,551 and
$251,495, respectively.
17
Liquidity and Capital Resources
The Company's primary capital requirements have been and will continue to
be to fund the purchase and installation of network equipment at its POPs, as
well as for working capital, including the salaries of executive and other
personnel. To date, the Company has financed its capital requirements through
the issuance of debt and equity securities. At May 31, 1997, the Company had a
working capital deficit of $82,954.
In May 1997, the Company consummated a private placement pursuant to which
it issued 200,000 shares of Common Stock and received proceeds of $400,000. The
proceeds were used primarily for the purchase of network equipment, salaries
and expenses in connection with this offering. See "Certain Transactions."
In May 1997, the Company effected the Reorganization, pursuant to which it
issued promissory notes in the amounts of $141,800, $163,537 and $66,800,
respectively, to Messrs. Feinberg, Char and Cole-Hatchard, principal
stockholders of the Company. Such indebtedness bears interest at the rate of 8%
per annum and is repayable on the earlier of (i) the consummation of this
offering or (ii) May 30, 1999 (May 1, 1998 in the case of indebtedness owed to
Mr. Char). The Company intends to use a portion of the proceeds of this
offering to repay the entire principal amount of and accrued interest on such
indebtedness. See "Certain Transactions."
In August 1997, the Company borrowed $60,000 from Mr. Cole-Hatchard. Such
indebtedness bears interest at the rate of 9.25% per annum and is repayable on
the earlier of (i) the consummation of this offering or (ii) May 1, 1999. The
Company intends to use a portion of the proceeds of this offering to repay such
indebtedness. See "Certain Transactions."
The capital requirements relating to implementation of the Company's
business plan will be significant. During the twelve months following the
consummation of this offering, the Company intends to purchase computer
equipment in connection with the establishment of additional POPs, upgrade its
existing POPs and hire additional technical and support personnel. Other than
as described above, as of the date of this Prospectus, the Company has no
material commitments for capital expenditures.
The Company is dependent on the proceeds of this offering or other
financing in order to fully implement its proposed plan of operation. Based on
currently proposed plans and assumptions relating to the implementation of its
business plans (including the timetable of, and costs associated with,
establishing additional POPs), the Company believes that the proceeds of this
offering will be sufficient to satisfy its contemplated cash requirements for
at least twelve months following the consummation of this offering. In the
event that the Company's plans change, its assumptions change or prove to be
inaccurate or if the proceeds of this offering prove to be insufficient to
implement its business plans, the Company would be required to seek additional
financing sooner than currently anticipated. There can be no assurance that the
proceeds in this offering will be sufficient to permit the Company to implement
its proposed business plan or that any assumptions relating to the
implementation of such plan will prove to be accurate. To the extent that the
proceeds of this offering are not sufficient to enable the Company to generate
meaningful revenues or achieve profitable operations, the inability to obtain
additional financing will have a material adverse effect on the Company. There
can be no assurance that any such financing will be available to the Company on
commercially reasonable terms, or at all.
18
BUSINESS
The Company is an Internet service provider that offers "dial-up" Internet
access primarily to individual subscribers. The Company provides subscribers
with direct access to a wide range of Internet applications and resources,
including electronic mail, world wide web sites and regional and local
information and data services. The Company believes that its low subscriber to
modem ratio, its technical and customer support and ancillary services position
the Company to capitalize on the emerging and expanding markets for Internet
services.
Market Trends
In recent years, the Internet has experienced a rapid increase in the
number of users. Industry sources estimate that the number of online households
in the United States was approximately 9.6 million at the end of 1995, 13.6
million at the end of 1996, and project that the number of online households
will exceed 35.2 million by the year 2000. The Company believes that the
following key trends will contribute favorably to expected continued popularity
of the Internet:
o Continuing Penetration of Computers and Modems in the Home: An increasing
percentage of computer owners also own modems, which are now pre-installed
in a growing number of new computers. According to Software Publishers
Association, more than 33.9 million or 34% of households in the United
States owned a personal computer at the end of 1995, of which
approximately 70% also owned a modem. The Company believes that this
growth is accompanied by increasing use of computers for communications
such as facsimile transmissions and electronic mail.
o Growth of the Informational, Entertainment and Commercial Applications of
the Internet: Use of the Internet has grown rapidly since its
commercialization in the early 1990s. An increasing number of servers and
websites are being connected to the Internet, making available text,
graphics, audio and video information which may be accessed by consumers.
Through an Internet connection, users can access commercial, educational
and governmental databases, entertainment software, photographs and
videos, newspapers, magazines, library card catalogs, industry
newsletters, weather updates and other information. Traditional and
emerging Internet applications, including electronic mail, the World Wide
Web and USENET news groups, are also increasing in popularity.
o Increasing Availability of User-friendly Navigational Tools: Internet use
is also being promoted by the development of software tools that simplify
access to the Internet's applications and resources. As users become more
familiar with the Internet and the Internet increasingly becomes a medium
for entertainment and personal communication, the Company believes that
demand by individuals for competitively priced, direct, high speed access
to personal home pages, interactive multimedia games and entertainment
will continue to grow.
Company Strategy
The Company's objective is to expand its network of POPs rapidly in
selected geographic markets. The Company's strategy is to aggressively build
its subscriber base by:
Providing Internet Access to Individuals. The Company is primarily focused
on providing access services to individual subscribers, one of the fastest
growing segments of the Internet market. The Company seeks to establish
brand identity by offering high speed access service and highly responsive
customer support. The Company believes that its low subscriber to modem
ratio helps prevent busy signals which is attractive to subscribers. The
Company also offers Internet access to business and other commercial users,
many of which often require access to a dedicated Internet connection to
maintain a competitive position.
Offering Competitive Pricing. The Company has established a simple pricing
structure of charging subscribers a flat monthly fee of $19.95 for
unlimited access. The Company believes that this structure encourages usage
by eliminating subscribers' concern about incurring significant hourly
charges, which may increase subscriber retention rates. The Company
believes that its pricing structure will help attract new subscribers and
facilitate continued market penetration. The Company also intends to
implement alternative price plans, permitting subscribers and customers to
select hourly or other special billing features.
19
Continuing Network Expansion. The Company is aggressively expanding its
high speed, digital network. The Company believes that rapid expansion is
necessary to build its subscriber base and to promote regional brand name
recognition. The Company plans to augment the capacity of existing POPs to
satisfy increased subscriber demand. The Company currently supports 14.4,
28.8 and 36.6 Kbps modems at each of its POPs and has introduced X2 56K and
ISDN technologies into its network for dial-up accounts. The Company
continually evaluates alternative technologies, including satellite
television delivery systems and cable modems.
Targeting Suburban Markets. The Company intends to target suburban markets
with attractive demographic characteristics similar to the Company's
existing POPs. To achieve its goal, the Company will seek to cluster POPs
for operational efficiency and to share certain marketing, financial,
customer service and management personnel. By targeting suburban markets
which will initially be subject to less intensive competition than in large
metropolitan areas, the Company believes it will be able to avoid
competition from large Internet service providers. The Company will also
seek to capitalize a demand for Internet access by offering subscriber
service which combines the capabilities typically provided by large
companies with the flexibility and responsiveness of a small Internet
service provider.
Pursuing Selective Acquisitions. Consistent with its strategy, the Company
intends to pursue opportunities by making selective acquisitions of
subscriber bases which the Company believes will enhance its prospects and
maximize revenues. The Company believes that it operates in a highly
fragmented segment of the Internet connectivity industry and that selective
acquisitions will enhance penetration in new and existing markets.
The Company's strategy and future marketing plans are subject to change as
a result of a number of factors, including progress or delays in the Company's
expansion efforts, changes in market conditions, the nature of possible
acquisitions which may become available to it in the future and technological
and competitive factors. There can be no assurance that the Company will be
able to successfully implement its business strategy or otherwise successfully
expand its operations.
Internet Services
The Company provides a variety of competitively priced Internet access
services. The Company's primary focus is on individuals who connect to the
Internet via a modem (referred to as "dial-up" accounts). Dial-up subscribers
can access the Internet by calling the Company's local POPs. The Company bills
its subscribers on a monthly or quarterly basis, in advance, typically through
pre-authorized credit card accounts.
Dial-Up Accounts: The Company believes that dial-up accounts present an
attractive opportunity for growth. A user can quickly activate an account
with the Company, obtain an Internet E-mail address, web space and
establish automatic billing to the user's credit card. Subscriber accounts
are priced at $19.95 per month for unlimited connections and $80 per month
for an unlimited ISDN use account. There is no connect fee, except for a
$20 start-up fee for X2 56K connections. Connections for ISDN services
require the customer to obtain an ISDN line from the local telephone
company. The Company's network supports connectivity software which
utilizes standard communication protocols such as TCP/IP, which enable a
user's computer to communicate with other computers over the Internet. As
of the date of this Prospectus, the Company had 1,068 individual and 88
business accounts.
Dedicated Access: The Company also offers high speed, high bandwidth
dedicated leased lines principally for business users who desire to connect
internal computer networks to the Internet, 24 hours a day, seven days a
week. The Company offers leased line accounts to provide Internet services
to businesses at various speeds, including X2 56K circuits, fractional T-1
and full T-1 lines, depending on the customer's needs. The Company provides
its customers with dedicated leased lines and bills subscribers on a
monthly basis through a consolidated bill (which includes the phone
company's charges).
Web Design and Hosting Services: Without incurring the expense of setting
up and maintaining a web server, including in-house technical support to
design and maintain a web site, a subscriber can rent space on a server for
an Internet presence. The Company offers web site hosting services for a
24-hour interactive presence on the Internet. The Company's web servers
connect directly to the Internet via high speed T-1 lines providing maximum
bandwidth. This service includes domain name registration, 24-hour access,
file upload and/or download capability, and statistical logs. The Company
also offers web page design and development services and will seek to
expand the scope of such services in the future.
20
Co-Location Space: The Company provides a physical location at its facility
for a customer to install equipment and connect directly to the Internet.
This service provides customers with a low cost direct connection to the
Company's router. The Company provides this service under maintenance
agreements with pricing determined by the amount of space occupied.
Subscriber Applications
The Company provides its subscribers with access to the full range of
available Internet applications, including:
Electronic Mail: E-mail is an Internet application by which an Internet
user can exchange messages with any other user who has an E-mail address.
Messages can be sent almost instantly to designated individuals or groups
on a mailing list.
