Initial Public Offering (IPO): Pre-Effective Amendment to Registration Statement (General Form) — Form S-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-1/A Ecommercial - Amendment #1 69 340K
2: EX-2.1 Agreement and Plan of Merger Between Mindarrow and 7 23K
Ecommercial
3: EX-3.1 Certificate of Incorporation of the Registrant 3 11K
4: EX-3.2 Bylaws of Registrant 18 93K
5: EX-4.1 Investor Rights Agreement 15 68K
6: EX-4.2 Form of Registrant's Common Stock Certificate 2 11K
7: EX-4.3 Form of Series B Preferred Stock Certificate 2 11K
8: EX-4.5 Certificate of Designation - Series B Preferred 10 44K
9: EX-4.6 Certificate of Designation - Series C Preferred 10 45K
10: EX-10.11 Sublease Agreement - Cupertino, Ca 1 7K
11: EX-23.1 Consent of Experts 1 6K
As filed with the Securities and Exchange Commission on April 3, 2000
Registration No. 333-91819
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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
To
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MindArrow Systems, Inc.
(formerly eCommercial.com, Inc.)
(Exact name of registrant as specified in charter)
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[Download Table]
Delaware 7372 77-0511097
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
101 Enterprise, Suite 340
Aliso Viejo, California 92656
(949) 916-8705
(Address, including ZIP code and telephone number, including area code, of
registrant's principal executive offices)
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Michael R. Friedl
Chief Financial Officer
MindArrow Systems, Inc.
101 Enterprise, Suite 340
Aliso Viejo, CA 92656
Telephone (949) 916-8705
(Name, address, including ZIP code, and telephone number,
including area code, of agent for service)
Copies to:
Attention: Kevin Coyle, Esq.
Gray Cary Ware & Freidenrich LLP
400 Capitol Mall, Suite 2400
Sacramento, CA 95814
Telephone: (916) 930-3240
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Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act Registration Statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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[Download Table]
Proposed Proposed
Title of each class of Amount maximum maximum Amount of
securities to be to be offering price aggregate registration
registered registered per unit offering price fee
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Common Stock, par value
$.001 per share....... 2,650,782 -- $ 99,086,231 $22,406
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The offering price is estimated solely for the purpose of calculating the
registration fee in accordance with Rule 457(c), using the closing price
reported by the Over-the-Counter Bulletin Board market for the common stock on
March 30, 2000, based upon the last trade of such shares which was $37.38 per
share.
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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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.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 3, 2000
PROSPECTUS
2,650,782 Shares of Common Stock
MindArrow Systems, Inc.
This prospectus covers our registration for possible resale of 2,160,014
shares of our common stock which are issuable upon (i) conversion of shares of
Series B preferred stock into shares of our common stock, or (ii) exercise of
certain warrants issued in connection with our private offering of Series B
preferred stock. We are also registering for resale 15,000 shares of common
stock issuable upon exercise of a warrant granted to a customer and 475,768
shares of currently issued and outstanding common stock issued in a prior
private placement. All proceeds from sale of the shares will be received by the
selling stockholders and not by us.
We are not currently a reporting company as defined in Section 12(g) of the
Securities Exchange Act of 1934. We intend to file a Form 10 to become a
reporting company under the Securities Exchange Act of 1934.
The selling stockholders may sell up to 2,650,782 shares from time to time in
the open market or otherwise at prevailing market prices.
Our common stock is traded on the Over-the-Counter Bulletin Board market
under the symbol "ECRL". On March 31, 2000, the last reported sale price of our
common stock was $40 per share. Effective April 4, 2000, our stock trading
symbol will change to "ARRW".
We will bear substantially all expenses of registration of the shares under
federal and state securities laws. We have also agreed to indemnify the selling
stockholders against liabilities under the Securities Act of 1933. See "Selling
Stockholders" and "Plan of Distribution."
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Investing in the shares involves a high degree of risk.
See "Risk Factors" beginning on page 4.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The date of this prospectus is , 2000.
You should rely only on the information contained in this prospectus. We and
the selling stockholders have not authorized anyone to provide you with
information different from that contained in this prospectus. The selling
stockholders are offering to sell, and seeking offers to buy, shares of common
stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or any
sale of common stock. In this prospectus, "MindArrow," "we," "us" and "our"
refer to MindArrow Systems, Inc. and its subsidiary.
TABLE OF CONTENTS
[Download Table]
Summary................................................................... 1
Risk Factors.............................................................. 4
Use of Proceeds........................................................... 11
Dividends................................................................. 11
Capitalization............................................................ 12
Dilution.................................................................. 12
Plan of Distribution...................................................... 12
Selected Financial Data................................................... 13
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 14
Business.................................................................. 17
Management................................................................ 26
Certain Transactions and Relationships.................................... 32
Market for Common Stock................................................... 32
Significant Stockholders.................................................. 33
Selling Security Holders.................................................. 34
Description of Securities................................................. 40
Legal Matters............................................................. 44
Experts................................................................... 44
Where You Can Find More Information....................................... 44
Financial Statements...................................................... F-1
We have applied for trademark registration for eCommercial(TM) and Virtual
Prospector(TM). This prospectus also contains trademarks of other companies.
i
SUMMARY
This summary may not contain all of the information that is important to you
in making a decision of whether or not to invest. To fully understand us and
this offering, you should read the entire prospectus. Most importantly, you
should read the "Risk Factors" beginning on page 4.
The Company
MindArrow Systems, Inc. provides proprietary interactive sales and marketing
automation or SMA systems designed to enhance customer relationships. Our one-
to-one Virtual Prospector(TM) systems are designed to enable our clients to
increase sales by significantly improving their sales and marketing response
rates, at a lower cost, while enhancing the relationships they have with their
customers. Our one-to-many Internet Relationship Marketing systems are designed
to enable our clients to improve the effectiveness of their marketing campaigns
that are targeted to larger groups. Our interactive SMA systems include the
following characteristics:
Rich eCommercial(TM) technology. Our proprietary technology enables our
clients to deliver a "website" to their customers via email. In this context,
"rich" means highly compressed multimedia files that combine high quality audio
and video, graphics, animation, chat, hypertext links, and telecommunication
links.
eCommercials typically generate very high response rates because:
. the recipient is not required to be connected to the Internet when
viewing;
. the recipient is not required to have a high speed or "broadband"
Internet connection; and
. the recipient is not required to install any other software to view the
eCommercial.
Activity tracking, reporting and analysis. Our systems offer technology that
allows for activity tracking and reporting which automatically tracks:
.the email address of the initial recipient of the eCommercial;
.whether the initial recipient forwarded the eCommercial to others; and
.the content reviewed by each recipient, including referrals.
This information allows our clients to accurately measure the interest and
attention generated by their sales and marketing efforts, including the so-
called viral or "pass-along" impact of their content.
Web-based technology. Our Virtual Prospector system is accessible via any
Internet browser and is easy to use, which enables rapid wide-scale deployment.
Our software systems are offered from offsite computer operations centers on
what is known as an Application Service Provider or ASP basis and larger
clients can license our systems and deploy our technology at their locations.
Immediate customer-initiated feedback. Our systems are designed to generate
immediate feedback using embedded telecommunication links that allow recipients
to respond via links to our clients websites.
1
We expect to generate revenue by:
.licensing our SMA systems to large companies seeking an enterprise
solution;
.charging small and medium-sized businesses on a per-item basis for
delivery and tracking;
.sharing revenue with our clients based on the effectiveness of their sales
and marketing efforts; and
.providing related consulting, implementation, content production and
maintenance services.
We market our systems through our direct sales force and indirectly through
third-party resellers and strategic partners. Our clients include Oracle
Corporation, Hewlett-Packard, Lockheed Martin, Bank of New York, AMFMi (Clear
Channel Communications), BMG, and Warner Bros.
We also intend to aggressively commercialize our proprietary technology into
areas other than the SMA industry. We believe our eCommercial technology offers
a compelling platform for streaming technologies that require users to connect
to content broadcast over the Internet. In addition, we believe our network
configuration architecture can enhance the performance of content delivery over
the Internet, and our proprietary compression algorithms may have multiple
applications in content delivery.
Company Strategy
We intend to create significant shareholder value by becoming a leading
provider of interactive SMA systems to companies seeking to enhance their
customer relationships, and by successfully commercializing our proprietary
technology in non-SMA industries. The principal elements of our strategy
include:
Market leadership adoption across critical industries. By offering what we
believe is a compelling value proposition, we intend to win the adoption of the
market-leading companies across several critical industries, including the
information technology and telecommunication, financial services,
pharmaceutical, media and entertainment, travel, e-commerce, industrial product
and public sector industries.
Increase market penetration by strategic partnerships. We intend to quickly
increase our market penetration through partnerships with companies that enable
us to extend and strengthen our sales presence, including value-added
resellers, database management and analytical customer relationship firms,
information technology firms, advertising agencies, and companies focused on
providing robust solutions to the small and medium-sized business market.
Expanding our business into global markets. Because we believe that
significant commercial opportunities exist outside of the United States, we
intend to rapidly expand our business to promising global markets, principally
through the adoption of our systems and technology by dominant international
companies and Value-Added Resellers, and by partnering with market-leading
local firms.
Partnering to commercialize non-SMA technology applications. We intend to
commercialize our technology in other industries by partnering with market-
leading firms in those industries where our technology provides a compelling
application.
Additional Information
Our business was founded in March 1999 and was incorporated as
eCommercial.com, Inc., a California corporation on April 9, 1999. On April 19,
1999, we merged into Wireless Netcom, Inc., a pre-existing Nevada corporation.
On March 31, 2000, we reincorporated as a Delaware corporation and changed our
name to MindArrow Systems, Inc. Our common stock began trading in the Over-the-
Counter Bulletin Board market under the symbol "ECRL" on April 29, 1999.
Effective April 4, 2000, our common stock will trade under the symbol "ARRW".
Our main office is located at 101 Enterprise, Suite 340, Aliso Viejo,
California 92656 and our telephone number is (949) 916-8705. Our email address
is info@mindarrow.com and our website is located at www.mindarrow.com.
2
The Offering
The shares offered in this offering are (i) issuable upon conversion of
shares of Series B preferred stock into shares of our common stock or exercise
of warrants issued to a customer or issued in connection with our private
offering of Series B preferred stock or (ii) shares of common stock issued in a
prior private placement.
[Download Table]
Common stock outstanding prior to this offering.. 9,692,295 shares
Common stock issuable on conversion of Series B
preferred(1).................................... 1,513,073 shares
Common stock issuable on exercise of
warrants(2)..................................... 661,941 shares
Common stock outstanding after conversion and
exercise........................................ 11,867,309 shares
Use of Proceeds.................................. We will not receive any of
the proceeds of the sale of
the shares.
Risk Factors..................................... This offering involves a
high degree of risk.
See "Risk Factors"beginning
on page 4.
The number of shares that will be outstanding after this offering is based
on the number of shares outstanding on February 29, 2000 and excludes 3,000,000
shares of common stock reserved for issuance under the 1999 Stock Option Plan,
and 14,586 shares reserved for issuance upon the exercise of outstanding
warrants not included above.
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(1) Includes 125,000 shares related to shares of Series B preferred that are
issuable upon exercise of an option.
(2) Includes 12,500 shares related to warrants that are issuable upon exercise
of an option.
Summary Financial Information
The following summary financial data should be read together with our
financial statements and the notes thereto included elsewhere in this
prospectus. The statement of operations data for the periods ending
September 30, 1999 and December 31, 1999 and the balance sheet data as of
September 30, 1999 and December 31, 1999 are derived from, and are qualified by
reference to, our financial statements included elsewhere in this prospectus.
[Download Table]
Cumulative from
For the period inception
from inception For the Three (March 26, 1999)
(March 26, 1999) to Months Ended to December 31,
September 30, 1999 December 31, 1999 1999
------------------- ----------------- ----------------
(unaudited) (unaudited)
Statement of Operations
Data
Revenues................ $ 6,250 $ 29,390 $ 35,640
Interest income......... 24,274 52,269 76,543
Total costs and
expenses............... 2,315,070 2,060,447 4,375,517
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Net loss................ $(2,284,546) $(1,978,788) $(4,263,334)
=========== =========== ===========
Net loss per common
share outstanding...... $ (0.26) $ (0.21) $ (0.47)
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Weighted average common
shares outstanding..... 8,751,760 9,556,737 9,016,188
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[Download Table]
September 30, 1999 December 31, 1999
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(unaudited)
Balance Sheet Data
Current assets............................. $4,894,143 $4,913,876
Working capital............................ 2,351,053 2,319,699
Total assets............................... 6,886,141 7,471,732
Total liabilities.......................... 2,543,090 2,594,177
Stockholders' equity....................... 4,343,051 4,877,555
3
RISK FACTORS
The purchase of our common stock involves substantial investment risk. You
should carefully consider the following factors and other information in this
prospectus before deciding to invest in shares of our common stock. This
prospectus contains "forward-looking statements" that are subject to a number
of risks and uncertainties, many of which are beyond our control. All
statements, other than statements of historical fact included in this
prospectus regarding our business strategy, future operations, financial
position, estimated revenues, projected costs, prospects, plans and objectives
of management as well as third parties are forward-looking statements. When
used in this prospectus, the words "anticipate," "intend," "estimate,"
"expect," "project," and similar expressions are intended to identify forward-
looking statements, although not all forward-looking statements contain such
identifying words. All forward-looking statements speak only as of the date of
this prospectus. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we can give no assurance that such
expectations will prove to be correct. Important factors that could cause our
actual results to differ materially from our expectations are described below
and elsewhere in this prospectus.
Our limited operating history makes evaluation of our business difficult
Our business was formed as eCommercial.com in March 1999 and we were a
development-stage company through December 31, 1999. In January 2000,
significant principal operations commenced. Accordingly, we have a limited
operating history on which to base our evaluation of current business and
prospects. Our short operating history makes it difficult to predict future
results, and there are no assurances that our revenues will increase, or that
we will achieve or maintain profitability or generate sufficient cash from
operations in future periods.
Our ability to achieve and sustain profitability would be adversely impacted
by our failure to do any of the following:
. effectively market and sell our services;
. develop new and maintain existing relationships with clients;
. continue to develop and upgrade our technology and network
infrastructure;
. respond to competitive developments;
. introduce enhancements to our existing products and services to address
new technologies and standards; and
. attract, retain and motivate qualified personnel. Our operating results
are also dependent on factors outside of our control, such as strength of
competition and the growth of the market for our services. There is no
assurance that we will be successful in addressing these risks, and
failure to do so could have a material adverse effect on our financial
performance.
We expect to incur significant losses for the foreseeable future, and if we
are unable to generate sufficient cash flow or raise the capital necessary to
allow us to continue to meet all of our obligations as they come due, our
business could suffer.
Our future revenues are not predictable, and our results could vary
significantly
Because of our limited operating history and the emerging nature of our
markets, we are unable to reliably forecast our revenues. We plan to
substantially increase our operating expenses in order to:
. expand our sales and distribution network;
. fund increased sales and marketing activities; and
. develop and upgrade our technology. Our expected expense levels are
based, in part, on planned revenues and our ability to raise additional
funding. If we are unsuccessful in generating significant revenues or
raising additional funds, we may be unable to adjust spending in time to
compensate for a shortfall or we may have to forego potential revenue
generating activities, either of which could hurt our financial
performance.
4
Our quarterly operating results may fluctuate significantly in the future as
a result of a variety of factors. These factors include:
. the demand for our services;
. the addition or loss of individual clients;
. the amount and timing of capital expenditures and other costs relating to
the expansion of our operations;
.the introduction of new products or services by us or our competitors; and
. general economic conditions and economic conditions specific to the
Internet, such as electronic commerce and online media.
Any one of these factors could cause our revenues and operating results to
vary significantly. In addition, as a strategic response to changes in the
competitive environment, we may from time to time make certain pricing, service
or marketing decisions or acquisitions that could significantly hurt our
operating results in a given period.
Due to all of the foregoing factors, we believe that period-to-period
comparisons of our results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. Furthermore, it
is possible that our operating results in one or more quarters will fail to
meet the expectations of securities analysts or investors. In such event, the
market price of our common stock could drop.
Possible need for additional financing
The capital requirements associated with developing our network and
corporate infrastructure have been and will continue to be significant. We have
been substantially dependent on the private placements of our equity securities
to fund such requirements. These private placements have raised approximately
$22 million in gross proceeds. We anticipate that our existing capital
resources and private placements will be sufficient to satisfy our contemplated
cash requirements for at least twelve months following the consummation of this
offering. Although we believe our assumptions to be reasonable, we lack the
operating history of a more seasoned company and there can be no assurance that
our forecasts will prove accurate. In the event that our plans change, our
assumptions change or prove inaccurate, or if future private placements, other
capital resources and projected cash flow otherwise prove to be insufficient to
fund operations, we could be required to seek additional financing sooner than
currently anticipated. We have no current arrangements with respect to sources
of additional financing if and when needed, or that, if available, such
additional financing would be on terms acceptable to us. To the extent that any
such financing involves the sale of our equity securities, the interests of our
shareholders could be substantially diluted. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
We are not sure if the market will accept our systems
Our ability to succeed will depend on the following, none of which can be
assured:
. our marketing and sales efforts;
. market acceptance of our current and future offerings;
. the reliability of our networks and services; and
. the extent to which end users are able to receive eCommercials at
tolerable download speeds.
We operate in a market that is at a very early stage of development, is
rapidly evolving, and is characterized by an increasing number of competitors
and risk surrounding market acceptance of new technologies and services.
Potential customers must accept eCommercials as a viable alternative to
traditional
5
commercial advertising. Because this market is so new, it is difficult to
predict its size and growth rate. If the market fails to develop as we expect,
our growth will be slower than expected.
Our success also depends on the market acceptance of our technology. For
example, congestion over the Internet may interrupt eCommercial broadcasts,
resulting in unsatisfying user experiences. Some users may block reception of
large files, including email attachments and executable files, which are
necessary to receive an eCommercial. Widespread adoption of eCommercial
technology depends on overcoming these obstacles, improving audio and video
quality and educating clients and users. If our technology fails to achieve
broad commercial acceptance, our growth will be slower than expected.
If we are unable to manage or sustain our growth our operating results could be
impaired
We anticipate that we will be required to rapidly expand our operations in
the near future to address market opportunities. Such growth, if it occurs,
will place a significant strain on our managerial, operational and financial
resources and systems. To manage this growth, we must implement, improve and
effectively utilize operational, management, marketing and financial systems,
and train and manage our employees. There can be no assurance that we will be
able to manage effectively the expansion of operations or that our personnel,
systems, procedures and controls will be adequate to support operations. Any
failure to manage our growth effectively could hurt our financial performance.
Network and system failures could adversely impact our business
The performance, reliability and availability of our websites and network
infrastructure is critical to our reputation and ability to attract and retain
clients. Our systems and operations are vulnerable to damage or interruption
from earthquake, fire, flood, power loss, telecommunications failure, Internet
breakdowns, break-ins, tornadoes and similar events. We carry business
interruption insurance to compensate for losses that may occur, but insurance
is not guaranteed to remove all risk of loss. Services based on sophisticated
software and computer systems often encounter development delays and the
underlying software may contain errors that could cause system failures. Any
system failure that causes an interruption could result in a loss of clients
and could reduce the attractiveness of our services.
We are also dependent upon web browsers, Internet service providers and
online service providers to provide Internet users access to our clients, users
and web sites. Users may experience difficulties due to system failures or
delays unrelated to our systems. These difficulties may hurt audio and video
quality or result in intermittent interruptions in broadcasting and thereby
slow our growth.
Circumvention of our security measures and viruses could disrupt our business
Despite the implementation of security measures, our networks may be
vulnerable to unauthorized access, computer viruses and other disruptive
problems. Anyone who is able to circumvent security measures could steal
proprietary information or cause interruptions in our operations. Service
providers have occasionally experienced interruptions in service as a result of
the accidental actions of users or intentional actions of hackers. We may have
to spend significant capital to protect against security breaches or to fix
problems caused by such breaches. Although we have implemented security
measures, there can be no assurance that such measures will not be circumvented
in the future. Eliminating computer viruses and alleviating other security
problems may require interruptions, delays or cessation of service to users,
which could hurt our business.
Our dependence on short-term contracts could make future revenues volatile
Although future clients may enter into multi-year agreements, all of our
current revenues are derived from contracts with less than three months
duration. Consequently, our clients can stop using our systems quickly and
without penalty, thereby increasing our exposure to competitive pressures.
There can be no assurance that current clients will continue to be clients, or
that we will be able to attract new clients.
6
We need to be scalable in the number of users we serve
Our success depends on our ability to deliver and track a large of number of
eCommercials. At our current capacity, we can deliver and track approximately
two million eCommercials per week. If demand for our services exceeds capacity,
we may not be able to add to our extensive network capability quickly enough to
serve clients.
We depend on continued growth in use of the Internet
Rapid growth in use of the Internet is a recent phenomenon and there can be
no assurance that use of the Internet will continue to grow or that a
sufficient base of users will emerge to support our business. The Internet may
not be accepted as a viable medium for broadcasting advertising, for a number
of reasons, including:
. potentially inadequate development of the necessary infrastructure;
. inadequate development of enabling technologies;
. lack of acceptance of the Internet as a medium for distributing rich
media advertising; and
. inadequate commercial support for Web-based advertising.
To the extent that Internet use continues to increase, there can be no
assurance that the Internet infrastructure will be able to support the demands
placed upon it, and especially the demands of delivering high-quality video
content.
Furthermore, user experiences on the Internet are affected by access speed.
There is no assurance that broadband access technologies will become widely
adopted. In addition, the Internet could lose its viability as a commercial
medium due to delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet activity, or due to
increased government regulation. Our business could suffer if use of the
Internet grows more slowly than expected, or if the Internet infrastructure
does not effectively support the growth that does occur.
If we do not respond to technological change, we could lose or fail to develop
customers
The development of our eCommercial business entails significant technical
and business risks. To remain competitive, we must continue to enhance and
improve the functionality and features of our technology. The Internet and the
e-commerce industry are characterized by:
. rapid technological change;
. changes in client requirements and preferences;
. frequent new product and service introductions embodying new
technologies; and
. the emergence of new industry standards and practices.
The evolving nature of the Internet could render our existing systems
obsolete. Our success will depend, in part, on our ability to:
. develop and enhance technologies useful in our business;
. develop new services and technology that address the increasingly
sophisticated and varied needs of our current and prospective clients;
and
. adapt to technological advances and emerging industry and regulatory
standards and practices in a cost-effective and timely manner.
7
Future advances in technology may not be beneficial to, or compatible with,
our business. Furthermore, we may not use new technologies effectively or adapt
our systems to client requirements or emerging industry standards on a timely
basis. Our ability to remain technologically competitive may require
substantial expenditures and lead time. If we are unable to adapt to changing
market conditions or user requirements in a timely manner, we will lose
clients.
We depend on the efforts of key managerial and technical people
Our continued growth and development is dependent upon our ability to retain
and motivate our key employees, including Thomas Blakeley, our Chief Executive
Officer, and Eric McAfee, our Executive Vice President. Competition for top
people is intense and there can be no assurance that we will be able to retain
our key management and technical employees or that we will be able to attract
or retain additional qualified technical personnel and management in the
future. We do not currently maintain key person life insurance on any member of
our management team. If we are unsuccessful in hiring and keeping key people,
our business will suffer.
We could face liability for Internet content
As a distributor of Internet content, we face potential liability for
negligence, copyright, patent or trademark infringement, defamation, indecency
and other claims based on the content of our broadcasts. Such claims have been
brought, and sometimes successfully pressed, against Internet content
distributors. Our general liability insurance may not be adequate to indemnify
us for all liability that may be imposed. Although we generally require our
clients to indemnify us for such liability, such indemnification may be
inadequate. Any imposition of liability that is not covered by insurance or by
an indemnification by a client could harm our business.
Our operating results could be impaired if we become subject to burdensome
government regulations and legal uncertainties concerning the Internet
Due to the increasing popularity and use of the Internet, it is possible
that a number of laws and regulations may be adopted with respect to the
Internet, relating to:
. user privacy;
. pricing, usage fees and taxes;
. content;
. copyrights;
. distribution;
. characteristics and quality of products and services; and
. online advertising and marketing.
The adoption of any additional laws or regulations may decrease the
popularity or impede the expansion of the Internet and could seriously harm our
business. A decline in the popularity or growth of the Internet could decrease
demand for our products and services, reduce our revenues and margins and
increase our cost of doing business. Moreover, the applicability of existing
laws to the Internet is uncertain with regard to many important issues,
including property ownership, intellectual property, export of encryption
technology, libel and personal privacy. The application of laws and regulations
from jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and other online
services, could also harm our business.
8
Our stock price could be volatile
Our stock price has been and is likely to continue to be highly volatile and
could be subject to wide fluctuations in response to factors such as:
. actual or anticipated variations in quarterly operating results;
. announcements;
. new sales formats or new services offered by us or our competitors;
. changes in financial estimates by securities analysts, conditions or
trends in Internet markets; and
. changes in the market valuations of other Internet companies.
In addition, the stock market in general, and the market for Internet-
related and technology companies in particular, has experienced extreme price
and volume fluctuations that have often been unrelated or disproportionate to
the operating performance of such companies. The trading prices of many
technology companies' stocks are at or near historical highs and reflect
price/earnings ratios substantially above historical levels. There can be no
assurance that these trading prices and price/earnings ratios will be
sustained. These broad market and industry factors may materially adversely
affect the market price of our common stock, regardless of our operating
performance. In the past, following periods of volatility in the market price
of a company's securities, securities class-action litigation has often been
instituted against such company. Such litigation, if instituted, could result
in substantial costs and a diversion of management's attention and resources,
which could seriously damage our business.
Our efforts to protect our intellectual property rights may not sufficiently
protect us and we may incur costly litigation to protect our rights
We have filed fourteen patent applications and we plan to file additional
patent applications in the future with respect to various additional aspects of
our technologies. We mark our software with copyright notices, and intend to
file copyright registration applications where appropriate. We have also filed
several federal trademark registration applications for trademarks and service
marks we use. There can, however, be no assurance that any patents, copyright
registrations, or trademark registrations applied for by us will be issued, or
if issued, will sufficiently protect our proprietary rights.
We also rely substantially on certain technologies that are not patentable
or proprietary and are therefore available to our competitors. In addition,
many of the processes and much of the know-how of importance to our technology
are dependent upon the skills, knowledge and expertise of our technical
personnel, whose skill, knowledge and experience are not patentable. To protect
our rights in these areas, we require all employees, significant consultants
and advisors to enter into confidentiality agreements under which they agree
not to use or disclose our confidential information as long as that information
remains proprietary. We also require that our employees agree to assign to us
all rights to any inventions made during their employment relating to our
activities, and not engage in activities similar to ours during the term of
their employment. There can be no assurance, however, that these agreements
will provide meaningful protection for our trade secrets, know-how or other
proprietary information in the event of any unauthorized use or disclosure of
such trade secrets, know-how or proprietary information. Further, in the
absence of patent protection, we may be exposed to competitors who
independently develop substantially equivalent technology or otherwise gain
access to our trade secrets, knowledge or other proprietary information.
Despite our efforts to protect our intellectual property, a third party or a
former employee could copy, reverse-engineer or otherwise obtain and use our
intellectual property or trade secrets without authorization or could develop
technology competitive to ours.
Our intellectual property may be misappropriated or infringed upon.
Consequently, litigation may be necessary in the future to enforce our
intellectual property rights, to protect our confidential information or
9
trade secrets, or to determine the validity or scope of the rights of others.
Litigation could result in substantial costs and diversion of management and
other resources and may not successfully protect our intellectual property.
Additionally, we may deem it advisable to enter into royalty or licensing
agreements to resolve such claims. Such agreements, if required, may not be
available on commercially reasonable or desirable terms or at all.
Our technology may infringe on the rights of others
Even if the patents, copyrights and trademarks we apply for are granted,
they do not confer on us the right to manufacture or market products or
services if such products or services infringe on intellectual property rights
held by others. If any third parties hold conflicting rights, we may be
required to stop making, using, or marketing one or more of our products or to
obtain licenses from and pay royalties to others, which could have a
significant and material adverse effect on us. There can be no assurance that
we will be able to obtain or maintain any such license on acceptable terms at
all.
We may also be subject to litigation to defend against claims of
infringement of the rights of others or to determine the scope and validity of
the intellectual property rights of others. If third parties hold trademark,
copyright or patent rights that conflict with our business, then we may be
forced to litigate infringement claims that could result in substantial costs
to us. In addition, if we were unsuccessful in defending such a claim, it could
have a negative financial impact. If third parties prepare and file
applications in the United States that claim trademarks used or registered by
us, we may oppose those applications and be required to participate in
proceedings before the United States Patent and Trademark Office to determine
priority of rights to the trademark, which could result in substantial costs to
us. An adverse outcome in litigation or privity proceedings could require us to
license disputed rights from third parties or to cease using such rights. Any
litigation regarding our proprietary rights could be costly, divert
management's attention, result in the loss of certain of our proprietary
rights, require us to seek licenses from third parties and prevent us from
selling our services, any one of which could have a negative financial impact.
In addition, inasmuch as we broadcast content developed by third parties, our
exposure to copyright infringement actions may increase because we must rely
upon such third parties for information as to the origin and ownership of such
licensed content. We generally obtain representations as to the origin and
ownership of such licensed content and generally obtain indemnification to
cover any breach of such representations; however, there can be no assurance
that such representations will be accurate or given, or that such
indemnification will adequately protect us.
Our officers and directors control a significant percentage of our outstanding
common stock which will enable them to exert control over many significant
corporate actions and may prevent a change in control that would otherwise be
beneficial to our stockholders
Upon completion of this offering, our officers and directors will
beneficially own approximately 44.8% of our outstanding stock. This level of
ownership could have a substantial impact on matters requiring the vote of the
stockholders, including the election of our directors and most of our corporate
actions. This control could delay, defer or prevent others from initiating a
potential merger, takeover or other change in our control, even if these
actions would benefit our stockholders and us. This control could adversely
affect the voting and other rights of our other stockholders and could depress
the market price of our common stock.
10
USE OF PROCEEDS
Since the only securities being offered are those of the selling
stockholders, we will not receive any of the proceeds from the sale of the
Shares.
Proceeds from exercise of warrants of up to $6,045,528 will be used for
general working capital purposes. However, each warrant contains a cashless
exercise feature so there can be no assurances that we will receive any
proceeds from the exercise of warrants or that any warrants will be exercised
at all.
DIVIDENDS
We have not declared or paid any dividends since our inception and do not
intend to declare or pay any such dividends in the foreseeable future. Our
ability to declare and pay dividends is subject to limitations imposed by
Delaware law.