World Wide Web: The World Wide Web is a browsing and searching system
comprised of thousands of computer servers, referred to as home pages, each
linked by a special communications protocol. This open protocol allows
Internet users to view and access text, graphics, digital video and audio
resident on a home page or to connect instantaneously to related and linked
information on the same server or other home pages. Since the Internet is
an open system, any company can create a home page on the World Wide Web in
order to provide users with product or service information. Users can then
solicit more information and, in some cases, make purchases electronically.
Browsers such as Netscape, Mosaic and Microsoft Explorer, which
incorporates its own World Wide Web browser, have helped contribute to the
rapid growth of the World Wide Web. The Company expects the World Wide Web
to continue to grow rapidly as more businesses and consumers become aware
of the advantages of communications on the Internet. As part of its
service, the Company provides each subscriber with one megabyte of web
space on the Company's World Wide Web servers.
USENET News Groups: USENET is a network of thousands of computers attached
to the Internet that provide forums, or news groups, that allow users to
exchange information on a variety of topics of shared interest. Internet
users can seek or provide information on diverse topics ranging from sports
or other hobbies, to job opportunities, to restaurant and travel
suggestions.
Databases and Public Domain Software: An increasing number of host
computers are being connected to the Internet, which make available growing
amounts of text, graphics, audio and video information and public domain
software. For example, with an Internet connection, a user can access
commercial, educational and government databases, newspapers, magazines,
library card catalogs, industry newsletters, weather updates, and other
information.
File Transfer Protocol: The Internet can be easily used to move electronic
files (including data, programs or text) from one computer to another. This
can be very useful for parties in separate locations that collaborate on
data files. Data transferred over the Internet remains in digital format
and does not need to be re-entered by a receiving party; it can be
manipulated and then re-transmitted to other Internet users.
Network Infrastructure
The Company's operations will depend upon the capacity, reliability and
security of its network infrastructure. The Company currently has limited
network capacity and will be required to continually expand its network
infrastructure to accommodate significant numbers of users and increasing
amounts of information they may wish to access. Expansion of the Company's
network infrastructure will require significant financial, operational and
management resources.
The Company maintains a telecommunications infrastructure that enables it
to provide digital Internet connectivity services to its subscribers. The
Company's network of POPs gives subscribers access to the Internet by means of
a local telephone call. The Company's network is currently comprised of
multiple T-1 lines which are connected directly to seven of the Company's POPs
(three of the Company's POPs are connected via T-1 to the Company's Nyack, New
York facility).
The Company closely monitors data traffic on its network and expects to
expand the capacity of its network by the addition of POPs and POP expansion at
existing locations as demand increases. POPs are monitored by
21
management software at the Company's computer facilities in Nyack and Pearl
River, New York. In order to build its subscriber base, the Company intends to
continue to expand the number of its POPs. As of the date of this Prospectus,
the Company had a total of ten POP locations in suburban areas servicing
Rockland, Orange, Dutchess, Sullivan, Putnam, Ulster and Westchester counties
in New York and Bergen County in New Jersey. The Company intends to continue
its expansion of POPs in the greater New York metropolitan area, including in
Morris and Passaic counties in New Jersey and New Haven and Fairfield counties
in Connecticut.
The number of POPs will be dependent upon, among other things, market
acceptance and demand in target geographic markets and the technical
effectiveness of alternative delivery technologies. Certain new network
services known as "display virtual private networks" may permit the Company to
establish a presence in particular geographic markets without establishing
additional POPs by permitting the Company to connect its existing POPs to such
networks.
The Company maintains a telecommunications center at its Nyack facility
and Pearl River headquarters. Through these centers, the Company's technical
staff constantly monitors network utilization and security, including equipment
at individual POPs to ensure reliable Internet connectivity service. The
Company is subject to significant risks from a natural disaster or other
unanticipated event at these sites, and any damage or failure that causes
interruptions in the Company's operations could have a material adverse effect
on the Company. The Company currently maintains $1,000,000 of general liability
insurance which includes coverage for business interruption and property
damage. The Company plans to connect all of its POPs to its Pearl River
facility in the future.
Internet Access Providers and Suppliers
The Company currently relies on a sole supplier to provide Internet access
via leased telecommunications lines on a cost-effective and continuous basis.
The Company has not entered into an interconnect agreement with such supplier.
Although the Company believes that it currently has sufficient access to
telecommunications networks on favorable terms and believes that its
relationship with such supplier is satisfactory, any increase in rates charged
by such supplier would materially adversely affect the Company's operating
margins. Failure to obtain continuing access to such networks would also have a
material adverse effect on the Company, including possibly requiring the
Company to significantly curtail or cease its operations.
The Company also is dependent on third-party manufacturers of hardware
components. Certain components used by the Company in providing its networking
services are acquired from only one source, including high performance routers
manufactured by Cisco Systems, Inc. and remote access servers manufactured by
U.S. Robotics, Inc. The Company has not entered into agreements with any
equipment manufacturer and purchases equipment components pursuant to purchase
orders placed from time to time in the ordinary course of business. Although
the Company believes that network equipment is currently available from
numerous sources, failure by manufacturers to deliver quality products on a
timely basis or the inability to develop alternative sources if and as
required, could result in delays which could materially adversely affect the
Company's business and limit the Company's ability to expand its operations.
Marketing and Sales
The Company's primary focus is on providing Internet services to
individuals who subscribe to the Company's dial-up service. The Company
currently sells its Internet access services through its executive officers
responding to inbound calls and E-mail, largely generated by referrals from
other subscribers. The Company anticipates that it will hire up to three sales
personnel during the twelve months following this offering to market the
Company's services and respond to subscription inquiries.
The Company is seeking to build its regional brand identity. The Company
engages in marketing and advertising activities, including advertising of its
services in specialty and regional publications, and participates in computer
trade shows. The Company also engages in various local promotional programs,
primarily to support newly opened POPs. The Company recently retained the
services of a marketing and advertising firm in order to develop a sales and
marketing program to complement the Company's planned expansion activities. The
agreement provides for payments of $1,500 per month and may be terminated upon
90 days' notice.
22
Customer Support
The Company believes that it is important to provide prompt and effective
assistance to its subscribers and customers. The Company provides network
monitoring and emergency subscriber assistance services 24 hours a day, seven
days a week. The Company provides regular support and technical assistance 12
hours per day Monday through Friday and 8 hours on Saturdays and Sundays. The
Company's two support personnel respond to telephone inquiries, and are
dedicated to responding to E-mail inquiries. The Company intends to increase
the number of its technical and customer support staff by hiring up to ten
additional persons over the next twelve months. There can be no assurance,
however, that the Company's customer support resources will be sufficient to
manage any expansion in the Company's subscriber base. Any failure to
adequately match customer support resources to projected increases in
subscribers could adversely affect the Company.
Competition
The market for Internet access services is highly competitive. There are
no substantial barriers to entry, and the Company expects that competition will
intensify in the future. The Company believes that its ability to compete
successfully will be significantly affected by numerous factors, including
price, ease of use, reliability, customer support, geographic coverage and
industry and general economic trends (particularly unfavorable economic
conditions adversely affecting consumer discretionary spending). The Company's
competitors include many large companies that have substantially greater market
presence and financial, technical, marketing and other resources than the
Company, including (i) international, national and regional commercial Internet
service providers, such as Performance Systems International, Inc., Bolt
Beranek & Newman, Inc. and UUNET Technologies, Inc. ("UUNET"); (ii) established
on-line services companies that currently offer Internet access, such as
America Online, Inc. ("AOL"), CompuServe Incorporated, Prodigy Services
Company, Earthlink, and Delphi Internet Services; (iii) computer hardware and
software and other technology companies, such as IBM and Microsoft Corp.
("Microsoft"); (iv) national long distance carriers, such as AT&T Corp., MCI
Communications Corp. and Sprint Corp.; (v) regional telephone companies; and
(vi) cable operators, such as Tele-Communications, Inc.
New competitors, including large computer hardware and software, media,
cable and telecommunications companies, have increased their focus on the
Internet access market, resulting in even greater competition for the Company.
Increased competition has resulted and could continue to result in significant
price competition, which in turn could result in significant reductions in the
average selling price of the Company's services. In addition, increased
competition for new subscribers could result in increased sales and marketing
expenses and related subscriber acquisition costs, which could materially
adversely affect the Company's potential profitability. There can be no
assurance that the Company will be able to offset the effects of any such
competition or resulting price reductions through an increase in the number of
its subscribers, higher revenue from enhanced services or cost reductions or
that the Company will have the financial resources, technical expertise or
marketing and support capabilities to compete successfully.
Most of the established on-line services companies and telecommunications
companies currently offer Internet access. In addition, new competitors,
including large computer hardware and software, media and telecommunications
companies, have increased their focus on the Internet access market, resulting
in even greater competition for the Company. In particular, Microsoft has
introduced an Internet access solution, including front-end software and an
on-line service, called "Microsoft Network." The application software for this
on-line service is bundled with Microsoft's Windows 95 operating system, which
may give the service a significant advantage over other on-line and Internet
services. Microsoft has undertaken a strategic alliance with UUNET that
provides Microsoft customers access to the Internet through UUNET's POPs.
Microsoft has also purchased an interest in Comcast, a leading cable operator,
to converge software and cable networks to deliver Internet access. In
addition, IBM's most recent version of its OS/2 operating system software
includes Internet utilities, and IBM offers Internet access through its own
private communications network. AOL is offering direct Internet access. The
ability of these competitors or others to bundle services and products with
Internet connectivity services could place the Company at a significant
competitive disadvantage.
The market for Internet access is characterized by rapidly changing
technology, evolving industry standards, emerging competition and frequent new
software and service introductions. There can be no assurance that the
23
Company can successfully identify new product and service opportunities as they
arise and develop and bring new products and services to market in a timely
manner or that software, services or technologies developed by others will not
render the Company's services or technologies noncompetitive, obsolete or less
marketable. The Company currently does not have any proprietary applications
software.
Employees
As of July 31, 1997, the Company had three full-time employees in addition
to its executive officers. Of such employees, two are engaged in customer
support and one in accounting. The Company also engages part-time employees.
None of the Company's employees is represented by a union. The Company
considers its employee relations to be good.