11
CAPITALIZATION
The following table sets forth our total capitalization:
. on an actual basis as of September 30, 1999;
. on an actual basis as of December 31, 1999;
. on a pro forma basis as of December 31, 1999, giving effect to the
exercise of an option to purchase 125,000 shares of Series B preferred
stock and the conversion of all outstanding shares of Series B
convertible preferred stock into 1,513,073 shares of common stock and the
exercise of warrants to purchase 762,591 shares of common stock. The
exercise of the option and all of the warrants hereunder for cash would
result in proceeds of $6,100,728. Each warrant contains a cashless
exercise feature so there can be no assurances that we will receive any
proceeds for the exercise of warrants or that any warrants will be
exercised at all.
[Download Table]
September 30, 1999 December 31, 1999
Actual Actual Pro Forma
------------------ ----------------- -----------
(unaudited) (unaudited)
Stockholders' Equity
Series B convertible
preferred stock, $0.001 par
value; 2,000,000 shares
authorized; 1,085,573 and
1,388,073 shares issued and
outstanding, actual;
no shares issued and
outstanding, pro forma..... $ 1,086 $ 1,388 $ --
Common stock, $0.001 par
value; 20,000,000 shares
authorized; 9,536,623 and
9,585,583 shares issued and
outstanding, actual;
11,861,247 shares issued
and outstanding, pro
forma...................... 9,537 9,586 11,861
Additional paid-in capital... 7,211,449 9,680,990 15,780,831
Deficit accumulated during
the development stage....... (2,284,546) (4,263,334) (4,263,334)
Unearned stock-based
compensation................ (594,475) (551,075) (551,075)
----------- ----------- -----------
Total stockholders'
equity.................... $ 4,343,051 $ 4,877,555 $10,978,283
=========== =========== ===========
DILUTION
Since we do not receive the proceeds of the sale of the Shares, we will not
experience any direct dilution. The existing common shareholders paid
substantially less per share than the offering price of the shares sold under
this prospectus.
PLAN OF DISTRIBUTION
The selling stockholders may offer their Shares at various times in one or
more of the following transactions:
1. In the over-the-counter market where our common stock is listed, or on
the Nasdaq National Market, where we have applied to have our common
stock listed;
2. Private transactions;
3. In connection with short sales of our common stock;
4. By pledgees or donees; or
5. A combination of any of the above transactions.
The selling stockholders may sell their shares at the market price
prevailing at the time of sale or at negotiated prices.
The selling stockholders may use broker-dealers to sell their shares. If
this happens, the broker-dealers will either receive discounts or commissions
from the selling stockholders or they will receive commissions from purchasers
of shares for whom they acted as agents. Selling stockholders and broker-
dealers acting on their behalf may be deemed underwriters under the Securities
Act of 1993.
The selling stockholders may attempt to sell all of the shares. This could
cause the supply of shares to exceed demand, which could drive the price of
our shares down.
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SELECTED FINANCIAL DATA
The following summary financial data should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the notes thereto included
elsewhere in this Prospectus. The Statement of Operations Data for the period
ending September 30, 1999 and the Balance Sheet Data as of September 30, 1999
are derived from, and are qualified by reference to, our audited financial
statements included elsewhere in this Prospectus. The selected financial data
for the three months ended December 31, 1999 is unaudited. The results for the
period ended December 31, 1999 are not necessarily indicative of results that
may be expected for any other interim period or for a full year.
[Download Table]
Cumulative from
For the period inception
from inception For the Three (March 26, 1999)
(March 26, 1999) to Months Ended to December 31,
September 30, 1999 December 31, 1999 1999
------------------- ----------------- ----------------
(unaudited) (unaudited)
Statement of Operations
Data
Revenues................ $ 6,250 $ 29,390 $ 35,640
----------- ----------- -----------
Operating expenses:
Development........... 320,766 385,651 706,417
Production............ 139,674 164,814 304,488
Sales and marketing... 1,060,795 715,090 1,775,885
General and
administration....... 684,343 671,223 1,355,566
Depreciation and
amortization......... 107,892 122,069 229,961
----------- ----------- -----------
Total operating
expenses........... 2,313,470 2,058,847 4,372,317
----------- ----------- -----------
Operating loss........ (2,307,220) (2,029,457) (4,336,677)
Interest income......... 24,274 52,269 76,543
Provision for income
taxes.................. (1,600) (1,600) (3,200)
----------- ----------- -----------
Net loss.............. $(2,284,546) $(1,978,788) $(4,263,334)
=========== =========== ===========
Net loss per common
share outstanding $ (0.26) $ (0.21) $ (0.47)
=========== =========== ===========
Weighted average common
shares outstanding..... 8,751,760 9,556,737 9,016,188
=========== =========== ===========
[Download Table]
September 30, 1999 December 31, 1999
------------------ -----------------
(unaudited)
Balance Sheet Data
Cash and cash equivalents.................. $4,744,741 $4,661,219
Working capital............................ 2,351,053 2,319,699
---------- ----------
Total assets............................... 6,886,141 7,471,732
Total liabilities.......................... 2,543,090 2,594,177
---------- ----------
Stockholders' equity....................... $4,343,051 $4,877,555
========== ==========
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read together with our financial
statements and related notes included elsewhere in this Prospectus.
Overview
Our business was founded in March 1999 and we had our first revenues in
August 1999.
Through December 31, 1999, our revenues were derived from the production and
delivery of eCommercials. eCommercial production services include theme
development, eCommercial design and layout, video production, special effects,
hyperlink recommendations, hyperlink page design and creation, reporting and
sales cycle consultation. In addition, we may generate revenues from corporate
sponsorships and from revenue-sharing arrangements with our clients. We have
made sponsorship arrangements with customers and we have entered into revenue
sharing arrangements with clients, but they have not generated material
revenues to date.
Revenues are recognized when the consulting or production services are
rendered and delivery revenues are recognized when the eCommercials are
delivered. We will recognize software license fee revenue when persuasive
evidence of an agreement exists, the product has been delivered, we have no
remaining significant obligations with regard to implementation, the license
fee is fixed or determinable and collection of the fee is probable.
We record cash receipts from clients and billed amounts due from clients in
excess of revenue recognized as deferred revenue. The timing and amount of cash
receipts from clients can vary significantly depending on specific contract
terms and can therefore have a significant impact on the amount of deferred
revenue in any given period.
We currently sell our products and services through a direct sales force and
are developing a network of resellers to expand our ability to identify
potential clients and develop relationships with them.
Results of operations
For the period from March 26, 1999 (inception) to September 30, 1999,
revenues totaled $6,250 as we focused on developing our technologies and
increasing our ability to serve clients. For the quarter ended December 31,
1999, revenues increased to $29,390.
For the period ended September 30, 1999 our net loss was $2,284,546 or $0.26
per share. For the quarter ended December 31, 1999, our net loss was $1,978,788
or $0.21 per share. The loss for both periods can be attributed to development,
marketing and selling, and general and administrative expenses incurred during
our development stage.
Development expenses consist primarily of salaries and related expenses for
design engineers and other technical personnel, including consultants, and were
focused on continued advancements in eCommercial
technology and development of the eComNetwork. Total costs for the period ended
September 30, 1999 and the quarter ended December 31, 1999 amounted to $320,766
and $385,651. We charge all research and development expenses to operations as
incurred. We believe that continued investment in research and development is
critical to our long-term success. Accordingly, we expect that our research and
development expenses will increase in future periods.
Production efforts focused on building a team of creative and client service
people and producing eCommercials and related websites. Total costs for the
period ended September 30, 1999 and the quarter ended December 31, 1999
amounted to $139,674 and $164,814.
14
Sales and marketing expenses for the period ended September 30, 1999 and for
the quarter ended December 31, 1999 amounted to $1,060,795 and $715,090 and
consisted primarily of salaries and related expenses for developing our direct
and reseller organizations, as well as marketing expenses designed to create
and promote brand awareness for eCommercials. Included in this amount for the
period ended September 30, 1999 is a non-cash charge of $240,000, which
represents the value of the common stock issued upon the signing of a strategic
partnership with Lockheed Martin Corporation, and a non-cash charge of $78,780,
which represents compensation expense related to the issuance of stock options.
Included in the amount for the quarter ended December 31, 1999 is a non-cash
charge of $77,773, which represents compensation expense related to the
issuance of stock options. We intend to pursue aggressive selling and marketing
campaigns and to expand our network of resellers, continue branding efforts and
identifying strategic partners. We therefore expect that our sales and
marketing expenses will increase in future periods.
General and administrative costs of $684,343 for the period ended September
30, 1999 and $671,223 for the quarter ended December 31, 1999 primarily
included salaries and related expenses for administrative, finance and human
resources personnel, professional fees and other corporate expenses related to
establishing our operations. Included in these amounts are non-cash charges of
$86,455 for the period ended September 30, 1999 and $38,576 for the quarter
ended December 31, 1999, which represent compensation expense related to the
issuance of stock options. We expect that, in support of our continued growth
and our operations as a public company, general and administrative expenses
will increase in the foreseeable future.
Recent financing
In December 1999, we completed a private placement offering of 1,388,073
shares of Series B preferred stock at $8 per share. Gross proceeds amounted to
$11,104,584. The shares were sold to approximately 185 accredited investors.
Net proceeds to us, after selling commissions of $829,242 and direct offering
costs of $121,869, totaled $10,153,473, of which $2,392,981 was received after
September 30, 1999. We intend to use the net proceeds in our continuing
operations.
In March 2000, we began a private placement offering of up to 3 million shares
of Series C preferred stock at $25 per share. We have received commitments
totaling approximately $45 million for approximately 1.8 million shares.
Through March 24, 2000, proceeds of $10,225,625 had been received and 409,025
shares of Series C preferred had been issued.
Liquidity and sources of capital
As a service company, we do not expect the liquidity constraints that face
companies that must maintain significant inventories. However, we anticipate
that we will have negative cash flow for the foreseeable future. We also
currently anticipate that we will invest $2 to $4 million in capital
expenditures in the next twelve months to expand our infrastructure.
Since our inception, we have funded our operations by selling stock. As of
December 31, 1999, our cash position reduced short-term liquidity problems.
While we expect to begin generating significant revenues during fiscal 2000, we
do not anticipate that revenues will be sufficient to offset expected
expenditures. Accordingly, we expect we will need to rely on proceeds from the
private placement offering described above to finance our operations.
As of September 30, 1999 and December 31, 1999, we had current assets of
$4,894,143 and $4,913,876, respectively, and current liabilities of $2,543,090
and $2,594,177, respectively. This represents working capital of $2,351,053 at
September 30, 1999 and $2,319,699 at December 31, 1999. Current liabilities at
December 31, 1999 included $2,118,809 of liabilities acquired in acquisitions,
of which $1,800,000 is reserved to pay the judgment in the Voxel matter. In
January 2000, we appealed the judgement and pledged a $2 million certificate of
deposit with the court. One of our significant shareholders, who is also an
officer and director, has agreed to repay to us in common stock or cash, at his
option, any amounts we must pay to the plaintiffs in this matter. See
"Business--Legal Proceedings."
15
For the period ended September 30, 1999, we used $2,013,188 of cash for
operating activities and for the quarter ended December 31, 1999, we used
$1,761,460 of cash for operating activities, which were primarily focused on
growing our organizational infrastructure to be able to service our clients.
During the same periods, $1,263,133 and $715,564, respectively, was used in
investing activities, primarily for acquisitions of fixed assets used to expand
our technology infrastructure and the eComNetwork. During the periods ended
September 30, 1999 and December 31, 1999, $8,021,062 and $2,393,502 was
provided by financing activities, primarily from issuance of preferred stock.
While we expect to begin generating significant revenues during the next
twelve months, it is likely that we will need to pursue additional funding in
order to continue the development of our technology infrastructure and add to
our capacity to provide services to our clients. We also expect the number of
employees to increase during that time. We expect that we will need to rely on
proceeds from the current private placement offering to continue to grow as
planned.
There can be no assurance the current private placement offering will
completely fund on terms that are acceptable, or at all. If we are unable to
obtain sufficient funding, our business will suffer significantly, as we would
need to cut back research and development, scale back sales and marketing
activities and reduce staffing, all of which could harm our ability to generate
revenues and continue as a going concern.
16
BUSINESS
Overview
MindArrow Systems, Inc. provides proprietary interactive sales and marketing
automation or SMA systems designed to enhance customer relationships. Our one-
to-one Virtual Prospector systems are designed to enable our clients to
increase sales by significantly improving their sales and marketing response
rates, at a lower cost, while enhancing the relationships they have with their
customers. Similarly, our one-to-many Internet Relationship Marketing systems
are designed to enable our clients to improve the effectiveness of their
marketing campaigns targeted to larger groups.
Company Strategy
We intend to create significant shareholder value by becoming a leading
provider of interactive SMA systems to companies seeking to improve their
profitability and enhance their customer relationships, and by successfully
commercializing our proprietary technology in non-SMA industries. The principal
elements of our strategy include:
Market leadership adoption across critical industries. By offering what we
believe is a compelling value proposition, we intend to win the adoption of the
market-leading companies across several critical industries, including the
information technology and telecommunication, financial services,
pharmaceutical, media and entertainment, travel, e-commerce, industrial product
and public sector industries.
Increase market penetration by strategic partnerships. We intend to quickly
increase our market penetration through partnerships with companies that enable
us to extend and strengthen our sales presence, including value-added resellers
("VARs"), database management and analytical customer relationship firms,
Information Technology ("IT") firms, advertising agencies, and companies
focused on providing robust solutions to the small and medium-sized business
market.
Expanding our business into global markets. Because we believe that
significant commercial opportunities exist outside of the United States, we
intend to rapidly expand our business to promising global markets, principally
through the adoption of our systems and technology by dominant international
companies and VARs, and by partnering with market-leading local firms.
Partnering to commercialize non-SMA technology applications. We intend to
commercialize our technology in other industries by partnering with market-
leading firms in those industries where our technology provides a compelling
application.
Industry Background
The Internet. The Internet and electronic commerce are fundamentally
changing the way businesses interact with customers, suppliers, employees and
other interested constituents. Companies across most industries are using the
Internet and electronic commerce to redefine the way that goods and services
are marketed, sold and distributed. They are also using this new medium to
redefine how they communicate with their customers and constituents. Some key
Internet statistics include:
. Access: In February 2000, the Strategis Group reported the number of
households in the US with Internet access had increased from 14.9 million
in 1995 to 46.5 million. By 2005, that number is expected to increase to
90 million.
. Use: Email is the most widely used Internet application, with the number
of email boxes expected to increase from 234 million worldwide in 1998 to
409 million in 1999, according to eMarketer.
. Commerce: The amount of merchandise sold over the Internet is expected to
increase to $3.2 trillion in 2003, according to Forrester Research.
. Advertising: Worldwide Internet advertising is expected to grow from $3.3
billion in 1999 to $33 billion in 2004, according to Forrester Research.
17
This growth has been spurred by developments such as easy-to-use Web
browsers, the availability of inexpensive multimedia PCs and Internet access,
the adoption of more robust network architectures, and the emergence of
compelling Web-based content and commerce applications. The proliferation of
email accounts has enabled businesses to use email as the primary means to
proactively communicate with their customers online. For example, email is
often used to confirm electronic transactions and to notify customers of
important new developments or product offerings.
Much of the Internet's rapid evolution towards becoming a mass medium can be
attributed to the accelerated pace of technological innovation, which has
expanded the Web's capabilities and improved users' experiences. Most notably,
the Internet has evolved from a mass of static, text-oriented Web pages and
email services to a much richer environment, capable of delivering graphical,
interactive and multimedia content.