Properties
The Company's executive offices are located in Pearl River, New York,
where the Company leases approximately 5,525 square feet under a lease that
expires in June 2002. The annual rental is $96,000. The Company also leases
space (typically, less that 100 square feet) in various geographic locations to
house the telecommunications equipment for each of its POPs. Leased facilities
for POPs have various expiration dates ranging from November 1997 through April
2002. Aggregate annual rentals for POPs are approximately $28,000 over the next
twelve months. The Company does not anticipate difficulties in obtaining future
leased space for its POPs.
Legal Proceedings
In June 1997, Michael Char, a founder, principal stockholder and former
officer and director of the Company, indicated that he disagreed with other
members of management with respect to various business matters. The Company has
been unsuccessful in resolving such disagreements or in negotiating a
settlement with Mr. Char and, after a prolonged absence, in August 1997, the
Company removed Mr. Char as a director and terminated his employment. While the
Company does not believe that Mr. Char has any meritorious claims against the
Company or members of management, there can be no assurance that Mr. Char will
not institute an action against the Company seeking substantial damages. Any
such claims, with or without merit, can be time consuming, costly and difficult
to defend and, if successful, could have a material adverse effect on the
Company.
24
MANAGEMENT
The directors and executive officers of the Company are as follows:
Name Age Position
- ---- ----- --------
Stephen J. Cole-Hatchard ...... 39 Chairman of the Board, Chief Executive Officer and
President
Nicko Feinberg ............... 26 Chief Information Officer, Vice President of Technology
and Director
Peter Morris .................. 39 Chief Financial Officer, Vice President and Director
Michael Olbermann ............ 41 Vice President of Business Development and Director
Stephen J. Cole-Hatchard has been Chairman, Chief Executive Officer and
President of the Company since August 1997. Mr. Cole-Hatchard was Vice
President of Finance of the Company from February 1997 to August 1997 and has
been a director of the Company since February 1997. Mr. Cole-Hatchard currently
serves in these capacities on a part-time basis devoting approximately thirty
hours a week of his business time to the Company's affairs. Mr. Cole-Hatchard
has been a director and executive officer of Hudson Technologies, Inc., a
publicly-traded company engaged in providing refrigerant management services,
since January 1993. Mr. Cole-Hatchard is a member of the bar of the State of
New York and is employed as a detective with the Clarkstown, New York Police
Department, Legal Division.
Nicko Feinberg has been a director and Vice President of Technology of the
Company since November 1996 and Chief Information Officer since August 1997.
From April 1994 to October 1996, Mr. Feinberg was a Sales Manager and, from
April 1991 to April 1994, a Sales Account Executive for Microage Computer
Outlet, Inc., a company engaged in computer sales and training. From September
1989 to March 1991, Mr. Feinberg owned and operated Creative Images, Inc., a
pre-press service bureau. Creative Images, Inc. filed for protection under
Chapter 7 of the United States Bankruptcy Code in 1991.
Peter Morris has been Chief Financial Officer, Vice President and a
director of the Company since June 1997. From April 1986 to June 1997, Mr.
Morris was Vice President and Controller of Georgette Klinger, Inc., a company
engaged in providing cosmetic services. Mr. Morris is a New York State
Certified Public Accountant.
Michael Olbermann has been Vice President of Business Development and a
director of the Company since February 1997. Mr. Olbermann has owned and
operated Rock House Construction Co., Inc., a company engaged in commercial and
residential construction, since 1986.
All directors hold office until the next annual meeting of stockholders
for the ensuing year or until their successors have been duly elected and
qualified. Officers are elected annually by the Board of Directors and serve at
the discretion of the Board.
The Company has agreed, for a period of three years from the effective
date of this Prospectus, if so requested by the Underwriter, to recommend and
use its best efforts to elect a designee of the Underwriter as a non-voting
advisor to the Company's Board of Directors. The Underwriter has not yet
exercised its right to designate such a person.
The Company intends to obtain "key man" life insurance on the life of each
of Nicko Feinberg and Stephen J. Cole-Hatchard in the amount of $1,000,000.
Executive Compensation
The following table sets forth the compensation paid to Nicko Feinberg for
the fiscal year ended December 31, 1996. No executive officer of the Company
received aggregate compensation which exceeded $100,000 during such year.
25
Summary Compensation Table
Long-Term
Annual Compensation Compensation Awards($)(1)
--------------------------------------------- --------------------------
Securities
Restricted Underlying
Other Annual Stock Options/
Name and Principal Position Year Salary($) Bonus ($) Compensation($) Award SARs(#)
- --------------------------------------- ------ ----------- ----------- ----------------- ------------ -----------
Nicko Feinberg, Vice President ...... 1996 $5,400 $-- $-- -- --
- ------------
(1) The Company did not have any long-term incentive or option plans during the
fiscal year ended December 31, 1996.
Employment Agreements
The Company has entered into three-year employment agreements with each of
Messrs. Feinberg, Cole-Hatchard, Olbermann and Morris which provide for an
annual base compensation of $88,000, $45,000, $90,000 and $95,000,
respectively, and such bonuses as the Board of Directors may from time to time
determine. The employment agreements provide for employment on a full-time
basis (except for the Company's agreement with Mr. Cole-Hatchard) and contain a
provision that the employee will not compete or engage in a business
competitive with the current or anticipated business of the Company during the
term of the employment agreement and for a period of two years thereafter (one
year in the case of Mr. Morris).
Indemnification of Directors and Officers
The Company's Certificate of Incorporation provides for the Company to
indemnify each director and officer of the Company to the fullest extent
permitted by the Delaware General Corporation Law. The foregoing provision may
reduce the likelihood of derivative litigation against directors and may
discourage or deter stockholders or management from suing directors for
breaches of their duty of care, even though such an action, if successful,
might otherwise benefit the Company and its stockholders.
Liability Insurance
The Company intends to procure and maintain a policy of insurance under
which the directors and officers of the Company will be insured, subject to the
limits of the policy, against certain losses arising from claims made against
such directors and officers by reason of any acts or omissions covered under
such policy in their respective capacities as directors or officers, including
liabilities under the Securities Act.
1997 Stock Option Plan
In February 1997, the Board of Directors and stockholders of the Company
adopted the 1997 Stock Option Plan (the Plan ), pursuant to which 500,000
shares of Common Stock are reserved for issuance upon exercise of options. The
Plan is designed to serve as an incentive for retaining qualified and competent
employees, directors and consultants.
The Company's Board of Directors, or a committee thereof, administers the
Plan and is authorized, in its discretion, to grant options thereunder to all
eligible employees of the Company, including officers and directors (whether or
not employees) of, and consultants to, the Company. The Plan provides for the
granting of both "incentive stock options" (as defined in Section 422 of the
Internal Revenue Code of 1986, as amended) and non-qualified stock options.
Options can be granted under the Plan on such terms and at such prices as
determined by the Board of Directors, or a committee thereof, except that the
per share exercise price of options will not be less than the fair market value
of the Common Stock on the date of grant. In the case of an incentive stock
option granted to a stockholder who owns stock of the Company possessing more
than 10% of the total combined voting power of all classes of stock ("10%
stockholder"), the per share exercise price will not be less
26
than 110% of such fair market value. The aggregate fair market value
(determined on the date of grant) of the shares covered by incentive stock
options granted under the Plan that become exercisable by a grantee for the
first time in any calendar year is subject to a $100,000 limit.
Options granted under the Plan will be exercisable during the period or
periods specified in each option agreement. Options granted under the Plan are
not exercisable after the expiration of ten years from the date of grant (five
years in the case of incentive stock options granted to a 10% stockholder) and
are not transferable other than by will or by the laws of descent and
distribution.
As of the date of this Prospectus, the Company has granted options to
purchase an aggregate of 260,000 shares of Common Stock (net of forfeitures)
under the Plan at an exercise price of $2.00 per share. Of such options,
options to purchase 40,000 shares were issued to each of Messrs. Feinberg,
Cole-Hatchard and Olbermann, and options to purchase 30,000 shares were issued
to Mr. Morris. Such options are exercisable as to one-third of the shares
covered thereby on the first, second and third anniversary of the date of
grant.
27
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of the date of this
Prospectus (based on information obtained from the persons named below),
relating to the beneficial ownership of shares of Common Stock by: (i) each
person or entity who is known by the Company to own beneficially five percent
or more of the outstanding Common Stock; (ii) each of the Company's directors;
and (iii) all directors and executive officers of the Company as a group.
Percentage of Shares
Beneficially Owned
----------------------------
Number of Shares
Name of Beneficially Before
Beneficial Owner Owned(1) Offering After Offering
- ------------------------------------ ------------------------- ---------- ---------------
Nicko Feinberg .................. 320,000 (19.3% 12.0%
Michael Char ..................... 320,000 19.3 12.0
Stephen J. Cole-Hatchard ......... 320,000 (19.3 12.0
Michael Olbermann ............... 235,000 (14.2 8.8
Peter Morris ..................... 20,000 (4) 1.2 *
All directors and executive officers
as a group (four persons) ...... 895,000 (53.9% 33.6%
- ------------
* Less than 1%
(1) The Company believes that all persons named in the table have sole voting
and investment power with respect to all shares of Common Stock
beneficially owned by them.
(2) Does not include options to purchase 40,000 shares of Common Stock.
(3) Includes 180,000 shares held by the Cole-Hatchard Family Limited
Partnership, of which Mr. Cole-Hatchard is the general partner. Does not
include (i) options to purchase 40,000 shares of Common Stock and (ii)
25,000 shares held by Mr. Cole-Hatchard's mother and brother.
(4) Does not include options to purchase 30,000 shares of Common Stock.
(5) Does not include options to purchase 150,000 shares of Common Stock.
Messrs. Char, Feinberg and Cole-Hatchard may be deemed to be "promoters"
of the Company as such term is defined in federal securities laws.
28
CERTAIN TRANSACTIONS
In February 1997, the Company issued 320,000 shares to each of Messrs.
Char, Feinberg and Cole-Hatchard, and issued 235,000 and 20,000 shares,
respectively, to Messrs. Olbermann and Morris, in each case in consideration of
$.01 per share.