Remaining Competitive. Many websites, particularly consumer-oriented sites,
rely on heavy spending to encourage current and prospective customers to visit
regularly. Concurrently, these companies also spend heavily to understand how
they interact with their website once they have arrived. Our technologies allow
companies to deliver targeted rich media information to their audience via
email, reducing the need for broad-based advertising and fostering a one-to-one
relationship. To remain competitive in this dynamic business environment, many
companies desire to improve both their profitability and their customer
relationships, We believe that companies that are able to improve their sales
and marketing response rates at a lower cost will significantly improve their
overall top-line growth and profitability. In addition, we believe companies
that provide rich, interactive communication to their customers will also
improve their relationships with them.
Direct Marketing. Direct marketing, always a significant portion of overall
advertising spending, is becoming a significant force on the Internet. Some key
statistics:
. Overall: Businesses and other organizations spent approximately $285
billion on general advertising in 1998, of which $163 billion (57%) was
spent on direct marketing, according to the Direct Marketing Association.
. Internet-based: According to a study by CE Underberg Towbin, interactive
marketing expenditures will grow from approximately $1 billion in 1998 to
an estimated $9 billion in 2003.
Online marketing allows businesses to cost-effectively target online
customers through customized email campaigns. Email did not initially gain wide
acceptance as a marketing tool because of concerns regarding privacy and
unsolicited communication. With the recent advent of permission-based email,
where individuals sign up or "opt-in" to receive information from specific
sources on topics of interest to them, email has become an increasingly
important direct marketing tool. Email campaigns offer significant advantages
over traditional direct mail, including shorter production times, reduced cost
and more rapid delivery, which increase flexibility and make it easier to add
greater degrees of personalization. Further, response rates for direct email
campaigns can be much higher than for traditional direct mail campaigns.
Products and Services
General. Companies can use our interactive SMA systems to enhance their per-
customer profitability while improving their customer relationships. Our
systems improve response rates, which may translate into additional sales on
the same number of contacted customers. Further, when compared with traditional
paper collateral and postal delivery, our systems are often much more cost
effective on a per customer basis. Moreover, our activity tracking provides
important feedback to companies using our systems, allowing them to efficiently
tailor their sales and marketing message over time.
Our systems enable companies to provide rich content to their target
audience, which we believe enhances the experience of the recipient, resulting
in greater company loyalty. In addition, our systems enable the recipient to
immediately contact a sales or customer support representative of the company
at their convenience, further improving the sales process and strengthening the
customer relationship.
Finally, our SMA systems are very complementary to website content
management systems because our systems drive traffic to websites and can be
configured to work with content management systems to improve the communication
between companies and their customers.
18
Our proprietary technology enables our clients to deliver a "website" to
their customers via email. eCommercials are highly compressed, multimedia files
that combine high quality audio and video, graphics, animation, chat, hypertext
links, and telecommunication links. eCommercials typically generate very high
response rates because:
.the recipient is not required to be connected to the Internet when
viewing:
.the recipient is not required to have a high speed or "broadband" Internet
connection; and
.the recipient is not required to install any other software to view the
eCommercial.
Activity tracking, reporting and analysis. Our systems offer technology that
allows for activity tracking and reporting which automatically tracks:
.the email address of the initial recipient of the eCommercial;
.whether the initial recipient forwarded the eCommercial to others; and
.the content reviewed by each recipient, including referrals.
This information allows our clients to accurately measure the interest and
attention generated by their sales and marketing efforts, including the so-
called viral or "pass-along" impact of their content.
Web-based technology. Our Virtual Prospector system is accessible via any
Internet browser and is easy to use, which enables rapid wide-scale deployment.
Our software systems are offered from offsite computer operations centers on
what is known as an Application Service Provider or ASP basis and larger
clients can license our systems and deploy our technology at their locations.
Immediate customer-initiated feedback. Our systems are designed to generate
immediate feedback using embedded telecommunication links that allow recipients
to respond via links to our clients' websites.
Categories. Our systems generally fall into two categories, both utilizing
proprietary eCommercial technologies:
. One-to-One--"Virtual Prospecting": Our business-to-business clients use
our "Virtual Prospector" system to manage the delivery, tracking and
linking of electronic brochures and other rich content to current and
prospective customers.
Our Virtual Prospecting service utilizes Virtual Prospector, our patent-
pending system which is deployed over the Internet on an Application Service
Provider (ASP) basis. Licensed users use the Virtual Prospector system to
deliver eCommercials to individuals with whom they have relationships, much the
same way individual sales representatives deliver printed collateral to
interested parties upon request. Delivering collateral over the Internet is
faster, significantly less expensive, interactive and can yield better results
than traditional paper collateral delivered via postal or overnight delivery.
Virtual Prospector is almost exclusively a business-to-business solution.
We intend to establish Virtual Prospector as a cost-effective alternative to
printed collateral by providing a compelling value proposition for our clients.
The Virtual Prospector system is designed to improve the efficiency and
effectiveness of sales representatives by enabling Internet-based delivery of
electronic collateral and providing reports that help them prioritize their
callbacks. The immediacy of delivery and the compelling nature of rich-media
brochures can help a sales representative turn an unqualified prospect into a
qualified prospect.
19
. One-to-Many--"Internet Relationship Marketing": We help our clients build
"clubs" or "communities" of interested parties who receive eCommercials
with relevant and compelling content.
Our Internet Relationship Marketing (IRM) systems enable our clients to use
our technology to provide eCommercials or other rich content to a constituent
group such as customers, employees or shareholders, generally comprised of
people who have signed up to receive it. Client companies can use our IRM
services to communicate Business-to-Business or Business-to-Consumer messages
to wide audiences.
Our eCommercial technology offers compelling content that is not deliverable
via text or graphic. Such content can be entertaining, educational or
persuasive. Delivering content desired by affinity groups is an excellent use
of the technology.
Other important aspects. Other important aspects of our products and
services include the ability to integrate our products and services with those
currently deployed by our clients, the ability to view eCommercials without a
current web connection, and our technology as a "front-end" for streaming.
Integrate with enterprise systems. We intend to help our clients to
integrate our Virtual Prospector system with their Website Content Management,
Sales Force Automation, Enterprise Resource Planning and Enterprise
Relationship Management packages to enable information sharing between the
systems.
View without a current web connection. Our technology has significant
advantages over on-line, or streaming media content delivery. Recipients can
interact with an eCommercial and can view and respond when convenient, rather
than requiring online viewing. Rather than providing streaming multimedia
content delivery services in which users must have an active connection to the
content provider in order to view rich media content, we deliver eCommercials
in a manner that allows end users to view them at their leisure. In addition,
our technologies allow us to provide highly specific feedback on the
effectiveness of each campaign to our customers.
Front-end for streaming technologies. While eCommercials can generally be
viewed offline, they can also serve as a "front end" for streaming
technologies, which require users to connect to content broadcast over the
Internet. An eCommercial can serve as a viewer and buffer for the Internet
broadcast, by delivering the first 15 to 30 seconds of rich media content then
delivering the remainder using streaming media. For example, if the content is
an announcement by a company CEO, the eCommercial can deliver the first 15
seconds, then seamlessly serve the remainder of the message via streaming
media.
Sources of revenue and internal organization. We generate revenue, and
deliver our products and services through three principal business units:
eComNetwork, eComTracker and eComstudio.
eCommercial Network Deliveries--eComNetwork. eCommercials are typically
delivered as email attachments and are generally the responsibility of our
eComNetwork business unit. Clients that license our architecture and SMA
systems deliver their eCommercials themselves. eCommercial delivery is
generally handled in one of three ways:
. Targeted deliveries to a subscriber base;
. Sent individually using our Virtual Prospector system; and
. For recipients not included in subscriber mailing lists, eCommercials may
be downloaded from ecommerce and other web sites.
eCommercial Activity Tracking and Reporting--eComTracker. Activity tracking
and reporting is handled by our eComTracker unit. eCommercials use industry-
standard web logging techniques to track the effectiveness of a campaign. We
gather information about how often each eCommercial is opened and viewed and
track the activity on related websites that we host.
20
At the request of our client, when a recipient views or interacts with an
eCommercial, our servers can be configured to automatically log and/or
recognize the following information:
. the email address of the initial recipient of the eCommercial;
. whether the initial recipient forwarded the eCommercial to others; and
. the content reviewed by each recipient; including referrals.
This information allows the sender to accurately measure the interest and
attention generated by a single eCommercial or eCommercial campaign, and this
tracking data may be provided to the marketing partner sponsoring the
eCommercial.
eCommercial Consultation and Production--eComStudio. eCommercial
consultation and production is managed by our eComStudio production unit and
third-party ad agencies. Sound and video production can involve simple editing
or more elaborate on-location filming or special effects. We anticipate that
company-licensed third-party firms such as advertising agencies will
increasingly provide this service. Consultation charges vary depending on the
size, scope and length of a given campaign.
Additional Sources of Revenue. In addition to licensing revenue received
from larger users, per-item delivery and tracking charges, and consultation and
studio services, we receive revenue from revenue sharing and ad-sponsorship.
Sales of products or services through eCommercials may result in variable
commission revenues to us depending on the product or service being sold. In
addition, our clients may choose to sell or have us sell sponsorship
advertisements on their eCommercial. Each eCommercial can support multiple
sponsorships.
Sales and Marketing
Our key marketing objective is to brand ourselves as the leading Internet
sales and marketing automation company. To achieve this objective, we have a
national team of sales people and are pursuing direct sales and sales via
resellers to market leaders in several industries, including, but not limited
to:
. Computer hardware/software
. Financial services
. Entertainment
. Electronic commerce web sites
. Telecommunications
. Travel
. Industrial products
. Government
In addition, we intend to quickly increase our market penetration across
other industries and with smaller and medium-sized businesses by partnering
with companies that enable us to extend and strengthen our sales presence,
including Value Added Resellers database management and analytical customer
relationship firms, information technology solutions/service firms, advertising
agencies, and companies focused on providing robust solutions to the small and
medium-sized business market.
As previously indicated under "Business Strategy," we intend to profitably
commercialize our technology in other industries by partnering with market-
leading firms in those industries where our technology provides a compelling
application.
We are currently in negotiations with prospective clients from each of the
areas noted above.
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Strategic Relationships
As noted in our strategy, we intend to enter into strategic relationships to
increase the breadth of market acceptance of our SMA systems and to more
effectively and efficiently commercialize our technology. A summary of our
current strategic relationships is set forth below.
Lockheed Martin: We have a strategic relationship agreement with Lockheed
Martin Integrated Business Solutions (Lockheed), a leading systems integrator,
which provides for joint marketing and service delivery efforts and allows us
to utilize Lockheed in establishing and managing e-commerce projects. Our
Virtual Prospector solution is designed to be integrated with Enterprise
Resource Planning and Enterprise Relationship Management packages. As a premier
systems integrator, Lockheed is in the position to lead integrations for our
large customers. In addition, Lockheed has established relationships with
companies we believe can be key customers for us. Our cross-marketing
arrangement provides for Lockheed to recommend eCommercial solutions to their
customers and for us to recommend Lockheed system integration solutions to our
customers who require systems integration capabilities. We issued 30,000 shares
of our common stock to Lockheed as compensation for them entering into this
arrangement with us. All other aspects of our arrangement are expected to be at
our normal pricing.
eContributor.com: We have entered into a strategic relationship with
eContributor.com, Inc. that provides for joint integration of technologies and
cross-promotion of services. We have also made an equity investment into
eContributor.com in the amount of $100,000 and we intend to share revenues
generated from projects in which we work together. eContributor.com is an
Internet-based fundraising management and donation processing firm. They have
developed proprietary technologies that streamline charitable giving, which we
intend to integrate into related eCommercials. We have worked together on the
Steve Forbes presidential campaign and have several other prospective customers
in common.
The Gingrich Group: We have entered into a strategic relationship with The
Gingrich Group, which is headed by former Speaker of the House, Newt Gingrich.
As a technology and political consultancy to senior management of Fortune 100
companies, The Gingrich Group is in a unique position to introduce eCommercial
solutions to its client base. We receive consulting services at a discounted
rate, and have discounted our pricing for services that they employ in
marketing their services.
Eurpsville USA: We have entered into a strategic relationship with
Eurpsville USA, Inc., a creator of licensed properties dedicated to creating
quality children's properties, storybooks, and products that blend children's
entertainment and literacy. We will act as a distribution channel for
Eurpsville content.
We are currently negotiating several additional strategic relationships,
primarily with technology companies that provide products or services which
enhance the functionality or marketing of our technologies.
Intellectual Property
We regard our copyrights, trademarks, trade secrets and similar intellectual
property as critical to our success, and we rely on a combination of copyright
and trademark laws, trade secret protection, confidentiality and non-disclosure
agreements and contractual provisions with our employees and with third parties
to establish and protect our proprietary rights.
We have filed fourteen patent applications through the U.S. Patent and
Trademark Office (USPTO) under the Patent Cooperation Treaty designating all
member countries, including the United States, essentially all of Europe,
Japan, Korea, China, Canada and Mexico. These patent applications were filed in
October 1999 and cover aspects of our proprietary eCommercial authoring
software and our network architecture, as well as methods of using eCommercials
and related media in marketing. The USPTO is currently reviewing the
applications, and we plan to file additional patent applications in the future
with respect to various additional aspects of these and other technologies.
22
We continue to develop proprietary computer software. We mark our software
with copyright notices, and intend to file copyright registration applications
where appropriate. We have also filed several federal trademark registration
applications for trademarks and service marks we use. In addition, we seek to
protect certain proprietary aspects of our products through nondisclosure
agreements with our employees, contractors and other third parties. There can,
however, be no assurance that any patents, copyright registrations, or
trademark registrations applied for by us will be issued, or if issued, will
sufficiently protect our proprietary rights.
We intend to continue to seek patent protection for technologies that we
consider important to the development of our business. We also intend to rely
upon copyright, trademark, trade secrets, know-how, and continuing
technological innovations to develop and maintain a competitive advantage.
Government Regulation
Although there are currently few laws and regulations directly applicable to
the Internet, it is likely that new laws and regulations will be adopted in the
United States and elsewhere covering issues such as broadcast license fees,
copyrights, privacy, pricing, sales taxes and characteristics and quality of
Internet services. The adoption of restrictive laws or regulations could slow
Internet growth. The application of existing laws and regulations governing
Internet issues such as property ownership, libel and personal privacy is also
subject to substantial uncertainty. There can be no assurance that current or
new government laws and regulations, or the application of existing laws and
regulations (including laws and regulations governing issues such as property
ownership, taxation, defamation and personal injury), will not expose us to
significant liabilities, slow Internet growth or otherwise hurt us financially.
We currently do not collect nor do we intend to collect sales or other taxes
with respect to the sale of services or products in states and countries where
we believe we are not required to do so. We do collect sales and other taxes in
the states in which we have offices and believe we are required by law to do
so. One or more states or countries have sought to impose sales or other tax
obligations on companies that engage in online commerce within their
jurisdictions. A successful assertion by one or more states or countries that
we should collect sales or other taxes on products and services, or remit
payment of sales or other taxes for prior periods, could have a material
adverse effect on our business, results of operations and financial condition.
The Communications Decency Act of 1996 (the "CDA") was enacted in 1996.
Although those sections of the CDA that, among other things, proposed to impose
criminal penalties on anyone distributing "indecent" material to minors over
the Internet were held to be unconstitutional by the U.S. Supreme Court, there
can be no assurance that similar laws will not be proposed and adopted.
Although we do not currently distribute the types of materials that the CDA may
have deemed illegal, the nature of such similar legislation and the manner in
which it may be interpreted and enforced cannot be fully determined, and
legislation similar to the CDA could subject us to potential liability, which
in turn could have an adverse effect on our business, financial condition and
results of operations. Such laws could also damage the growth of the Internet
generally and decrease the demand for our products and services, which could
adversely affect our business, results of operations and financial condition.