During the year ended December 31, 1996, the Company borrowed $37,000 and
$15,000, respectively, from Messrs. Char and Cole-Hatchard. In January 1997,
the Company borrowed an additional $20,000 from Mr. Cole-Hatchard. Pursuant to
the Reorganization, Messrs. Feinberg, Char and Cole-Hatchard exchanged their
respective interests in the Predecessor Companies for promissory notes in the
principal amounts of $141,800 $163,537 and $66,800, respectively (inclusive of
previously outstanding indebtedness of $21,737 and $35,000, respectively, to
Messrs. Char and Cole-Hatchard described above). All of such indebtedness bears
interest at the rate of 8% per annum and is repayable upon the earlier of (i)
the consummation of this offering or (ii) May 30, 1999 (May 1, 1998 in the case
of indebtedness owed to Mr. Char). The Company intends to use a portion of the
proceeds of this offering to repay such indebtedness.
Mr. Cole-Hatchard's mother and brother purchased 15,000 shares and 10,000
shares, respectively, pursuant to the Company's private placement in May 1997.
In August 1997, the Company borrowed $60,000 from Mr. Cole-Hatchard. Such
indebtedness bears interest at the rate of 9.25% per annum (the rate at which
Mr. Cole-Hatchard borrowed such funds from an institutional lender) and is
repayable on the earlier of (i) the consummation of this offering or (ii) May
1, 1999. The Company intends to use a portion of the proceeds of this offering
to repay such indebtedness.
29
DESCRIPTION OF SECURITIES
General
The Company is authorized to issue 10,000,000 shares of Common Stock, par
value $.01 per share, and 1,000,000 shares of Preferred Stock, par value $.01
per share. As of the date of this Prospectus, there are 1,660,000 shares of
Common Stock outstanding and no shares of Preferred Stock outstanding.
Common Stock
The holders of Common Stock are entitled to one vote for each share held
of record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voting for the election of directors can
elect all of the directors then up for election. The holders of Common Stock
are entitled to receive ratably such dividends when, as and if declared by the
Board of Directors out of funds legally available therefor. In the event of
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining which are available
for distribution to them after payment of liabilities and after provision has
been made for each class of stock, if any, having preference over the Common
Stock. Holders of shares of Common Stock, as such, have no conversion,
preemptive or other subscription rights, and there are no redemption provisions
applicable to the Common Stock. All of the outstanding shares of Common Stock
are, and the shares of Common Stock offered hereby, when issued in exchange for
the consideration set forth in this Prospectus, will be, fully paid and
nonassessable.
Preferred Stock
The Company is authorized to issue 1,000,000 shares of Preferred Stock
from time to time in one or more series, in all cases ranking senior to the
Common Stock with respect to payment of dividends and in the event of the
liquidation, dissolution or winding-up of the Company. There are currently no
shares of Preferred Stock outstanding. The Board has the power, without
stockholder approval, to issue shares of one or more series of Preferred Stock,
at any time, for such consideration and with such relative rights, privileges,
preferences and other terms as the Board may determine (including, but not
limited to, terms relating to dividend rates, redemption rates, liquidation
preferences and voting, sinking fund and conversion or other rights). The
rights and terms relating to any new series of Preferred Stock could adversely
affect the voting power or other rights of the holders of the Common Stock or
could be utilized, under certain circumstances, as a method of discouraging,
delaying or preventing a change in control of the Company.
Redeemable Warrants
Each Warrant offered hereby entitles the registered holder thereof (the
"Warrant Holders") to purchase one share of Common Stock at a price of $5.50,
subject to adjustment in certain circumstances, at any time between , 1998
and 5:00 p.m., Eastern Time, on , 2002.
The Warrants are redeemable by the Company at any time commencing ,
1998, upon notice of not less than 30 days, at a price of $.10 per Warrant,
provided that the closing bid quotation of the Common Stock on all 20 trading
days ending on the third day prior to the day on which the Company gives notice
has been at least 150% (currently $8.25, subject to adjustment) of the then
effective exercise price of the Warrants and the Company obtains the written
approval of the Underwriter to such redemption prior to the Call Date. The
Warrant Holders shall have the right to exercise their Warrants until the close
of business on the date fixed for redemption. The Warrants will be issued in
registered form under a warrant agreement by and among the Company, Continental
Stock Transfer and Trust Company, as warrant agent, and the Underwriter (the
"Warrant Agreement"). The exercise price and number of shares of Common Stock
or other securities issuable on exercise of the Warrants are subject to
adjustment in certain circumstances, including in the event of a stock
dividend, recapitalization, reorganization, merger or consolidation of the
Company. However, the Warrants are not
30
subject to adjustment for issuances of Common Stock at prices below the
exercise price of the Warrants. Reference is made to the Warrant Agreement
(which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part) for a complete description of the terms and conditions
therein (the description herein contained being qualified by reference
thereto).
The Warrants may be exercised upon surrender of the Warrant certificate
during the exercise period at the offices of the warrant agent, with the
exercise form on the reverse side of the Warrant certificate completed and
executed as indicated, accompanied by full payment of the exercise price (by
certified check or bank draft payable to the Company) to the warrant agent for
the number of Warrants being exercised. The Warrant Holders do not have the
rights or privileges of holders of Common Stock.
No Warrant will be exercisable unless at the time of exercise the Company
has filed a current registration statement with the Commission covering the
shares of Common Stock issuable upon exercise of such Warrant and such shares
have been registered or qualified or deemed to be exempt from registration or
qualification under the securities laws of the state of residence of the holder
of such Warrant. The Company will use its best efforts to have all such shares
so registered or qualified on or before the exercise date and to maintain a
current prospectus relating thereto until the expiration of the Warrants,
subject to the terms of the Warrant Agreement. While it is the Company's
intention to do so, there can be no assurance that it will be able to do so.
No fractional shares will be issued upon exercise of the Warrants.
However, if a Warrant Holder exercises all Warrants then owned of record by
him, the Company will pay to such Warrant Holder, in lieu of the issuance of
any fractional share which is otherwise issuable, an amount in cash based on
the market value of the Common Stock on the last trading day prior to the
exercise date.
Dividend Policy
To date, the Company has not declared or paid any dividends on its Common
Stock. The payment by the Company of dividends, if any, is within the
discretion of the Board of Directors and will depend on the Company's earnings,
if any, its capital requirements and financial condition, as well as other
relevant factors. The Board of Directors does not intend to declare any
dividends in the foreseeable future, but instead intends to retain earnings, if
any, for use in the Company's business operations.
Delaware Anti-Takeover Law
Upon the consummation of this offering, the Company will be governed by
the provisions of Section 203 of the DGCL. In general, the law prohibits a
public Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. "Business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the stockholder. An "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of the corporation's voting stock.
Transfer Agent and Warrant Agent
The transfer agent for the Common Stock and the warrant agent for the
Warrants is Continental Stock Transfer and Trust Company, 2 Broadway, New York,
New York 10004.
Reports to Stockholders
The Company intends to file a registration statement with the Securities
and Exchange Commission to register its Common Stock and Warrants under the
provisions of Section 12(g) of the Exchange Act prior to the date of this
Prospectus and has agreed with the Underwriter that it will use its best
efforts to continue to maintain such registration. Such registration will
require the Company to comply with periodic reporting, proxy solicitation and
certain other requirements of the Exchange Act.
31
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, the Company will have 2,660,000
shares of Common Stock outstanding (assuming no exercise of Warrants). All
1,000,000 shares of Common Stock being offered hereby will be immediately
tradable without restriction or further registration under the Securities Act.
The remaining 1,660,000 shares of Common Stock outstanding are deemed to be
"restricted securities," as that term is defined under Rule 144 promulgated
under the Securities Act, in that such shares were acquired by the stockholders
of the Company in transactions not involving a public offering, and, as such,
may only be sold pursuant to a registration statement under the Securities Act,
in compliance with the exemption provisions of Rule 144, or pursuant to another
exemption under the Securities Act. The 1,660,000 restricted shares of Common
Stock will become eligible for sale under Rule 144, subject to the volume
limitations prescribed by the Rule and the contractual restrictions described
below on various dates commencing February 1998.
In general, under Rule 144 a person (or persons who may be deemed to be
"affiliates" of the Company as that term is defined under the Securities Act),
is entitled to sell within any three-month period a number of restricted shares
beneficially owned for at least one year that does not exceed the greater of
(i) 1% of the then outstanding Common Shares, or (ii) an amount equal to the
average weekly trading volume in the Common Shares during the four calendar
weeks preceding such sale. Sales under Rule 144 are also subject to certain
requirements as to the manner of sale, notice and the availability of current
public information about the Company. However, a person who is not deemed an
affiliate and has beneficially owned such shares for at least three years is
entitled to sell such shares without regard to the volume or other resale
requirements.
Under Rule 701 of the Securities Act, persons who purchase shares upon
exercise of options granted prior to the date of this Prospectus are entitled
to sell such shares after the 90th day following the date of this Prospectus in
reliance on Rule 144, without having to comply with the holding period
requirements of Rule 144 and, in the case of non-affiliates, without having to
comply with the public information, volume limitation or notice provisions of
Rule 144. Affiliates are subject to all Rule 144 restrictions after this 90-day
period, but without a holding period.
The Company's officers, directors and all of the Company's
securityholders, other than Michael Char who holds 320,000 shares, and the
holders of 200,000 shares purchased pursuant to the Company's private placement
in May 1997, have agreed not to sell or otherwise dispose of any securities of
the Company beneficially owned by them for a period of twelve months from the
date of this Prospectus, without the prior written consent of the Underwriter.
The holders of 200,000 shares issued in the private placement have agreed not
to sell such shares for a period of six months from the date of this
Prospectus.
Prior to this offering, there has been no market for the Common Stock and
no prediction can be made as to the effect, if any, that public sales of shares
of Common Stock or the availability of such shares for sale will have on the
market prices of the Common Stock and the Warrants prevailing from time to
time. Nevertheless, the possibility that substantial amounts of Common Stock
may be sold in the public market may adversely affect prevailing market prices
for the Common Stock and the Warrants and could impair the Company's ability in
the future to raise additional capital through the sale of its equity
securities.
32
UNDERWRITING
Rockefeller Securities Group, Inc. (the "Underwriter") has agreed, subject
to the terms and conditions contained in the Underwriting Agreement, to
purchase 1,000,000 shares of Common Stock and 500,000 Warrants from the
Company. The Underwriter is committed to purchase and pay for all of the Common
Stock and Warrants offered hereby if any of such securities are purchased. The
Common Stock and Warrants are being offered by the Underwriter, subject to
prior sale, when, as and if delivered to and accepted by the Underwriter and
subject to approval of certain legal matters by counsel and to certain other
conditions.
The Underwriter has advised the Company that it proposes to offer the
Common Stock and Warrants to the public at the public offering prices set forth
on the cover page of this Prospectus. The Underwriter may allow to certain
dealers who are members of the National Association of Securities Dealers, Inc.
(the "NASD") concessions, not in excess of $ per share of Common Stock and
$ per Warrant, of which not in excess of $ per share of Common Stock and
$ per Warrant may be reallowed to other dealers who are members of the NASD.
The Company has granted to the Underwriter an option, exercisable for 45
days from the date of this Prospectus, to purchase up to 150,000 additional
shares of Common Stock and/or 75,000 additional Warrants at the public offering
prices set forth on the cover page of this Prospectus, less the underwriting
discounts and commissions. The Underwriter may exercise this option in whole
or, from time to time, in part, solely for the purpose of covering
over-allotments, if any, made in connection with the sale of the shares of
Common Stock and/or Warrants offered hereby.
The Company has agreed to pay the Underwriter a nonaccountable expense
allowance of 3% of the gross proceeds of this offering, of which $40,000 has
been paid as of the date of this Prospectus. Of such amount, $10,000 was paid
to Adams Stevens, Inc., an NASD member. The Company has also agreed to pay all
expenses in connection with qualifying the shares of Common Stock and Warrants
offered hereby for sale under the laws of such states as the Underwriter may
designate, including expenses of counsel retained for such purpose by the
Underwriter.
The Company has agreed to sell to the Underwriter and its designees for an
aggregate of $100, warrants (the "Underwriter's Warrants") to purchase up to
100,000 shares of Common Stock at an exercise price of $5.50 per share (110% of
the public offering price per share) and up to 50,000 Warrants (each
exercisable to purchase one share of Common Stock at a price of $5.50 per
share) at an exercise price of $.11 per Warrant (110% of the public offering
price per Warrant). The Underwriter's Warrants may not be sold, transferred,
assigned or hypothecated for one year from the date of this Prospectus, except
to the officers and partners of the Underwriter and members of the selling
group and are exercisable at any time and from time to time, in whole or in
part, during the five-year period commencing on the date of this Prospectus
(the "Warrant Exercise Term"). During the Warrant Exercise Term, the holders of
the Underwriter's Warrants are given, at nominal cost, the opportunity to
profit from a rise in the market price of the Common Stock. To the extent that
the Underwriter's Warrants are exercised, dilution to the interests of the
Company's stockholders will occur. Further, the terms upon which the Company
will be able to obtain additional equity capital may be adversely affected
since the holders of the Underwriter's Warrants can be expected to exercise
them at a time when the Company would, in all likelihood, be able to obtain any
needed capital on terms more favorable to the Company than those provided in
the Underwriter's Warrants. Any profit realized by the Underwriter on the sale
of the Underwriter's Warrants, the underlying shares of Common Stock or the
underlying warrants, or the shares of Common Stock issuable upon exercise of
such underlying warrants may be deemed additional underwriting compensation.
The Company has agreed, at the request of the holders of a majority of the
Underwriter's Warrants, at the Company's expense, to register the Underwriter's
Warrants, the shares of Common Stock and warrants underlying the Underwriter's
Warrants, and the shares of Common Stock issuable upon exercise of the
underlying warrants under the Securities Act on one occasion during the Warrant
Exercise Term and to include the Underwriter's Warrants and all such underlying
securities in any appropriate registration statement which is filed by the
Company during the seven years following the date of this Prospectus.
The Company has also agreed, for a period of three years from the date of
this Prospectus, if so requested by the Underwriter, to elect a designee of the
Underwriter as a non-voting advisor to the Company's Board of Directors. The
Underwriter has not yet exercised its right to designate such a person.
33
In addition, the Company has agreed to enter into a consulting agreement
to retain the Underwriter as a financial consultant for a period of two years
from the consummation of this offering at an annual fee of $50,000, the entire
$100,000 payable in full, in advance. The consulting agreement will not require
the consultant to devote a specific amount of time to the performance of its
duties thereunder. In the event that the Underwriter originates a financing or
a merger, acquisition, joint venture or other transaction to which the Company
is a party, the Underwriter will be entitled to receive a finder's fee in
consideration for origination of such transaction.
The Company has agreed, in connection with the exercise of the Warrants
pursuant to solicitation (commencing one year from the date of this
Prospectus), to pay to the Underwriter a fee of 5% of the exercise price for
each Warrant exercised; provided, however, that the Underwriter will not be
entitled to receive such compensation in Warrant exercise transactions in which
(i) the market price of Common Stock at the time of exercise is lower than the
exercise price of the Warrants; (ii) the Warrants are held in any discretionary
account; (iii) disclosure of compensation arrangements is not made, in addition
to the disclosure provided in this Prospectus, in documents provided to holders
of Warrants at the time of exercise; (iv) the exercise of the Warrants is
unsolicited by the Underwriter; or (v) the solicitation of exercise of the
Warrants was in violation of Regulation M promulgated under the Exchange Act.
The Underwriter has advised the Company that it does not expect sales made
to discretionary accounts to exceed 1% of the securities offered hereby.
The Company has agreed to indemnify the Underwriter against certain civil
liabilities, including liabilities under the Securities Act.
Prior to this offering, there has been no public trading market for the
Common Stock or Warrants. Consequently, the initial public offering price of
the Common Stock and Warrants and the exercise price of the Warrants have been
determined by negotiations between the Company and the Underwriter. Among the
factors considered in determining these prices were the Company's financial
condition and prospects, market prices of similar securities of comparable
publicly-traded companies and the general condition of the securities market.
In order to facilitate the offering, the Underwriter may engage in
transactions that stabilize, maintain or otherwise affect the prices of the
Common Stock and Warrants. Specifically, the Underwriter may over-allot in
connection with the offering, creating a short position in the Common Stock
and/or Warrants for its own account. In addition, to cover over-allotments or
to stabilize the price of the Common Stock and Warrants, the Underwriter may
bid for, and purchase, shares of Common Stock and Warrants in the open market.
The Underwriter may also reclaim selling concessions allowed to a dealer for
distributing the Common Stock and Warrants in the offering, if the Underwriter
repurchases previously distributed Common Stock and Warrants in transactions to
cover short positions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Common Stock and
Warrants above independent market levels. The Underwriter is not required to
engage in these activities, and may end any of these activities at any time.
EXPERTS
The financial statements of the Company included in this Prospectus have
been audited by BDO Seidman LLP, independent certified public accountants, to
the extent and for the periods set forth in their report appearing elsewhere
herein and is included in reliance upon such report given upon the authority of
said firm as experts in accounting and auditing.
LEGAL MATTERS
The legality of the securities offered by this Prospectus will be passed
upon for the Company by Tenzer Greenblatt LLP, New York, New York. Morrison
Cohen Singer & Weinstein, LLP, New York, New York, has acted as counsel to the
Underwriter in connection with this offering.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 (the "Registration
Statement") under the Securities Act with respect to the securities
34
offered by this Prospectus. This Prospectus, filed as a part of such
Registration Statement, does not contain all of the information set forth in,
or annexed as exhibits to, the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and this offering, reference is
made to the Registration Statement, including the exhibits filed therewith,
which may be inspected without charge at the Office of the Commission, 450
Fifth Street, N.W., Washington D.C. 20549; and at the following regional
offices: Midwest Regional Office, Northwestern Atrium Center, 500 West Madison,
Suite 1400, Chicago, Illinois 60661-2511, and the Northeast Regional Office, 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of the
Registration Statement may be obtained from the Commission at its principal
office upon payment of prescribed fees. Statements contained in this Prospectus
as to the contents of any contract or other document are not necessarily
complete and, where the contract or other document has been filed as an exhibit
to the Registration Statement, each statement is qualified in all respects by
reference to the applicable document filed with the Commission.
As of the date of this Prospectus, the Company will become subject to the
reporting requirements of the Exchange Act and, in accordance therewith, will
file reports, proxy statements and other information with the Commission. Such
reports, proxy statements and other information can be inspected and copied at
the public reference facilities of the Commission set forth above, and copies
of such materials can be obtained from the Commission's Public Reference
Section at prescribed rates. The Company intends to furnish its stockholders
with annual reports containing audited financial statements and such other
periodic reports as the Company deems appropriate or as may be required by law.
35
GLOSSARY
Dial-up Accounts ............... Accounts with an Internet connectivity provider that utilize
a telephone call to a modem rather than a dedicated data
line.
E-mail ........................ Electronic mail. An application that allows a user to send
or receive text messages to or from any other user with an
Internet address, commonly termed an E-mail address.
FTP ........................... File Transfer Protocol. A protocol that allows file transfer
between a host and a remote computer.
ISDN ........................... Integrated Services Digital Network. An information trans-
fer standard for transmitting digital voice and data over
telephone lines at speeds up to 128 Kbps.
Internet ........................ A worldwide network of computer networks that are inter-
connected at certain points and utilize a common commu-
nications protocol, TCP/IP.
Kbps ........................... Kilobits per second. A measure of digital information trans-
mission rates. One kilobit equals 1,000 bits of digital infor-
mation.
Mbps ........................... Megabits per second. A measure of digital information
transmission rates. One megabit equals 1,000 Kbps.
On-line Service Providers ...... Commercial information services that offer a computer user
access through a modem to a specified slate of information,
entertainment and communications menus. These services
are generally closed systems and many offer limited, if any,
Internet access.
OEM ........................... Original Equipment Manufacturer.
POP ........................... Point-of-Presence. An interlinked group of modems, rout-
ers and other computer equipment, located in a particular
city or metropolitan area, that allows a nearby subscriber to
access the Internet through a local telephone call.
T-1 ........................... A data communications line capable of transmission speeds
of 1.54 Mbps.
TCP/IP ........................ Transmission Control Protocol/Internet Protocol. A compi-
lation of network- and transport-level protocols that allow
computers with different architectures and operating sys-
tem software to communicate with other computers on the
Internet.
World Wide Web .................. A network of servers that uses a special communications
protocol to link different servers throughout the Internet
and permits communication of graphics, video and sound.
X2 56K ........................ A new transmission technique which supplies 56 Kbps
"downstream" for transmissions from service providers.