Competition
Although our marketing automation solutions and rich media asynchronous
messaging are rapidly emerging Internet marketing technologies, the market for
Internet marketing and marketing automation services is highly competitive and
we expect that competition will continue to intensify. We compete with other
marketing automation companies that provide various components of our product
and service offerings, including online thin media and streaming media
services, as well as traditional media such as television, radio and print, for
a share of the total budget for production and distribution of marketing
materials and targeted content.
23
Many of our competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than we do and thus
may be able to respond more quickly to new or changing opportunities,
technologies and customer requirements. Also, many current and potential
competitors have wider name recognition and more extensive customer bases that
could be leveraged, thereby gaining market share to our detriment. Such
competitors may be able to undertake more extensive promotional activities,
adopt more aggressive pricing policies, and offer more attractive terms to
purchasers than we can. In addition, current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to enhance their products.
Accordingly, it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. Such
competition could materially and adversely affect our ability to obtain
revenues from either license or service fees from new or existing customers on
terms favorable to us. Further, competitive pressures may require us to reduce
the price of our software and services. In either case, our business, operating
results and financial condition would be materially and adversely affected.
There can be no assurance that we will be able to compete successfully with
existing or new competitors or that competition will not have a material
adverse effect on our business, financial condition and operating results.
Research and Development
We have developed several proprietary technologies which are used in a
variety of Internet-related products and services. These products and services
are continually being enhanced to meet the needs of the Internet advertiser and
retailer. The Research and Development department is organized by area of
interest including Multimedia Development, Database Development, Web
Development, and Networking. Each development area requires highly specialized
individuals with extensive backgrounds in their respective disciplines.
Through December 31, 1999, we had incurred $706,417 of research and
development expenses in the engineering of our software tools and the
eComNetwork.
Facilities
Our headquarters and production facilities are at 101 Enterprise, Suite 340,
Aliso Viejo, California 92656. The base rent is $29,642 per month and the lease
expires in November 2004. In March 2000, we leased additional sales offices in
San Clemente, California at a monthly rental of $3,675 through February 2001.
We also lease an office in Cupertino, California at a current monthly rent of
$12,251, a portion of which will be subleased to an unrelated party. This lease
expires September 1, 2004. In addition, effective December 1, 1999, we opened
an office in New York City, in space we are subleasing for $2,883 per month.
We anticipate that we will require additional space within the next
12 months and that suitable additional space will be available on commercially
reasonable terms, although there can be no assurance in this regard. We do not
own any real estate.
Legal Proceedings
Although we have not become a party to any material legal proceeding since
eCommercial.com was founded, we are named as a defendant in a lawsuit filed on
March 25, 1999 in the US Bankruptcy Court. The lawsuit arises from an Asset
Purchase Agreement, dated November 25, 1998, pursuant to which our predecessor,
Wireless Netcom, had proposed to acquire the assets of Voxel, Inc. for $5
million. A dispute about the terms of the agreement arose, and Wireless Netcom
did not complete the acquisition. The Bankruptcy trustee then sold the assets
of Voxel for less and sued Wireless Netcom for the difference. We acquired this
lawsuit when we subsequently merged with Wireless on April 19, 1999.
On October 27, 1999, the trial judge granted a summary judgment motion in
favor of the plaintiffs in the amount of $1.8 million. In January 2000, we
appealed the decision and pledged a $2 million certificate of deposit to the
court. We plan to aggressively pursue a resolution of this matter.
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Pursuant to an indemnity agreement, one of our significant shareholders, who
is also an officer and director, has agreed to reimburse to us in common stock
or cash, at his option, any amounts we must pay to the plaintiffs. Accordingly,
we have recorded the entire amount as part of our current liabilities of
September 30, 1999, and will record any reductions in the balance due or
amounts received in repayment as additional paid-in capital at the time such
amounts are received.
Employees
As of February 29, 2000, we had 57 full-time employees. None of our
employees are subject to a collective bargaining agreement and we believe that
our relations with our employees are good.
25
MANAGEMENT
Directors and Executive Officers
The directors and executive officers of the company, their respective ages
and positions with us as of February 29, 2000 are as follows:
[Enlarge/Download Table]
Name Age Position
---- --- --------
Thomas J. Blakeley...... 41 Chief Executive Officer, President, Chairman of the Board
Eric A. McAfee.......... 37 Executive Vice President, Corporate Secretary, Director
Mark Grundy............. 38 Chief Operating Officer, Executive Vice President, Director
John Troiano............ 29 Director
Michael R. Friedl....... 36 Chief Financial Officer, Treasurer
Rick McEwan............. 35 Executive Vice President of Engineering
Michael Briola.......... 29 Executive Vice President, Creative Director
Donald R. Howren........ 40 Vice President of Sales
Thomas J. Blakeley, 41, CEO, President and Chairman of the Board. Mr.
Blakeley co-founded MindArrow Systems, and currently serves as President, Chief
Executive Officer and Chairman of the Board. From 1998 until founding the
Company, Mr. Blakeley served as Vice President of Sales for Zap International,
which was subsequently acquired by eCommercial.com. From 1996 to 1998, he
served as director of marketing and sales for Cubic Videocomm, creators of
CVideo-Mail, one of the first retail video email products. From 1987 until
1996, he was a principal of Blakeley & Associates, a marketing consulting and
training organization which produced training seminars for marketing
executives.
Eric A. McAfee, 37, Executive Vice President and Director. Mr. McAfee is the
co-founder of MindArrow Systems and currently serves as Executive Vice
President, Corporate Secretary and a Director of the company. Mr. McAfee is
also a principal at Berg McAfee Companies, a venture capital partnership based
in Cupertino, California, with investments in Internet, software and
telecommunications companies. From 1995 until joining us, he operated McAfee
Capital, a venture capital firm. In 1992, Mr. McAfee co-founded New Media
Corporation, a PC-card manufacturing company and served as its Chief Financial
Officer and Director until 1995. Mr. McAfee has also served for six years as a
member of the Board of Directors of the California Manufacturer's Association.
Mr. McAfee is a graduate of Fresno State University with a B.S. in Management
(with an emphasis in statistics) and the Stanford Graduate School of Business
Executive Program.
Mark Grundy, 38, Executive Vice President, Chief Operating Officer and
Director. Mr. Grundy joined the Company in May 1999 as Executive Vice
President, Chief Operating Officer and a director. In 1990, he founded
Destination America, Inc. a company that provided English language tours of the
United States. Mr. Grundy served as President of Destination America from its
inception until joining eCommercial.com in May 1999. From 1981 to 1990, he
developed sales and marketing strategies for Americantours International, Inc.,
where he served as Vice President, Sales and Marketing.
John Troiano, 29, Director. Mr. Troiano, who joined our Board in November
1999, is the Managing Director of @ONEX LLC, a significant shareholder of the
Company. @ONEX LLC is wholly-owned by Onex Corporation. Mr. Troiano has led
Onex' strategic investments in a number of areas, particularly e-commerce and
the Internet. He has also initiated and developed value creation ideas in a
number of other industry sectors where Onex may now invest, specifically
telecommunications, financial services and consumer products. Before joining
Onex, he was employed by Donaldson, Lufkin & Jenrette in both the Investment
Banking and Merchant Banking Groups. He also worked in corporate finance for
Gleacher & Co. in New York. Mr. Troiano received his B.S. in Economics (summa
cum laude) from the Wharton School, University of Pennsylvania; and his M.B.A.
from the Harvard Graduate School of Business Administration. Mr. Troiano was
elected to our Board in November 1999 as a representative of @ONEX LLC as a
result of our Series B preferred stock financing.
26
Michael R. Friedl, CPA, 36, Chief Financial Officer. Mr. Friedl joined the
company as Chief Financial Officer and Treasurer in May 1999. Prior to joining
us, Mr. Friedl served as President of DialRight Software, Inc., a database
utility company for which he continues to serve as a member of its board of
directors. Prior to joining DialRight, Mr. Friedl was the Chief Financial
Officer of V-Systems, Inc., a software company that spun out DialRight as a
separate venture. From 1995 to 1997, Mr. Friedl served as Chief Financial
Officer for publicly-held Grip Technologies, Inc., an Irvine, California,
manufacturer of golf club components. From 1993 to 1995, Mr. Friedl served as
Corporate Controller for New Media Corporation, a high-tech manufacturing
company. From 1986 to 1993, Mr. Friedl worked in public accounting, most
recently for Arthur Andersen & Co. where he served as an Audit Manager. Mr.
Friedl is a graduate of Kent State University and is a Certified Public
Accountant licensed in Ohio and California.
Richard R. McEwan, 35, Executive Vice President of Engineering. Mr. McEwan
joined the company in April 1999 as Vice President of Engineering. Prior to
joining us, Mr. McEwan served as President, CEO, and a co-founder of Zap
International, a video compression technology company which was acquired by
the Company in April 1999. Prior to co-founding Zap International, Mr. McEwan
was a manager with Fourth Communications Network from 1993 through 1998, where
he managed the development of Internet systems for the hotel industry based on
Microsoft Windows NT Server, Windows 3.1/95, and NT Workstation as well as the
database systems for statistical gathering for all of Fourth Communications'
Internet-related advertising and commerce information. Prior to joining Fourth
Communications, Mr. McEwan ran his own consulting business where he created
custom sales information databases for various organizations. Before entering
the consulting field, Mr. McEwan spent over eight years in several technical
and marketing duties for SuperMac Technology, RasterOps Corporation, and
Ramtek Corporation.
Michael Briola, 29, Vice President, Creative Director. Mr. Briola joined
the company in April 1999 as Vice President, Creative Director. Prior to
joining us, Mr. Briola founded and served as Vice President of Marketing and a
director of Zap International, where he played a major role in the development
of the Zap Media Messenger technology. Prior to his work at Zap International,
Mr. Briola co-founded Cameo International (now AnTares Systems) where he
served as Vice President of Technology and Marketing. Prior to founding Cameo,
Mr. Briola worked for MegaChips Corporation, a Japanese semiconductor design
firm specializing in audio/video codec and systems technologies. Previously,
Mr. Briola served as Technical Sales Director, Professional Products Division
for InVision Interactive, Inc. and was responsible for developing and
maintaining sales channels in the United States and abroad. From 1993 to 1996,
Mr. Briola maintained a consulting practice dedicated to supplying high-end
computer-based multimedia design and production equipment where he designed
facilities and equipment systems for clients.
Donald R. Howren, 40, Vice President of Sales. Mr. Howren joined us in
January 2000. Prior to joining us, he served as Vice President and General
Manager for the Analytic Applications Products division of Best Software,
which in 1999 acquired Omni Vista Software, a company Mr. Howren served as
Vice President of Marketing and Business Development since 1998. From 1995 to
1997, he served as Vice President of Marketing and Strategic Partners for
Epicor Software, a provider of enterprise business software.
Other Significant Employees
Other significant employees of the company, their respective ages and
positions with us are as follows:
[Download Table]
Name Age Position
---- --- --------
Serge Herring................. 51 Vice President of Research & Development
Adrian Turcotte............... 49 Vice President of Media Development
Serge Herring, 51, Vice President of Research & Development. Mr. Herring
joined the company in April 1999 as Director of Program Development, and was
named Vice President of Research & Development in November 1999. Prior to
joining us, Mr. Herring was Senior Software Engineer for Zap International, a
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video compression technology company which was acquired by the company in April
1999. From 1997 to 1998, Mr. Herring worked in research and development for
Innovacom, Inc., a video compression company serving the broadcast industry.
From 1996 to 1997, he worked as a Principle Engineer for Intellect Electronics,
Inc., a developer of point-of-sale terminals for the retail and banking
industries.
Adrian Turcotte, 49, Vice President of Media Development. Mr. Turcotte
joined the company as Vice President of Media Development in April 1999. From
1987 until joining us, he was Executive Producer for Odyssey Productions, a
producer of video presentations for the educational and entertainment markets.
Mr. Turcotte holds a Master's Degree from UCLA.
Executive Compensation
The following table sets forth the total compensation for each of our most
highly compensated executive officers whose total salary and bonus for the year
ended September 30, 1999 would have exceeded $100,000 on an annualized basis
(collectively, the "Named Executive Officers"):
Summary Compensation Table
[Download Table]
Name and Principal Position Salary Bonus Options
--------------------------- -------- ------- -------
Thomas Blakeley, Chief Executive Officer(1)........ $178,000 $ -- --
Eric A. McAfee, Executive Vice President(1)........ 172,000 -- --
Mark Grundy, Chief Operating Officer(1)............ 168,000 10,000 225,000
Michael Friedl, Chief Financial Officer............ 110,000 3,000 100,000
Deborah Olinto, Vice President of Sales(2)......... 130,000 -- 100,000
Ross Teasley, Vice President of Marketing(3)....... 120,000 -- 85,000
--------
(1) Effective October 1, 1999, we entered into employment contracts with these
executives specifying levels of compensation, duties and cause for
termination.
(2) Effective October 1999, Ms. Olinto left the company.
(3) Effective March 2000, Mr. Teasley left the company.
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Fiscal 1999 Stock Option Grants to Executives
The following table sets forth for each of the Named Executive Officers
certain information concerning stock options granted during fiscal 1999.
[Enlarge/Download Table]
Potential
Realizable
Value at Assumed
Annual Rates of
Stock Price
Appreciation
for Option Term
Name and Principal -----------------
Position Options % of Total Exercise Price Expiration 5% 10%
------------------ ------- ---------- -------------- ---------- -------- --------
Thomas Blakeley, Chief
Executive Officer...... -- -- -- -- -- --
Eric A. McAfee,
Executive Vice
President.............. -- -- -- -- -- --
Mark Grundy, Chief
Operating Officer...... 175,000(1) 8% $ 1 2005 $ 59,517 $135,023
50,000(2) 2 8 2005 136,038 308,624
Michael Friedl, Chief
Financial Officer...... 100,000(3) 5 1 2004 27,628 61,051
Deborah Olinto, Vice
President of Sales..... 100,000(4,5) 5 8 2005 272,077 617,249
Ross Teasley, Vice
President of
Marketing.............. 85,000(4,6) 4 8 2005 231,265 524,661
Potential realizable values are net of exercise price, but before the
payment of taxes associated with exercise. Amounts represent hypothetical gains
that could be achieved for the respective options if exercised at the end of
the option term. The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange Commission
and do not represent our estimate or projection of our future common stock
prices. These amounts represent assumed rates of appreciation in the value of
the common stock from the fair market value on the date of grant. Actual gains,
if any, on stock option exercises are dependent on the future performance of
our common stock and overall stock market conditions. The amounts reflected in
the table may not necessarily be achieved.
--------
(1) This option was granted in April 1999 and vests one-third in April 2000
with the remainder vesting quarterly over the following two years.
(2) This option was granted in September 1999 and vests one-third in September
2000 with the remainder vesting quarterly over the following two years.
(3) This option was granted in April 1999. 60,000 shares of which are
immediately vested, 40,000 shares of which vest one-third in April 2000
with the remainder vesting quarterly over the following two years.
(4) These options were granted in August 1999 and vest one-third in August 2000
with the remainder vesting quarterly over the following two years.
(5) Effective October 1999, Ms. Olinto left the company.
(6) Effective March 2000, Mr. Teasley left the company.
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Stock Option Exercises And Year-End Value Table
The following table reflects the number of shares covered by both
exercisable and non-exercisable stock options as of September 30, 1999 for the
Named Executive Officers. Values for "in-the-money" options represent the
spread between the exercise price of existing options and the market value for
our common stock on September 30, 1999, which was $8.125 per share.