36
Frontline Communications Corporation
Contents
Page
-----------
Report of independent certified public accountants ...... F-2
Combined financial statements:
Balance sheets ....................................... F-3
Statements of operations .............................. F-4
Statements of stockholders' deficit .................. F-5
Statements of cash flows .............................. F-6
Notes to financial statements ........................ F-7 - F-12
F-1
Report of Independent Certified Public Accountants
To the Board of Directors of
Frontline Communications Corporation
We have audited the accompanying combined balance sheet of Frontline
Communications Corporation (the "Company") as described in Note 1 to the
financial statements, as of December 31, 1996, and the related combined
statements of operations, stockholders' deficit and cash flows for the year
ended December 31, 1996 and the period from May 1, 1995 (inception) to December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1996, and the results of its operations and its cash flows for the
year ended December 31, 1996 and the period from May 1, 1995 (inception) to
December 31, 1995, in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Valhalla, New York
July 27, 1997
F-2
Frontline Communications Corporation
Combined Balance Sheets
December 31, May 31,
1996 1997
-------------- ------------
(Unaudited)
Assets
Current:
Cash ......................................................... $ 2,303 $ 371,793
Accounts receivable .......................................... 506 9,439
Prepaid expenses and other ................................. 3,048 378
Deferred registration costs ................................. -- 28,000
--------- ----------
Total current assets .................................... 5,857 409,610
Equipment, net (Note 4) ....................................... 46,760 74,076
Deposits ...................................................... 1,613 1,852
--------- ----------
$ 54,230 $ 485,538
========= ==========
Liabilities and Stockholders' Deficit
Current:
Notes payable to stockholders (Note 5) ..................... $ -- $ 372,137
Accounts payable and accrued expenses (Note 3) ............... 58,358 103,927
Deferred revenues .......................................... -- 16,500
Due to stockholders (Note 5) ................................. 15,266 --
--------- ----------
Total current liabilities ................................. 73,624 492,564
Due to stockholders (Note 5) .................................... 36,737 --
--------- ----------
Total liabilities ....................................... 110,361 492,564
--------- ----------
Commitments and contingencies (Notes 6 and 7)
Stockholders' deficit
Preferred stock, $.01 par value, 1,000,000 authorized, 0 issued
and outstanding ............................................. -- --
Common stock, $.01 par value, 10,000,000 shares authorized,
1,660,000 issued and outstanding ........................... -- 16,600
Additional paid-in capital ................................. 6,000 295,000
Accumulated deficit .......................................... (62,131) (313,626)
Stock subscriptions receivable .............................. -- (5,000)
--------- ----------
Total stockholders' deficit .............................. (56,131) (7,026)
--------- ----------
$ 54,230 $ 485,538
========= ==========
See accompanying notes to combined financial statements.
F-3
Frontline Communications Corporation
Combined Statements of Operations
Period from Five Months Ended
May 1, 1995 ----------------------------
(Inception) to Year ended (Unaudited)
December December May 31, May 31,
31, 1995 31, 1996 1996 1997
---------------- ------------ ------------ -------------
Revenues ................................. $ 1,880 $ 98,699 $ 16,234 $ 110,566
Cost of revenues ........................... 3,347 67,582 14,831 67,707
---------- ---------- ---------- ----------
Gross (loss) profit ..................... (1,467) 31,117 1,403 42,859
Operating expenses:
Selling, general and administrative ...... 6,458 81,220 29,327 85,680
Special non-cash compensation charge
(Note 1) .............................. -- -- -- 205,000
---------- ---------- ---------- ----------
Loss from operations ..................... (7,925) (50,103) (27,924) (247,821)
Other income (expense):
Interest ................................. -- (6,677) (907) (3,174)
Other .................................... -- 2,574 3,280 (500)
---------- ---------- ---------- ----------
Net loss ................................. $ (7,925) $ (54,206) $ (25,551) $ (251,495)
========== ========== ========== ==========
Loss per share of common stock and com-
mon stock equivalents -- (.03) (.01) (.14)
========== ========== ========== ==========
Weighted average number of shares out-
standing 1,816,000 1,816,000 1,816,000 1,816,000
========== ========== ========== ==========
See accompanying notes to combined financial statements.
F-4
Frontline Communications Corporation
Combined Statements of Stockholders' Deficit
Common Stock Additional Stock Total
---------------------- Paid-in Accumulated Subscriptions Stockholders'
Shares Amount Capital Deficit Receivable Deficit
----------- --------- ------------ ------------- --------------- --------------
Balance, May 1, 1995 (inception) . -- $ -- $ -- $ -- $ -- $ --
Net loss ........................... -- -- -- (7,925) -- (7,925)
---------- -------- ---------- ---------- -------- ----------
Balance, December 31, 1995 ......... -- -- -- (7,925) -- (7,925)
Officer salary contributed to capital -- -- 6,000 -- -- 6,000
Net loss ........................... -- -- -- (54,206) -- (54,206)
---------- -------- ---------- ---------- -------- ----------
Balance, December 31, 1996 ......... -- -- 6,000 (62,131) -- (56,131)
For five months ended May 31,
1997 (Unaudited):
Frontline reorganization
(See Note 2) ........................ 640,000 6,400 (325,000) -- -- (318,600)
Shares issued as compensation ...... 820,000 8,200 205,000 -- (5,000) 208,200
Officer salary contributed to capital -- -- 3,000 -- -- 3,000
Private placement of shares at $2
per share ........................... 200,000 2,000 398,000 -- -- 400,000
Common stock options issued for
services ........................... -- -- 8,000 -- -- 8,000
Net loss ........................... -- -- -- (251,495) -- (251,495)
---------- -------- ---------- ---------- -------- ----------
Balance, May 31, 1997
(Unaudited) ........................ 1,660,000 $16,600 $ 295,000 $ (313,626) $ (5,000) $ (7,026)
========== ======== ========== ========== ======== ==========
See accompanying notes to combined financial statements.
F-5
Frontline Communications Corporation
Combined Statements of Cash Flows
Increase (Decrease) in Cash
Period from Five Months Ended
May 1, 1995 ----------------------------
(Inception) Year ended (Unaudited)
to December 31, December 31, May 31, May 31,
1995 1996 1996 1997
------------------ -------------- ----------- --------------
Cash flows from operating activities:
Net loss .................................... $ (7,925) $ (54,206) $(25,551) $ (251,495)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation .............................. -- 9,962 3,817 10,630
Officer salary contributed to capital ...... -- 6,000 2,500 3,000
Common stock options issued for services -- -- -- 8,000
Special non cash compensation charge ...... -- -- -- 205,000
Changes in assets and liabilities:
Accounts receivable ........................ (681) 175 (1,829) (8,933)
Prepaid expenses and other ............... -- (1,661) (1,163) (239)
Other assets .............................. -- (3,000) (3,000) 2,670
Accounts payable and accrued expenses 3,109 55,249 21,443 45,569
Deferred revenue ........................... -- -- 4,300 16,500
Deferred financing costs .................. -- -- -- (28,000)
-------- --------- --------- ----------
Net cash provided by (used in) oper-
ating activities (5,497) 12,519 517 2,702
-------- --------- --------- ----------
Cash flows from investing activities:
Acquisitions of equipment ..................... (1,608) (55,114) (19,391) (37,946)
-------- --------- --------- ----------
Cash flows from financing activities:
Proceeds from stockholder loans, net ......... 18,933 33,070 11,556 4,734
Proceeds from sale of common stock ............ -- -- -- 400,000
-------- --------- --------- ----------
Net cash provided by financing
activities .............................. 18,933 33,070 11,556 404,734
-------- --------- --------- ----------
Net increase (decrease) in cash ............... 11,828 (9,525) (7,318) 369,490
Cash, beginning of period ..................... -- 11,828 11,828 2,303
-------- --------- --------- ----------
Cash, end of period ........................... $ 11,828 $ 2,303 $ 4,510 $ 371,793
======== ========= ========= ==========
Supplemental disclosure of cash flow informa-
tion:
Cash paid for interest ........................ $ -- $ 6,600 $ 890 $ 3,105
Non-cash investing and financing activities:
Common stock issued for reduction of stock-
holder loans $ -- $ -- $ -- $ 9,600
Notes payable to stockholders issued as dis-
tributions $ -- $ -- $ -- $ 325,000
Common stock subscriptions .................. $ -- $ -- $ -- $ 5,000
======== ========= ========= ==========
See accompanying notes to combined financial statements.
F-6
Frontline Communications Corporation
Notes to Combined Financial Statements
(Amounts related to May 31, 1997 and for the five month
periods ended May 31, 1996 and 1997 are unaudited)
1. Summary of Significant Accounting Policies
Business
Frontline Communications Corporation ("Frontline" or the "Company") is an
internet service provider that provides subscribers with direct access to a
wide range of internet applications and resources including electronic mail,
world wide web sites and regional and local information and data services.
Reorganization and Principles of Combination
The financial statements include the accounts of Hobbes & Co., LLC
("Hobbes"), INET Communications Company, LLC ("INET") and Sara Girl & Co., LLC
("Sara Girl"), (collectively the "Predecessor Companies") and Frontline
Communications Corporation. As described more fully in Note 2, on May 30, 1997,
Frontline acquired the net assets of the Predecessor Companies. For accounting
purposes, the business combination has been accounted for as if the acquirer is
Hobbes. With respect to the acquisition of INET, the acquisition has been
accounted for as a combination of entities under common control in a manner
similar to a pooling of interests and reflects the combined financial position,
operating results and cash flows of Hobbes and INET as if they had been
combined for all periods presented. With respect to Sara Girl and Frontline,
the business combination has been accounted for using purchase accounting,
which resulted in the recording of a special non-cash charge of $205,000 at May
30, 1997. The non-cash charge represents the estimated fair market value of the
Company's 820,000 shares of common stock issued to certain founding
shareholders for current and future services. The Predecessor Companies were
dissolved and Frontline is the continuing legal entity. All intercompany
accounts and transactions have been eliminated.
Interim Financial Information
The financial statements as of May 31, 1997 and for the five months ended
May 31, 1996 and 1997 are unaudited but in the opinion of management, include
all adjustments (consisting only of normal recurring adjustments and accruals)
which the Company considers necessary for the fair presentation of the
financial position, operating results and cash flows for that period. Results
of interim periods are not necessarily indicative of results for the entire
year.
Equipment and Depreciation
Equipment is stated at cost, less accumulated depreciation. Depreciation
is computed over the estimated useful lives of the assets using the
straight-line method for book purposes and accelerated methods for income tax
purposes.