[Download Table]
Value of
Options Outstanding In-the-Money Options
------------------------- -------------------------
Name and Principal
Position Exercisable Unexercisable Exercisable Unexercisable
------------------ ----------- ------------- ----------- -------------
Thomas Blakeley, Chief
Executive Officer...... -- -- -- --
Eric A. McAfee,
Executive Vice
President.............. -- -- -- --
Mark Grundy, Chief
Operating Officer...... -- 225,000 -- $1,603,125
Michael Friedl, Chief
Financial Officer...... 60,000 40,000 $427,500 285,000
Deborah Olinto, Vice
President of Sales(1).. -- 100,000 -- 12,500
Ross Teasley, Vice
President of Marketing
(2).................... -- 85,000 -- 10,625
--------
(1) Effective October 1999, Ms. Olinto left the company.
(2) Effective March 2000, Mr. Teasley left the company.
Compensation of Directors
We may reimburse directors for reasonable expenses pertaining to attending
meetings, including travel, lodging and meals but we do not pay directors for
their service as directors, as all of our directors are either executive
officers or significant shareholders.
Employment Agreements
As of September 30, 1999, each of the Named Executive Officers was a party
to a Change in Control Agreement with us, which provides for payment of two
year's salary to the executive if we are acquired by another company and he (or
she) loses his (or her) job for other than cause, as defined in the agreement.
In addition, effective October 1, 1999, we entered into three-year
employment contracts with Messrs. Blakeley, Grundy and McAfee, setting forth
terms of their employment, as follows:
[Download Table]
Year Base Salary Bonus(1)
----- ----------- --------
Thomas Blakeley, Chief Executive Officer......... 2000 $198,000 3.7%
2001 248,000
2002 298,000
Eric A. McAfee, Executive Vice President......... 2000 182,000 2.4%
2001 232,000
2002 282,000
Mark Grundy, Chief Operating Officer............. 2000 178,000 1.9%
2001 228,000
2002 278,000
--------
(1) Bonus is based upon a percentage of operating income.
Each of these employment agreements provides for payment in the amount of
two years salary if we terminate their employment. In addition, each contract
provides a $1 million life insurance policy, a car allowance of $750 per month,
and a car down payment reimbursement of $5,000 every two years.
30
Stock Option Plans
Our Board of Directors adopted our 1999 Stock Option Plan (the "Plan") in
April 1999. The Plan as amended in December 1999, was established to furnish
incentives for employees, directors and consultants to continue their service
to us. We reserved 3,000,000 shares of common stock for issuance upon exercise
of options granted under the Plan, which have vesting schedules up to 3 years.
However, in the event we undergo a change in control, as defined in the Plan,
all unvested options immediately become fully vested. Under the Plan, options
are granted at a price equal to the fair market value on the date of grant.
As of February 29, 2000, options to purchase 2,802,100 shares of common
stock at exercise prices ranging from $1 to $25 had been issued under the Plan.
Our Board of Directors administers the Plan. We intend to issue additional
options or other incentives to attract and retain qualified management and
directors. Such plans and incentives could have a dilutive effect on our common
stock.
Indemnification of Directors and Officers
Our Bylaws provide for indemnification of our directors, officers and
employees as follows: Any person made a party to an action, suit or proceeding,
by reason of the fact that he/she, his/her testator or intestate representative
is or was a director, officer or general manager of the Corporation, or of any
Corporation in which he/she served as such at the request of the Corporation,
shall be indemnified by the Corporation against the reasonable expenses,
including attorney's fees, actually and necessarily incurred by him/her in
connection with any appeal therein, except in relation to matters as to which
it shall be adjudged in such action, suit or proceeding, or in connection with
any appeal therein that such officer, director or general manager is liable for
negligence or misconduct in the performance of his/her duties.
Our Bylaws further state that the foregoing right of indemnification shall
not be deemed exclusive of any other rights to which any officer or director or
general manager may be entitled apart from the provisions of this section.
The amount of indemnity to which any officer, director or general manager
may be entitled shall be fixed by the board of directors, except that in any
case where there is no disinterested majority of the board available, the
amount shall be fixed by arbitration pursuant to the then existing rules of the
American Arbitration Association. In the event that whatever liability
insurance is procured for the protection of the company, its officers,
directors or management, then the indemnification shall not exceed the maximum
percent of policy coverage procured. We have also entered into indemnification
agreements with each of our directors.
31
CERTAIN TRANSACTIONS AND RELATIONSHIPS
Certain executive officers and directors of the company are former
shareholders of eCommercial.com, Inc., a California corporation ("eCommercial
California"). Pursuant to the terms of the Merger Agreement dated as of April
19, 1999, between us and the shareholders of eCommercial California, those
executive officers and directors acquired an aggregate of 4,000,000 shares of
our common stock in exchange for their eCommercial California shares.
In September 1999, the Company entered into a non-cancelable five-year
sublease for a satellite office in Cupertino, California. The sublease calls
for minimum monthly rental payments ranging from $10,091 per month at the start
of the lease and gradually increasing to $13,358 per month by the end of the
lease. The sublessor is a company related to Clyde Berg, a significant
stockholder and Eric McAfee, an officer, director and significant stockholder.
The sublease terms are identical to the terms of the sublessor's lease with the
landlord, and are favorable to the terms we would have been able to acquire on
our own.
MARKET FOR COMMON STOCK
The principal United States market for our common stock is the OTC Bulletin
Board. Our common stock began trading on the OTC Bulletin Board on April 29,
1999. The high and low bid prices for shares of our common stock for each
quarter since April 29, 1999 were as follows:
[Download Table]
Low High
--- ----
Quarter ended June 30, 1999:.................................. 6 1/2 16
Quarter ended September 30, 1999:............................. 7 10
Quarter ended December 31, 1999............................... 7 1/8 29 1/8
Quarter ended March 31, 2000.................................. 18 7/8 55
--------
Source: www.otcbb.com
These quotations represent inter-dealer prices, without retail mark-up,
markdown or commission, and may not represent actual transactions. On March 31,
2000, there were approximately 2,300 holders of record of our common stock and
185 holders of record of our preferred stock.
32
SIGNIFICANT STOCKHOLDERS
The following sets forth certain information as of February 29, 2000 (the
"Reference Date") with respect to the beneficial ownership of our common stock,
(i) by each person known by us to own beneficially more than five percent of
our common stock, (ii) by each executive officer and director, and (iii) by all
officers and directors as a group. Unless otherwise indicated, all persons have
sole voting and investment powers over such shares, subject to community
property laws. As of the Reference Date, there were 9,692,295 shares of common
stock and 1,388,073 shares of preferred stock outstanding.
[Download Table]
Number of Percent
Name and Address of Owner(1) Shares(2) of Class
---------------------------- --------- --------
Thomas J. Blakeley, CEO, President, Chairman........... 2,000,000 20.9%
Eric A. McAfee, EVP, Corporate Secretary, Director..... 2,036,567 21.2
Mark Grundy, COO, EVP, Director........................ 120,293 1.2
John Troiano, Director(3).............................. 549,500 5.5
c/o @ONEX LLC, 712 Fifth Avenue, 40th Floor New York,
NY 10019
Michael R. Friedl, CFO, Treasurer...................... 60,000 0.6
Ross Teasley, VP, Marketing(5)......................... -- --
All directors and executive officers taken as a group.. 4,487,360 44.8
Clyde Berg............................................. 933,333 9.7
10050 Bandley Drive Cupertino, CA 95014
@ONEX LLC(4)........................................... 525,000 5.2
712 Fifth Avenue, 40th Floor New York, NY 10019
Joseph McCarthy........................................ 480,000 5.0
PO Box 361256, Milpitas, CA 95036-1256
--------
(1) Except as otherwise noted, the address for each person is c/o MindArrow
Systems, Inc., 101 Enterprise Suite 340, Aliso Viejo, CA 92656.
(2) Unless otherwise noted, we believe that all persons named in the table have
sole voting and investment power with respect to all shares of common stock
listed as beneficially owned by them. A person is deemed to be the
beneficial holder of securities that can be acquired within 60 days from
the Reference Date upon the exercise of warrants or options. Each
beneficial owner's percentage ownership is determined by including shares,
underlying options or warrants which are exercisable currently, or within
60 days following the Reference Date, and excluding shares underlying
options and warrants held by any other person.
(3) Mr. Troiano is the managing director of @ONEX LLC.
(4) @ONEX LLC is wholly-owned by Onex Corporation. Mr. Gerald W. Schwartz is
the Chief Executive Officer of Onex Corporation and owns stock having a
majority of the voting power of Onex Corporation's outstanding stock. Onex
Corporation and Mr. Schwartz may also be deemed beneficial owners of the
shares owned by @ONEX LLC. The business address of Onex Corporation and Mr.
Schwartz is 161 Bay Street, Toronto, Ontario M5J 2S1, Canada.
(5) Effective March 2000, Mr. Teasley left the company.
33
SELLING SECURITY HOLDERS
The stockholders who may from time to time offer their shares for sale
pursuant to this prospectus are as follows:
[Download Table]
Shares Owned
Prior to Shares Being Shares Owned
this Offered Pursuant After the
Name of Selling Stockholder(1) Offering(2) to this Prospectus Offering(3)
------------------------------ ------------ ------------------ ------------
@ONEX LLC(4)..................... 525,000 525,000 --
Alfred Abiouness................. 11,000 11,000 --
Richard Aghababian............... 6,188 6,188 --
Altech Packaging Co.............. 3,300 3,300 --
Alignment Captial(5) ............ 137,500 137,500 --
America First Associates Corp. .. 1,875 1,875 --
American High Growth Equities
Retirement Trust................ 18,563 18,563 --
Francis Anderson................. 2,614 2,614 --
Barclay M. Armitage.............. 3,713 3,713 --
William Barclay Trust............ 4,950 4,950 --
Barrington Barisic............... 1,444 1,444 --
Darin Barker..................... 2,062 2,062 --
Linda Bassin..................... 3,300 3,300 --
Steve Bauman..................... 8,334 8,334 --
Alan Beinhacker.................. 412 412 --
Melissa Belyski.................. 500 500 --
Jerome & Stuart Bercun........... 2,475 2,475 --
Valery Berger.................... 13,750 13,750 --
Bill Berkley..................... 4,950 4,950 --
Bill & Claudia Berkley........... 6,188 6,188 --
Paul D. Berkley.................. 2,475 2,475 --
Paul & Judith Berkman............ 6,188 6,188 --
Gregory Beyerl................... 6,188 6,188 --
Edwin R. Bindseil................ 4,400 4,400 --
Kostaki Bis...................... 3,713 3,713 --
George Bisnoff................... 2,363 2,363 --
BNB Associates c/o Ben Bollag.... 6,875 6,875 --
Michael Bollag................... 6,875 6,875 --
Richard Bowe..................... 3,300 3,300 --
Steven Braccini.................. 12,375 12,375 --
Christopher Brothers............. 2,062 2,062 --
Alan & Cathy Buraghi............. 1,238 1,238 --
Ronald Buzard.................... 2,200 2,200 --
B V H Holdings c/o Ronald
Krinick......................... 4,400 4,400 --
John Byram....................... 34,375 34,375 --
Sean Cahill...................... 5,500 5,500 --
Capitol Bay Securities........... 722 722 --
Car Cap, Co, LLC c/o Richard
Carney.......................... 11,413 11,413 --
James Carr....................... 3,300 3,300 --
Addie B. Carroll................. 1,856 1,856 --
Susan Carroll.................... 1,375 1,375 --
Richard Casari................... 2,475 2,475 --
Francis Cheong................... 1,238 1,238 --
Timothy & Nadine Cherney......... 2,475 2,475 --
Robert & Phyllis Ching........... 3,988 3,988 --
34
[Download Table]
Shares Owned
Prior to Shares Being Shares Owned
this Offered Pursuant After the
Name of Selling Stockholder(1) Offering(2) to this Prospectus Offering(3)
------------------------------ ------------ ------------------ ------------
Robert Ching Trust............... 4,125 4,125 --
Raymond & Ellen Chow............. 4,950 4,950 --
James & Caren Cobb............... 22,000 22,000 --
Marc Cohen....................... 1,650 1,650 --
Del Coleman (Rose Inc.).......... 42,350 42,350 --
Thomas C. Coleman & Donna K.
Norell.......................... 2,200 2,200 --
Tom Coleman IRA.................. 6,875 6,875 --
James F. Corcoran................ 9,900 9,900 --
Edmund Cranch.................... 6,600 6,600 --
Robert W. Crawford............... 3,713 3,713 --
Jonathan Cress IRA............... 3,300 3,300 --
Scott Crowther................... 3,300 3,300 --
Brad Danforth.................... 2,475 2,475 --
Paul De Groot.................... 8,000 8,000 --
Harvey Deckert................... 6,188 6,188 --
Daniel Denihan................... 9,900 9,900 --
Albert Digangi................... 2,475 2,475 --
David B. Doft.................... 2,750 2,750 --
Jacob Doft....................... 5,500 5,500 --
John P. Donohue.................. 7,425 7,425 --
Paul Dorfman..................... 1,378 1,378 --
Yakov Dumanis.................... 3,300 3,300 --
Glenn & Dorothy Egli............. 2,475 2,475 --
Christopher C. Ertz.............. 8,334 8,334 --
Paul Eshelby..................... 3,600 3,600 --
Clifford A. & Helen Falkenau..... 2,200 2,200 --
Tim Farrell...................... 2,475 2,475 --
Aaron Feder...................... 1,856 1,856 --
Dale S. Feinblatt & Jack
Feinblatt....................... 4,400 4,400 --
Michael Fenton................... 20,950 20,950 --
Lloyd Fields..................... 3,713 3,713 --
Kevin Fight...................... 9,281 9,281 --
Michael Finnell.................. 3,438 3,438 --
Jacob & Elizabeth Fish........... 4,813 4,813 --
D. A. Fleming.................... 800 800 --
Fred Foulkes..................... 2,475 2,475 --
Brian Frank...................... 141 141 --
Matthew Frank.................... 2,200 2,200 --
Henry Fredericks................. 11,000 11,000 --
Phil Fresen...................... 2,063 2,063 --
Stanley Friedlander.............. 3,300 3,300 --
Keith Gaeddert................... 3,713 3,713 --
Tim Gannon....................... 2,475 2,475 --
Robert Ganz(6)................... 100,000 100,000 --
Theodore Gardocki Trust.......... 13,338 13,338 --
Kent Garlinghouse c/o Shadow
Capital......................... 8,800 8,800 --
Mark Geller...................... 2,475 2,475 --
Richard E. Gerzof................ 37,125 37,125 --
Ray Glover....................... 3,200 3,200 --
35
[Download Table]
Shares Owned
Prior to Shares Being Shares Owned
this Offered Pursuant After the
Name of Selling Stockholder(1) Offering(2) to this Prospectus Offering(3)
------------------------------ ------------ ------------------ ------------
Elliot Goldberg................... 2,475 2,475 --
Stanley Goldberg.................. 11,000 11,000 --
Steven Graves..................... 6,188 6,188 --
Sean Green........................ 3,713 3,713 --
Paul & Linda Gridley.............. 3,438 3,438 --
Mark Grundy(7).................... 120,293 100,000 20,293
Martin P. Hanly................... 30,000 30,000 --
Zachary Walker Hanson............. 5,000 5,000 --
Jordan Taylor Hanson.............. 5,000 5,000 --
Clarke Isaac Hanson............... 5,000 5,000 --
John Hatsopoulos.................. 1,091 1,091 --
Lawrence S. and Barbara Heller.... 4,000 4,000 --
R.G. Hildreth Jr. ................ 2,750 2,750 --
Daryl & Joan Hill................. 5,500 5,500 --
David Hodkinson................... 2,000 2,000 --
Douglas & Alexis Hogue............ 3,300 3,300 --
Andrew Howard..................... 1,238 1,238 --
Donald R. Howren, Jr. ............ 4,400 4,400 --
Roger Husted...................... 6,188 6,188 --
IBT, Inc.......................... 40,000 40,000 --
David Ivers....................... 4,950 4,950 --
JAOR c/o James Jacobs............. 5,500 5,500 --
Art Jenkins....................... 3,300 3,300 --
Colleen Jenkins................... 1,100 1,100 --
Irwin & Ruth Kabat................ 1,320 1,320 --
Leo G. & Merle Kailas............. 3,300 3,300 --
Robert Kantor..................... 12,375 12,375 --
Gerald Kay........................ 2,200 2,200 --
Frances Kehoe..................... 600 600 --
Peter Kellner..................... 13,750 13,750 --
Jerry Kessler..................... 1,650 1,650 --
Raji Khabbaz...................... 1,650 1,650 --
Norman O. King.................... 3,300 3,300 --
Aaron Kirzner..................... 2,200 2,200 --
Harvey Kohn....................... 16,500 16,500 --
Helen Kohn........................ 89,016 89,016 --
Jeffrey Kohn...................... 2,200 2,200 --
Michael Kohn...................... 1,562 1,562 --
Stuart Kohn....................... 1,563 1,563 --
Leonard Korets.................... 7,700 7,700 --
Lyudmila Korets................... 2,475 2,475 --
Walter Koschak.................... 6,875 6,875 --
Raymond Kralovic.................. 11,000 11,000 --
Ronald & Elizabeth Krinick........ 3,300 3,300 --
David & Catherine Langlois........ 5,500 5,500 --
Curtis Lanning.................... 3,750 3,750 --
Barbara Lazarus................... 1,856 1,856 --
Eddie E. Lee...................... 11,000 11,000 --
Michael Limberg................... 5,500 5,500 --
36
[Download Table]
Shares Owned
Prior to Shares Being Shares Owned
Name of Selling this Offered Pursuant After the
Stockholder(1) Offering(2) to this Prospectus Offering(3)
--------------- ------------ ------------------ ------------
Morris Macy............. 3,713 3,713 --
Martin Madorsky & Judith
Richard................ 6,188 6,188 --
Dante & Jeanine Maffeo.. 1,238 1,238 --
Tom Manz................ 10,000 10,000 --
Judy Marcucilli......... 3,300 3,300 --
Robert Margolin......... 2,063 2,063 --
James A. Martens........ 9,900 9,900 --
Lewis Mason............. 20,950 20,950 --
Raina Massand........... 1,650 1,650 --
Robert Mattei........... 1,238 1,238 --
Adam McAfee(8).......... 28,050 28,050 --
George McDonnell........ 3,713 3,713 --
John McMains............ 5,000 5,000 --
John McNierney.......... 3,713 3,713 --
Chris Meiklejohn........ 9,600 9,600 --
Aris Melissarratos...... 6,188 6,188 --
James Milgard........... 13,613 13,613 --
Allen Moore............. 4,400 4,400 --
Stuart Morrice.......... 2,500 2,500 --
Samuel Morse............ 3,300 3,300 --
Dave Mosenson........... 2,888 2,888 --
Peter Moser............. 11,000 11,000 --
Nancy Murdocco.......... 600 600 --
Robert & Barbara
Myerson................ 3,713 3,713 --
Namax Corp.............. 25,000 25,000 --
Irl Nathan.............. 25,000 25,000 --
Barry F. Nathanson...... 12,375 12,375 --
Jules Ness.............. 2,475 2,475 --
Allen Notowitz.......... 3,713 3,713 --
Jerry Novack............ 4,400 4,400 --
Adam & Sherri Ocner..... 9,625 9,625 --
Elizabeth Olander....... 1,000 1,000 --
Jeffrey R. Olander...... 30,000 30,000 --
Peter O'Neill........... 2,564 2,564 --
Peter & Rosemary
O'Neill................ 11,000 11,000 --
Walter O'Neill.......... 3,713 3,713 --
Bertram Ordan........... 1,238 1,238 --
KarenAnn Orlando........ 600 600 --
Anthony Pasco........... 688 688 --
Simon & Adina Pelman.... 3,713 3,713 --
Jonathan Plate.......... 3,713 3,713 --
Gabriel Plaut........... 127 127 --
Donald Poinsette........ 3,713 3,713 --
Paul Potamianos......... 6,600 6,600 --
John & Norma Price...... 2,200 2,200 --
Privet Row, Inc......... 34,375 34,375 --
Sheldon Rabin........... 9,213 9,213 --
Sol Rabinipour.......... 5,500 5,500 --
Edward Raskin........... 11,000 11,000 --
37
[Download Table]
Shares Owned
Prior to Shares Being Shares Owned
this Offered Pursuant After the
Name of Selling Stockholder(1) Offering(2) to this Prospectus Offering(3)
------------------------------ ------------ ------------------ ------------
David Raven...................... 37 37 --
Marsha & Barry Reiss............. 2,200 2,200 --
Stacey Richards.................. 1,650 1,650 --
Edwin W. Richardson.............. 3,300 3,300 --
Kevin Riegelsberger.............. 6,875 6,875 --
Ed Roberts....................... 5,000 5,000 --
Margaret Rogers.................. 13,750 13,750 --
Romar Fabrics Corp............... 3,300 3,300 --
John Rose........................ 6,875 6,875 --
David Rosensaft & Debra
Braverman....................... 22,000 22,000 --
Steven Rubel..................... 6,188 6,188 --
Pairoj Ruktanonichai............. 6,188 6,188 --
Richard Santulli c/o Executive
Jet............................. 11,000 11,000 --
David Schneider.................. 3,713 3,713 --
Thomas Schoenauer................ 2,475 2,475 --
Joel Schoenfeld.................. 3,713 3,713 --
Howard Shapiro................... 2,475 2,475 --
Michael L. Shinn................. 6,188 6,188 --
Alexander Slobin................. 3,300 3,300 --
Glenn H. Spears.................. 12,375 12,375 --
Jerold Stern..................... 13,200 13,200 --
Cindy Stewart.................... 16,775 16,775 --
Joseph & Sandra Stewart.......... 3,713 3,713 --
Melissa Stewart.................. 16,775 16,775 --
Sandra Stewart................... 3,438 3,438 --
Ronit Sucoff..................... 92,141 92,141 --
Iris Sultan...................... 325 325 --
Ronald Sumner.................... 4,400 4,400 --
David J. Tadych.................. 3,300 3,300 --
Trude Taylor..................... 6,875 6,875 --
Bruce Toll....................... 55,000 55,000 --
John Troiano(4).................. 16,500 16,500 --
Adrian F. Turcotte, III.......... 25,000 25,000 --
Susan Berzon Turcotte............ 25,000 25,000 --
William D. Turner................ 1,238 1,238 --
Harry Vidger..................... 3,713 3,713 --
Samuel Watts..................... 2,475 2,475 --
Joel & Sandra Wenacur............ 4,331 4,331 --
Susan & Theodore Wenacur......... 4,950 4,950 --
Dean Willard..................... 3,713 3,713 --
Stanton & Jennifer Williams...... 6,188 6,188 --
Xanadu Associates LLC............ 12,375 12,375 --
Alkis P. Zingas.................. 12,375 12,375 --
Simon Zunamon.................... 6,188 6,188 --
--------
(1) Each selling stockholder has sole voting and investment power with respect
to the Shares beneficially owned by such selling stockholder. All share
amounts reflect beneficial ownership determined pursuant to Rule 13d-3
under the Exchange Act. Unless otherwise indicated, each selling
stockholder beneficially owns less than 1% of our outstanding common stock.
(2) The Shares listed herein include only the shares issuable upon conversion
of the Series B convertible preferred stock and upon exercise of the Series
B warrants and options.
38
(3) Assumes all of the Shares of common stock beneficially owned by the selling
stockholders and registered hereunder are sold.
(4) Prior to this offering, @ONEX LLC beneficially owns 5.2% of our outstanding
common stock. John Troiano, a managing director @ONEX LLC, is a member of
our board of directors.
(5) Prior to this offering, Alignment Capital beneficially owns 1.3% of our
outstanding common stock.
(6) Prior to this offering, Robert Ganz beneficially owns 1% of our outstanding
common stock.
(7) Prior to this offering, Mark Grundy beneficially owns 1.2% of our
outstanding common stock.
(8) Adam McAfee is a brother of Eric McAfee, a director, officer and
significant stockholder.
39
DESCRIPTION OF SECURITIES
We are authorized to issue up to 30,000,000 shares of common stock, par
value $.001 per share, and 10,000,000 shares of preferred stock, par value
$.001 per share. We have designated 1,750,000 shares as Series B preferred
stock and 3 million shares as Series C preferred stock. As of February 29,
2000, there were issued and outstanding 9,692,295 shares of common stock,
1,388,073 shares of Series B preferred stock, options to purchase
2,802,100 shares of common stock and warrants to purchase 664,027 shares of
common stock. In addition, through March 24, 2000, we had issued 409,225 shares
of Series C preferred stock.
Common Stock
Common stockholders are entitled to one vote per share. Subject to the
preferences of outstanding preferred stock, common stockholders are entitled to
receive dividends, if and when they are declared by our Board of Directors. If
we go out of business and are liquidated, common stockholders will receive
their proportionate share of our assets that are available to be distributed,
after all other debts have been paid and the Preferred stockholders receive
their distribution. The common shares have no preemptive, subscription or
conversion rights nor may we redeem them.
Series A Preferred Stock
All shares of Series A preferred stock issued by our predecessor, Wireless
Netcom, were converted into shares of common stock upon the merger with
eCommercial California.
Series B and Series C Preferred Stock
The following is a brief summary of the rights, preferences, privileges and
restrictions and limitations of the Series B and Series C preferred stock (the
"Series B and Series C preferred") as more completely set forth in the
Certificate of Designation of the Company:
Dividends. Dividends will be payable with respect to the holders of Series B
and Series C preferred when and if declared by our Board of Directors and will
be non-cumulative. No dividends (other than those payable solely in common
stock) will be declared or paid with respect to shares of common stock for any
fiscal year until dividends in the aggregate amount of at least $0.90 and $2.25
per share, respectively, (as adjusted for any stock splits or
recapitalizations) have been paid or declared and set apart with respect to the
Series B and Series C preferred during such fiscal year.
Optional Conversion. The shares of Series B and Series C preferred held by
any holder may be converted into shares of common stock at any time upon the
stockholder's election. The total number of shares of common stock into which a
share of Series B and Series C preferred may be converted shall be determined
by dividing the purchase price by the conversion price applicable to the
conversion of the Series B and Series C preferred (the "Conversion Price"). The
Conversion Price is currently equal to the purchase price, resulting in a
conversion ratio of one-to-one, but will be adjusted in the event of stock
splits, stock dividends, recapitalizations and similar events occurring with
respect to our capital stock. The Conversion Price will also be subject to
adjustment in the event of certain dilutive issuances of capital stock of the
Company.
Automatic Conversion. The shares of Series B preferred will be automatically
converted into shares of common stock at the then-effective Conversion Price
upon:
. the effective date of a firm commitment, underwritten offering of common
stock pursuant to an effective registration statement under the
Securities Act, other than a registration relating solely to a
transaction under Rule 145 of the Securities Act (or any successor
thereto) or to any of our employee benefit plans, generating aggregate
proceeds to the Company of not less than $15,000,000 (after deducting
underwriters' discounts and all expenses relating to the offering) and
with a per share offering price (prior to underwriters' discounts and
expenses) of not less than $15.00 per share, as such per share price may
be adjusted to reflect stock subdivisions, combinations or dividends
with respect to such shares; or
. the date specified by affirmative vote or written consent or agreement
of the holders of not less than two-thirds (2/3) of the then-outstanding
shares of Series B preferred.
40
The shares of Series C preferred will be automatically converted into shares
of Common Stock at the then-effective Conversion Price upon:
. the effective date of a firm commitment, underwritten offering of Common
Stock pursuant to an effective registration statement under the
Securities Act, other than a registration relating solely to a
transaction under Rule 145 of the Securities Act (or any successor
thereto) or to any employee benefit plan of the Company, generating
aggregate proceeds to the Company of not less than $25,000,000 (after
deducting underwriters' discounts and expenses) of not less than $40.00
per share, as such per share price may be adjusted to reflect stock
subdivisions, combinations or dividends with respect to such shares; or
. the date specified by affirmative vote or written consent or agreement
of the holder of not less than two-thirds (2/3) of the then-outstanding
shares of Series C preferred.
Antidilution Protection. If at any time while any shares of Series B and
Series C preferred are outstanding the Company issues any capital stock (which
includes options to acquire our capital stock and instruments convertible into
our capital stock) without consideration or for consideration per share with a
value less than the then-effective Conversion Price, then the Conversion Price
shall be adjusted concurrently with such issue to a price (calculated to the
nearest cent) determined by multiplying such Conversion Price by a fraction,
the numerator of which shall be the number of shares of common stock
outstanding immediately prior to such issue (on a fully diluted basis) plus the
number of shares of common stock which the aggregate consideration received by
us for the newly-issued capital stock would purchase at the Conversion Price in
effect immediately prior to such issue, and the denominator of which shall be
the number of shares of common stock outstanding immediately prior to such
issue (on a fully diluted basis) plus the number of additional shares of
capital stock so issued; provided, however, that no such adjustment to the
Conversion Price shall be made with respect to:
. issuances to our employees, consultants, officers and directors pursuant
to stock purchase or stock option plans or agreements or other incentive
stock arrangements approved by our Board of Directors;
. issuances as consideration in connection with mergers, acquisitions or
other business combinations; or
. issuances in connection with strategic investments, licensing
arrangements or debt or equipment financings approved by our Board of
Directors.
Voting Rights. Holders of shares of Series B and Series C preferred are
entitled to vote on all matters submitted to a vote of our stockholders. Each
share of Series B and Series C preferred entitles the holder to that number of
votes equal to the number of shares of common stock into which such share of
Series B and Series C preferred is convertible as of the record date
established for the vote of our stockholders. Fractional votes will not,
however, be permitted, and any fractional voting rights resulting from the
above formula (after aggregating all shares of Common Stock into which shares
of Series B and Series C preferred held by each holder could be converted) will
be rounded to the nearest whole number (with one-half being rounded upward).
Except with respect to the two seats on the Board of Directors allocated to the
purchasers of the Series B preferred or as required by law, the Series B
preferred will vote together with the common stock and not as a separate class.
Board Seats. The Company's Certificates of Designation provides for a Board
of Directors that consists of a minimum of three (3) and up to seven (7)
members. Promptly following the Offering Termination Date, the holders of the
Shares will be entitled to elect two persons to serve on the Company's Board of
Directors upon the terms and conditions set forth in the Investors' Rights
Agreement that is to be entered into between the Company and the purchasers of
the Securities and that is a part of the Subscription Booklet attached as
Exhibit "A" hereto.