The following estimated useful lives are applied in the computation of
depreciation:
Years
------
Computer equipment ............................... 3-5
===
Upon retirement or sale, the cost and related accumulated depreciation are
removed from the accounts and any resulting gains or losses are included in the
statement of operations.
Revenue Recognition
Revenues are derived from the sale of direct access to the internet and
various internet applications to subscribers. Revenues are recognized in the
period when internet access is provided.
F-7
Frontline Communications Corporation
Notes to Combined Financial Statements -- (Continued)
(Amounts related to May 31, 1997 and for the five month
periods ended May 31, 1996 and 1997 are unaudited)
1. Summary of Significant Accounting Policies -- (Continued)
Income Taxes
Deferred income taxes are provided on differences between the financial
reporting and income tax bases of assets and liabilities based upon statutory
tax rates enacted for future periods.
Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade accounts receivable. The Company's cash investments are placed with
high credit quality financial institutions and may exceed the amount of federal
deposit insurance. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Company's customer base.
Cash and cash equivalents
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Use of Estimates
In preparing the financial statements in conformity with generally
accepted accounting principles, management is required 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 amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Financial Instruments
The carrying amounts of financial instruments including cash, accounts
receivable, due to stockholders and accounts payable approximated fair value as
of December 31, 1996, because of the relatively short maturity of these
instruments. The carrying value of notes payable to stockholders cannot be
determined because of the nature of their terms.
Loss Per Share of Common Stock
Loss per share of common stock is calculated by dividing net loss by the
weighted average number of shares of common stock and common stock equivalents,
if dilutive, outstanding during each of the periods presented. In addition, when
an initial public offering is contemplated, common stock and common stock
equivalents issued during and subsequent to the Frontline reorganization (see
Note 2) by the Company at a price less than the estimated initial public
offering price during the twelve months immediately preceding the anticipated
initial filing of the offering are treated as outstanding for all periods
presented, using the treasury stock method.
Deferred Registration Costs
Costs incurred in connection with the Company's anticipated public
offering are deferred and will be charged against stockholders' equity upon
successful completion of the offering. If the offering is not consummated,
deferred costs will be charged to expense.
Recent Accounting Pronouncements
During February, 1997 the FASB issued SFAS No. 128 "Earnings Per Share"
which replaces the presentation of primary earnings per share ("EPS") with
basic EPS. It also requires dual presentation of basic and diluted EPS. SFAS
No. 128 is effective for periods ending after December 15, 1997. The Company
believes the adoption of this pronouncement will not have a material effect on
the financial statements.
F-8
Frontline Communications Corporation
Notes to Combined Financial Statements -- (Continued)
(Amounts related to May 31, 1997 and for the five month
periods ended May 31, 1996 and 1997 are unaudited)
1. Summary of Significant Accounting Policies -- (Continued)
During June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income", which establishes standards for
reporting and display of comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all changes in equity
except those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS 130 requires that all items that are required to
be recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements.
SFAS 130 is effective for financial statements for periods beginning after
December 15, 1997 and requires comparative information for earlier years to be
restated. Because of the recent issuance of this standard, management has been
unable to fully evaluate the impact, if any, the standard may have on future
financial statement disclosures. Results of operations and financial position,
however, will be unaffected by implementation of this standard.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 121 "Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of " ("SFAS No.
121"). SFAS No. 121 requires, among other things, impairment losses on assets
to be held and gains or losses from assets that are expected to be disposed of
be included as a component of income from continuing operations before taxes on
income. The Company adopted SFAS No. 121 as of January 1, 1996 and its
implementation did not have a material effect on the financial statements.
Stock-Based Compensation
In October 1995, FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 establishes a fair value method for accounting for
stock-based compensation plans either through recognition or disclosure. The
Company adopted the employee stock-based compensation provisions of SFAS No.
123 by disclosing the pro forma net income and pro forma net income per share
amounts assuming the fair value method as of January 1, 1995. The adoption of
this standard did not impact the Company's results of operations, financial
position or cash flows. Stock arrangements with non-employees, if applicable,
are recorded at fair value.
Advertising
All costs associated with advertising services are expensed in the period
incurred. Advertising expense was approximately $1,000, $19,000, $8,000 and
$8,500 for the years ended December 31, 1995 and 1996, and the five month
periods ended May 31, 1996 and 1997, respectively.
2. Reorganization
On May 30, 1997, the Predecessor Companies were acquired by the Company by
issuing three notes aggregating $325,000 (excluding $47,137 of certain
advances) (See Note 5) for all the membership interest in the Predecessor
Companies. For accounting purposes Hobbes has been considered to be the
acquirer. As a result, the business combination of Hobbes and INET has been
accounted for as a combination of entities under common control in a manner
similar to a pooling of interests. The business combination with Sara Girl and
Frontline have been accounted for as purchases. The net assets and operations
of Sara Girl and Frontline are not material to the Company's financial
statements. Notes payable to the members of the Predecessor Companies are
accounted for as distributions in the accompanying statement of stockholders'
equity.
F-9
Frontline Communications Corporation
Notes to Combined Financial Statements -- (Continued)
(Amounts related to May 31, 1997 and for the five month
periods ended May 31, 1996 and 1997 are unaudited)
3. Accounts Payable and Accrued Expenses
Accrued expenses were approximately $13,000 and $55,000 at December 31,
1996 and May 31, 1997, respectively. Accrued expenses consisted of various
items including telephone charges, professional fees, rent and supplies.
4. Equipment
Equipment consist of the following:
December 31, May 31,
1996 1997
-------------- --------
Computer equipment .................. $56,722 $94,668
-------- --------
Less accumulated depreciation ...... 9,962 20,592
-------- --------
Equipment, net ..................... $46,760 $74,076
======== ========
5. Related Party Transactions
On May 30, 1997, the Company issued notes aggregating $372,137 to three of
its stockholders related to the reorganization discussed in Note 2, and certain
advances made to the Company since inception. The notes bear interest at 8% and
are payable at the earlier of an initial public offering or on May 30, 1999,
except for $163,537, which is due on the earlier of an initial public offering
or May 1, 1998. At December 31, 1996, due to stockholders represents advances
made to the Company for working capital purposes.
6. Commitments and Contingencies
Leases
The Company rents office space and equipment under operating leases.
Future minimum rental payments required under operating leases as of May
31, 1997 are as follows:
1998 .......................... $114,127
1999 .......................... 114,301
2000 .......................... 121,358
2001 .......................... 117,545
2002 .......................... 107,611
---------
Total .......................... $574,942
=========
Rental expense was $0, $17,475, $6,143 and $15,209 for the years ended
December 31, 1995 and 1996 and the five month periods ended May 31, 1996 and
1997, respectively.
Potential Litigation
In June 1997, Michael Char, a founder and principal stockholder of the
Company, had disagreements with other members of management with respect to
various business matters. The Company has been unsuccessful in resolving such
disagreements or in negotiating a settlement with Mr. Char and, after a
prolonged absence, in August 1997, the Company removed Mr. Char as a director
and terminated his employment. While the Company does not believe that Mr. Char
has any meritorious claims against the Company or members of management, there
can be no assurance that Mr. Char will not institute an action against the
Company, seeking substantial damages. Any such claims, with or without merit,
can be time consuming, costly and difficult to defend and, if successful, could
have a material adverse effect on the Company.
F-10
Frontline Communications Corporation
Notes to Combined Financial Statements -- (Continued)
(Amounts related to May 31, 1997 and for the five month
periods ended May 31, 1996 and 1997 are unaudited)
7. Stock Options
Effective March 1, 1997, the Board of Directors (the "Board") approved the
1997 stock option plan (the "Plan"), which authorized the issuance of incentive
options and non-qualified options to purchase up to 500,000 shares of common
stock. The plan has a ten year term. The Board retained the authority to
determine the individuals to whom, and the times at which, stock options would
be made, along with the number of shares, vesting schedule and other provisions
related to the stock options.
For the period ended May 31, 1997, the Company issued incentive options to
purchase 220,000 shares of common stock to employees and non-qualified options
to purchase 40,000 shares of common stock to certain non-employees. These
options have a five year term and are exercisable at any time on or after March
1, 1998 at $2 per share.
The Company applies Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees" and related interpretations by recording
compensation expense for the excess of fair market value over the exercise
price per share as of the date of the grant in accounting for its stock
options. Accordingly, no compensation costs have been recognized for its
issuance of 220,000 options to employees since the exercise price exceeded the
then fair market value on the date of the grant. In accordance with SFAS No.
123, the Company has recognized $8,000 as the fair value of services received
for the 40,000 options granted to non-employees.
SFAS No. 123 requires the Company to provide pro forma information
regarding net loss and net loss per share as if compensation cost for the
Company's stock options had been determined in accordance with the fair value
based method prescribed in SFAS No. 123. The Company estimates fair value of
each stock based option at the date of the grant using the Black Scholes
option-pricing model with the following weighted average assumptions used for
options in 1997:
Risk-free interest rate ...... 6.51%
Expected life ............... 5 Years
Expected volatility ......... 0.00%
Dividend yield ............... None
Had compensation cost for the issuance of options been determined based on
the fair value at the grant dates consistent with the fair value method of SFAS
No. 123, the Company's net loss would not have changed since options at the
grant date were considered to have no value.
Weighted Weighted
Average Average
Remaining Exercise
Life Shares Price
------------ --------- ---------
Outstanding, January 1, 1997 ........................... -- $ --
Granted ................................................ 260,000 2.00
-------- ------
Outstanding, May 31, 1997 .............................. 4.75 years 260,000 2.00
======== ======
Options exercisable at end of period .................. -- --
Weighted average fair value of options granted during the
period ................................................ $ --
======
During the initial phase-in period of SFAS No. 123, the effects on pro
forma results are not likely to be representative of the effects on pro forma
results in future years since additional awards could be made each year.
F-11
Frontline Communications Corporation
Notes to Combined Financial Statements -- (Continued)
(Amounts related to May 31, 1997 and for the five month
periods ended May 31, 1996 and 1997 are unaudited)
8. Income Taxes
The Company had net operating loss carryforwards of approximately $59,000
and $62,000 at December 31, 1996 and May 31, 1997, respectively, which expire
in 2111 and 2112. A valuation allowance has been provided for these loss
carryforwards since their realization is not considered to be more likely than
not.
9. Subsequent Events
a) The Company has a letter of intent with Rockefeller Securities Group,
Inc. in connection with a proposed offering and sale to the public of one
million shares of common stock of the Company at a price of $5 per share and
500,000 warrants at a price of $.10 per warrant. Each warrant will be
exercisable to purchase one share of common stock at $5.50 per share.
b) The Company has entered into employment contracts expiring on various
dates from June 2000 to August 2000 with four officers of the Company for
aggregate annual salaries of $318,000.
c) In August 1997, the Chairman advanced the Company $60,000 for working
capital purposes.
F-12
================================================================================
No dealer, sales person or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or the Underwriter.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any security other than the securities offered by this Prospectus,
or an offer to sell or a solicitation of an offer to buy any securities by
anyone in any jurisdiction in which such offer or solicitation is not
authorized or is unlawful. The delivery of this Prospectus shall not, under any
circumstances, create any implication that the information contained herein is
correct as of any time subsequent to the date hereof.
--------------------------
TABLE OF CONTENTS
Page
-----------
Prospectus Summary .................. 3
Risk Factors ........................ 6
Use of Proceeds ..................... 13
Dilution .............................. 14
Capitalization ........................ 15
Plan of Operation ..................... 16
Business .............................. 19
Management ........................... 25
Principal Stockholders ............... 28
Certain Transactions .................. 29
Description of Securities ............ 30
Shares Eligible for Future Sale ...... 32
Underwriting ........................ 33
Experts .............................. 34
Legal Matters ........................ 34
Additional Information ............... 34
Glossary .............................. 36
Index to Financial Statements ......... F-1
--------------------------
Until , 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities offered hereby,
whether or not participating in this distribution may be required to deliver a
Prospectus. This is in addition to the obligation of dealers to deliver a
Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
================================================================================
================================================================================
FRONTLINE
COMMUNICATIONS
CORPORATION
1,000,000 Shares of Common Stock
and
Redeemable Warrants to Purchase
500,000 Shares of Common Stock
-------------
PROSPECTUS
------------
Rockefeller Securities Group, Inc.
, 1997
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law (the "DGCL") contains
the provisions entitling the Registrant's directors and officers to
indemnification from judgments, fines, amounts paid in settlement, and
reasonable expenses (including attorney's fees) as the result of an action or
proceeding in which they may be involved by reason of having been a director or
officer of the Registrant. In its Certificate of Incorporation, the Registrant
has included a provision that limits, to the fullest extent now or hereafter
permitted by the DGCL, the personal liability of its directors to the
Registrant or its stockholders for monetary damages arising from a breach of
their fiduciary duties as directors. Under the DGCL as currently in effect,
this provision limits a director's liability except where such director (i)
breaches his duty of loyalty to the Registrant or its stockholders, (ii) fails
to act in good faith or engages in intentional misconduct or a knowing
violation of law, (iii) authorizes payment of an unlawful dividend or stock
purchase or redemption as provided in Section 174 of the DGCL, or (iv) obtains
an improper personal benefit. This provision does not prevent the Registrant or
its stockholders from seeking equitable remedies, such as injunctive relief or
rescission. If equitable remedies are found not to be available to stockholders
in any particular case, stockholders may not have any effective remedy against
actions taken by directors that constitute negligence or gross negligence.
The Certificate of Incorporation also includes provisions to the effect
that (subject to certain exceptions) the Registrant shall, to the maximum
extent permitted from time to time under the law of the State of Delaware,
indemnify, and upon request shall advance expenses to, any director or officer
to the extent that such indemnification and advancement of expenses is
permitted under such law, as may from time to time be in effect. In addition,
the By-Laws require the Registrant to indemnify, to the full extent permitted
by law, any director, officer, employee or agent of the Registrant for acts
which such person reasonably believes are not in violation of the Registrant's
corporate purposes as set forth in the Certificate of Incorporation. At
present, the DGCL provides that, in order to be entitled to indemnification, an
individual must have acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the Registrant's best interests.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to any charter provision, by-law, contract, arrangement,
statute or otherwise, the Registrant has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. See Item 28.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses payable by the Registrant in connection with the
issuance and distribution of the securities being registered (other than
underwriting discounts and commissions and the Underwriter's non-accountable
expense allowance) are as follows:
Securities and Exchange Commission registration fee ............... $ 2,969.82
NASD filing fee ................................................... 1,480.06
Nasdaq listing fee ................................................ *
Underwriter's consulting fee ....................................... 100,000.00
Printing and engraving expenses .................................... *
Legal fees and expenses ............................................. *
Accounting fees and expenses ....................................... *
Blue sky fees and expenses (including legal fees) .................. *
Transfer agent, warrant agent and registrar fees and expenses ...... *
Miscellaneous ...................................................... *
------------
Total ............................................................. $
- ------------
* To be filed by amendment.
II-1
Item 26. Recent Sales of Unregistered Securities
In February 1997, the Company issued an aggregate of 1,460,000 shares of
Common Stock to twelve persons, including Messrs. Char, Feinberg,
Cole-Hatchard, Olbermann and Morris, in consideration of $.01 per share.
In February 1997, the Company issued options to purchase 260,000 shares of
Common Stock (net of forfeitures).
In May 1997, the Company issued 200,000 shares of Common Stock to twenty
persons for a consideration of $400,000 or $2.00 per share.
In connection with the above referenced issuances, the Company relied on
Section 4(2) under the Securities Act of 1933 as transactions by an issuer not
involving any public offering.
Item 27. Exhibits
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
4.1 Form of Underwriter's Warrant Agreement, including Form of Warrant Certificate.
4.2 Form of Public Warrant Agreement among the Registrant, Rockefeller Securities Group, Inc.,
as Underwriter and Continental Transfer & Trust Company as Warrant Agent.
*4.3 Form of Registrant's Public Warrant Certificate.
*5.1 Opinion of Tenzer Greenblatt LLP.
10.1 Exchange Agreement.
10.2 Promissory Note issued by Registrant to Mr. Feinberg, amended.
10.3 Promissory Note issued by Registrant to Mr. Cole-Hatchard, as amended.
10.4 Promissory Note issued by Registrant to Mr. Char.
10.5 1997 Stock Option Plan.
10.6 Office Lease between Registrant and Glorious Sun Robert Martin LLC.
*10.7 Employment Agreements with Messrs. Morris, Cole-Hatchard, Feinberg and Olbermann.
10.8 Promissory Note issued to Mr. Cole-Hatchard.
23.1 Consent of BDO Seidman LLP, Independent Certified Public Accountants.
*23.2 Consent of Tenzer Greenblatt LLP (will be contained in such firm's opinion filed as Exhibit 5.1).
24.1 A power of attorney relating to the signing of amendments hereto is incorporated in the
signature pages of this Registration Statement.
27 Financial Data Schedule (SEC use only).
- ------------
* To be filed by amendment.
Item 28. Undertakings.
The undersigned registrant hereby undertakes to:
(1) file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the
Securities Act.
(ii) reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information set forth in
the Registration Statement;
(iii) include any additional or changed material information on the plan
of distribution;
(2) for determining liability under the Securities Act, treat each such
post-effective amendment as a new registration of the securities offered, and
the offering of such securities at that time to be initial bona fide offering;
and
(3) file a post-effective amendment to remove from registration any of the
securities that remain unsold at the termination of the offering.
II-2
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the standby under writing agreement
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for the
purpose of determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this Registration Statement as of the time
the Securities and Exchange Commission declares it effective; and (3) that for
the purpose of determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of Prospectus as a new
Registration Statement for the securities offered in the Registration Statement
therein, and treat the offering of the securities at that time as the initial
bona fide offering of those securities.
II-3
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
city of Pearl River, State of New York on August 21, 1997.
FRONTLINE COMMUNICATIONS CORPORATION
By: /s/ Stephen J. Cole-Hatchard
-------------------------------------
Stephen J. Cole-Hatchard, Chairman
POWER OF ATTORNEY
Each person whose signature appears below on this Registration Statement
hereby constitutes and appoints Stephen J. Cole-Hatchard and Nicko Feinberg and
each of them, as his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution for him and in his name, place and
stead, in any and all capacities (until revoked in writing) to sign any and all
amendments (including pre-effective amendments and post-effective amendments
and amendments thereto) to this Registration Statement on Form SB-2 of
Frontline Communications Corporation and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, each acting alone or his substitute,
may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- ------------------------------ ---------------------------------------------- ----------------
/s/ Stephen J. Cole-Hatchard Chairman of the Board, President and August 21, 1997
- ------------------------- Secretary
Stephen J. Cole-Hatchard
/s/ Nicko Feinberg Chief Information Officer, Vice President of August 21, 1997
- ------------------------- Technology and Director
Nicko Feinberg
/s/ Peter Morris Chief Financial Officer, Vice President, August 21, 1997
- ------------------------- Treasurer and Director
Peter Morris
/s/ Michael Olbermann Vice President of Business Development and August 21, 1997
- ------------------------- Director
Michael Olbermann
II-4
EXHIBIT INDEX
Exhibit
No. Description
- ---------- ---------------------------------------------------------------------------------------------------
1.1 Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
4.1 Form of Underwriter's Warrant Agreement, including Form of Warrant Certificate.
4.2 Form of Public Warrant Agreement among the Registrant, Rockefeller Securities Group, Inc., as
Underwriter and Continental Transfer & Trust Company as Warrant Agent.
*4.3 Form of Registrant's Public Warrant Certificate.
*5.1 Opinion of Tenzer Greenblatt LLP.
10.1 Exchange Agreement.
10.2 Promissory Note issued by Registrant to Mr. Feinberg, amended.
10.3 Promissory Note issued by Registrant to Mr. Cole-Hatchard, as amended.
10.4 Promissory Note issued by Registrant to Mr. Char.
10.5 1997 Stock Option Plan.
10.6 Office Lease between Registrant and Glorious Sun Robert Martin LLC.
*10.7 Employment Agreements with Messrs. Morris, Cole-Hatchard, Feinberg and Olbermann.
10.8 Promissory Note issued to Mr. Cole-Hatchard.
23.1 Consent of BDO Seidman LLP, Independent Certified Public Accountants.
*23.2 Consent of Tenzer Greenblatt LLP (will be contained in such firm's opinion filed as Exhibit 5.1).
24.1 A power of attorney relating to the signing of amendments hereto is incorporated in the signature
pages of this Registration Statement.
27 Financial Data Schedule (SEC use only).
- ------------
* To be filed by amendment.