41
Protective Covenants. So long as shares of Series B and Series C preferred
remain outstanding and for such further period as may be required by law, we
will not, without first obtaining the affirmative vote or written consent of
the holders of at least a majority of the then outstanding Series B and Series
C preferred voting separately as a class:
. sell, convey or otherwise dispose of all or substantially all of our
assets, merge with or consolidate the Company into another entity, or
engage in any other form of corporate reorganization or recapitalization
that would require the vote of our shareholders under applicable law;
. increase the number of authorized shares of Series B and Series C
preferred (except as a result of a stock split or combination);
. effect an exchange, reclassification or cancellation of all or a part of
the shares of Series B and Series C preferred (except as a result of a
stock split or combination);
. effect an exchange, or create a right of exchange, of all or part of the
shares of another class into shares of Series B and Series C preferred;
. alter or change the rights, preferences, privileges and restrictions of
the Series B and Series C preferred;
. authorize or issue shares of any class of stock having any rights,
preferences or privileges superior to any such right, preference or
privilege of the Series B and Series C preferred;
. authorize or issue shares of stock of any class or any bonds,
debentures, notes or other obligations convertible or exchangeable for,
or having option rights to purchase, any shares of our stock having any
rights, preferences or privileges superior to any right, preference or
privilege of the Series B and Series C preferred; or
. reclassify any other outstanding shares of stock into shares having any
right, preference or privilege superior to any such preference or
priority of the Series B and Series C preferred.
Stock Dividends, Subdivisions and Consolidations. In the event we declare or
pay any dividend on the common stock payable in shares of common stock, or
effect a subdivision or consolidation of the outstanding shares of common stock
into a greater or lesser number of shares of common stock, then the number of
shares of common stock issuable upon conversion of the Series B and Series C
preferred shall be adjusted accordingly.
Notices of Record Date. In the event that the Company shall propose at any
time to:
. declare any dividend or distribution upon the Common Stock other than
the distributions to shareholders in connection with the repurchase of
shares of former employees or consultants to which at least a majority
of the holders of Series B and Series C preferred have consented;
. to offer for subscription to the holders of any class or series of its
capital stock any additional shares of stock of any class or series or
any other rights;
. to effect any reclassification or recapitalization; or
. to merge or consolidate with or into any other corporation, or sell,
lease or convey all or substantially all its property or business, or to
liquidate, dissolve or wind up; then the Company will send to the
holders of the Series B and Series C preferred, at least 10 days' prior
written notice of the date on which a record shall be taken for such
dividend, distribution, or subscription rights and on which such even
shall take place.
No Impairment. We will not, by amendment of the Certificate of Designation
or through any reorganization, transfer of assets, consolidation, merger,
dissolution, issuance or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or
42
performed by us with respect to the Series B and Series C preferred but will at
all times in good faith assist in the carrying out of all the provisions of the
Certificate of Designation relating to conversion and in the taking of all such
action as may be necessary or appropriate in order to protect the conversion
rights of the holders of the Series B preferred and Series C preferred against
impairment.
Redemption. Shares of Series B and Series C preferred are not redeemable by
us.
Liquidation Preference. In the event of any liquidation, dissolution or
winding up of the Company for an aggregate value of less than $40.00 per share,
either voluntary or involuntary, the holders of the Series B and Series C
preferred shall be entitled to receive, prior and in preference to any
distribution to the holders of the common stock, the amount of $9.00 and
$25.00, respectively, per share (or as such amount shall be adjusted to reflect
subdivisions and combinations of shares and stock dividends) for each share of
Series B and Series C preferred then held by them plus an amount equal to all
accrued and unpaid dividends (the "Liquidation Amount"). If upon occurrence of
any such liquidation, dissolution or winding up the assets and funds available
for distribution among the holders of the Series B and Series C preferred shall
be insufficient to permit the payment of the full Liquidation Amount, then such
assets and funds shall be distributed ratably among the holders of the Series B
preferred in proportion to their respective holdings of Series B and Series C
preferred. After full payment of the Liquidation Amount has been made to the
holders of the Series B and Series C preferred, the remaining assets of the
Company, if any, shall be distributed ratably among the holders of the common
stock.
A liquidation, dissolution or winding up of the Company shall be deemed to
be occasioned by, or to include, a consolidation, merger or reorganization of
the Company with or into any other corporation or entity in which the holders
of our outstanding capital stock immediately before that consolidation, merger
or reorganization do not retain a majority of the voting power in the surviving
corporation immediately thereafter, or a sale, conveyance or disposition of all
or substantially all of our assets.
Registration Rights. Subject to certain restrictions set forth in the
Investors' Rights Agreement, if at any time after the Offering Termination Date
the Company files a registration statement, other than a registration solely to
a corporate reorganization or other transaction on Form S-4 (or any successor
thereto) or to any employee benefit plan of the Company or a registration on
any registration form that does not permit secondary sales, with the
Commission, the holder of the Shares and the holders of Registrable Securities
will be entitled to include any of the Registrable Securities held by such
persons in such registration up to a maximum of three such "piggy-back"
registrations and no more than one such registration in any twelve-month
period. In the event that any of such registrations are underwritten, the
number of shares of Registrable Securities that the holders thereof may include
in such a piggyback registration may be reduced in the underwriters of such
registration determine that market factors require such a reduction.
Subject to certain restrictions set forth in the Investors' Rights
Agreement, at any time after the expiration of one (1) year following the
closing of the initial underwritten offering of our common stock, the holders
of Registrable Securities will be entitled to request that we file a
registration statement on Form S-3 with the Commission covering the shares of
Registrable Securities held by such holders, provided that the aggregate amount
of Registrable Securities to be registered on such Form S-3 shall have an
aggregate price to the public of not less than $1,000,000. In the event that
any of such registrations are underwritten, the number of shares of Registrable
Securities that the holders thereof may include in such a Form S-3 registration
may be reduced if the underwriters of such registration determine that market
factors require such a reduction.
In the event that all Registrable Securities are not sold in our
underwritten offering, the holders of Registrable Securities not sold may be
required to execute "lock-up" agreements pursuant to which they will agree not
to transfer or otherwise dispose of any Registrable Securities for a period of
up to 180 days from the date of commencement of such underwritten offering
without the prior written consent of the managing underwriter of such offering.
43
Warrants
We have outstanding warrants to purchase common stock prices ranging from
$0.10 to $11.25 per share, expiring at various dates through October 2004. The
warrants for shares registered under this Registration Statement include
warrants for 396,941 shares issuable at $8 per share expiring at various dates
from August through November 2001, 250,000 shares issuable at $7 per share
expiring in October 2004, and 15,000 shares issuable at $11.25 per share
expiring in 2001.
Shares Eligible for Sale
Sales of a substantial number of shares of common stock in the public market
could adversely affect the market price for our common stock. The number of
shares of common stock available for sale in the public market is limited by
restrictions under the Securities Act of 1933, as amended (the "Securities
Act"). As of February 29, 2000, there were 9,692,295 shares of common stock
outstanding, of which 7,604,592 were "restricted shares" under the Securities
Act and 2,087,703 were freely tradable subject to the restrictions and
conditions of SEC Rule 144. In addition, as of February 29, 2000, there were
outstanding warrants to purchase 664,027 shares of our common stock and options
to purchase 2,802,100 shares of our common stock.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is RTT Transfers, Inc.
LEGAL MATTERS
The validity of the issuance of our securities will be passed upon for us by
Gray Cary Ware & Freidenrich, LLP, Sacramento, California. Certain partners of
Gray Cary Ware & Freidenrich, LLP own an aggregate of 2,000 shares of our
stock.
EXPERTS
The financial statements appearing in this Prospectus have been audited by
Grant Thornton LLP, independent certified public accountants, to the extent and
for the periods set forth in their report appearing elsewhere herein, and are
included in reliance upon such report given upon the authority of said firm as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed, with the Securities and Exchange Commission, a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered hereby. This prospectus does not contain all of the information in the
registration statement, the exhibits and schedules. For more information about
our common stock and us, please refer to the registration statement, exhibits
and schedules. Statements made in this prospectus as to the contents of any
contract, agreement or other documents filed as an exhibit are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the registration statement, reference is made to the exhibit
for a more complete description of the matter involved.
The registration statement, exhibits and schedules may be inspected without
charge and copied at the public reference facilities maintained by the SEC in
Room 1024, 450 Fifth Street, NW, Washington, D.C. 20549, and at the SEC's
regional offices located at Citicorp Center, 500 West Madison, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of such material may be obtained from such offices upon the
payment of the fees prescribed by the SEC. The SEC phone number is 1-800-SEC-
0330.
In addition, the SEC maintains a website that contains registration
statements, reports, proxy and other information regarding registrants that
file electronically with the Securities and Exchange Commission. The address
for the website is http://www.sec.gov.
44
MindArrow Systems, Inc. and Subsidiary
INDEX TO FINANCIAL STATEMENTS
[Download Table]
Report of Independent Certified Public Accountants......................... F-2
Financial Statements:
Consolidated Balance Sheets, September 30, 1999 and December 31, 1999..... F-3
Consolidated Statements of Operations, Period from Inception (March 26,
1999) to September 30, 1999 and the three months ended December 31,
1999..................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity, Period from
Inception (March 26, 1999) to September 30, 1999 and the three months
ended December 31, 1999.................................................. F-5
Consolidated Statements of Cash Flows, Period from Inception (March 26,
1999) to September 30, 1999 and the three months ended December 31,
1999..................................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
F-1
Report of Independent Certified Public Accountants
Board of Directors
MindArrow Systems, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of MindArrow
Systems, Inc. and Subsidiary (a development stage company) as of September 30,
1999, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the period from inception (March 26, 1999) through
September 30, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MindArrow
Systems Inc. and Subsidiary as of September 30, 1999, and the consolidated
results of their operations and their consolidated cash flows for the period
from inception (March 26, 1999) through September 30, 1999 in conformity with
generally accepted accounting principles.
Grant Thornton LLP
Reno, Nevada
October 25, 1999 (Except for the second paragraph
of Note H-1, as to which the date is November 5, 1999,
and the third paragraph of Note H-1, as to which the date is March 24, 2000)
F-2
MindArrow Systems, Inc. and Subsidiary
(a development stage company)
CONSOLIDATED BALANCE SHEETS
[Download Table]
September 30, December 31,
1999 1999
------------- ------------
(unaudited)
ASSETS
Current Assets:
Cash................................................ $ 4,744,741 $ 4,661,219
Accounts receivable................................. 25,500 52,549
Prepaid expenses.................................... 108,961 184,744
Other current assets................................ 14,941 15,364
----------- -----------
Total current assets............................... 4,894,143 4,913,876
Cash, pledged........................................ 233,890 263,820
Fixed Assets, net ................................... 936,336 1,494,238
Intangible Assets, net .............................. 744,797 750,460
Deposits............................................. 76,975 49,338
----------- -----------
Total assets....................................... $ 6,886,141 $ 7,471,732
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities............ $ 312,178 $ 419,868
Customer deposits................................... 30,500 55,500
Judgement payable from acquired company............. 1,800,000 1,800,000
Accounts payable remaining from acquired companies.. 400,412 318,809
----------- -----------
Total current liabilities.......................... 2,543,090 2,594,177
----------- -----------
Stockholders' Equity:
Series B Convertible Preferred Stock, $0.001 par
value; 2,000,000 shares authorized; 1,085,573 and
1,388,073 shares issued and outstanding as of
September 30, 1999 and December 31, 1999;
$8,684,584 and $11,104,584 aggregate liquidation
preference as of September 30, 1999 and
December 31, 1999.................................. 1,086 1,388
Common Stock, $0.001 par value; 20,000,000 shares
authorized; 9,536,623 and 9,585,583 shares issued
and outstanding as of September 30, 1999 and
December 31, 1999 ................................. 9,537 9,586
Additional paid-in capital.......................... 7,211,449 9,680,990
Deficit accumulated during the development stage.... (2,284,546) (4,263,334)
Unearned stock-based compensation................... (594,475) (551,075)
----------- -----------
Total stockholders' equity......................... 4,343,051 4,877,555
----------- -----------
$ 6,886,141 $ 7,471,732
=========== ===========
The accompanying notes are an integral part of these statements.
F-3
MindArrow Systems, Inc. and Subsidiary
(a development stage company)
CONSOLIDATED STATEMENTS OF OPERATIONS
[Download Table]
For the period Cumulative
from inception Three Months from inception
(March 26, 1999) Ended (March 26, 1999)
to September 30, December 31, to December 31,
1999 1999 1999
---------------- ------------ ----------------
(Unaudited) (Unaudited)
Revenues...................... $ 6,250 $ 29,390 $ 35,640
----------- ----------- -----------
Operating expenses:
Development.................. 320,766 385,651 706,417
Production................... 139,674 164,814 304,488
Sales and marketing.......... 1,060,795 715,090 1,775,885
General and administration... 684,343 671,223 1,355,566
Depreciation and
amortization................ 107,892 122,069 229,961
----------- ----------- -----------
2,313,470 2,058,847 4,372,317
----------- ----------- -----------
Operating loss................ (2,307,220) (2,029,457) (4,336,677)
Interest income............... 24,274 52,269 76,543
Provision for income taxes.... (1,600) (1,600) (3,200)
----------- ----------- -----------
Net loss.................... $(2,284,546) $(1,978,788) $(4,263,334)
=========== =========== ===========
Basic and diluted loss per
share........................ $ (0.26) $ (0.21) $ (0.47)
=========== =========== ===========
Shares used in computation of
basic and diluted loss per
share........................ 8,751,760 9,556,737 9,016,188
=========== =========== ===========
The accompanying notes are an integral part of these statements.
F-4
MindArrow Systems, Inc. and Subsidiary
(a development stage company)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
[Enlarge/Download Table]
Deficit
Series B Accumulated
Preferred Stock Common Stock Additional During the Unearned
---------------- ------------------- Paid-In Subscriptions Development Stock-Based
Shares Amount Shares Amount Capital Receivable Stage Compensation Total
--------- ------ ---------- ------- ----------- ------------- ----------- ------------ -----------
Balance, March
26, 1999....... -- $ -- -- $ -- $ -- $ -- $ -- $ -- $ --
Sale of common
stock, net of
issuance
costs.......... -- -- 4,000,000 4,000 595 -- -- -- 4,595
Issuance of
common stock
for acquisition
of Zap
International,
Inc. .......... -- -- 2,640,000 2,640 -- -- -- -- 2,640
Reclassifications
of $.001 common
stock.......... -- -- (6,640,000) (6,640) (595) -- -- -- (7,235)
Issuance of
$.001 common
stock in
connection with
reclassification
of equity...... -- -- 8,758,033 8,758 595 -- -- -- 9,353
Assumption of
liabilities and
subscription
receivable in
connection with
recapitalization.. -- -- -- -- (2,570,000) (47,000) -- -- (2,617,000)
Sale of common
stock, net of
issuance
costs.......... -- -- 475,118 475 941,929 -- -- -- 942,404
Issuance of
common stock
pursuant to
exercise of
warrants....... -- -- 233,613 234 23,123 -- -- -- 23,357
Issuance of
common stock at
a discount as
compensation
for services... -- -- 39,859 40 54,028 -- -- -- 54,068
Issuance of
common stock as
compensation
for services... -- -- 30,000 30 239,970 -- -- -- 240,000
Sales of
preferred
stock, net of
issuance
costs.......... 1,085,573 1,086 -- -- 7,759,406 -- -- -- 7,760,492
Compensation
expense on
option and
warrant
grants......... -- -- -- -- 167,923 -- -- -- 167,923
Unearned
compensation on
option and
warrant
grants......... -- -- -- -- 594,475 -- -- (594,475) --
Collection of
subscriptions
receivable..... -- -- -- -- -- 47,000 -- -- 47,000
Net loss........ -- -- -- -- -- -- (2,284,546) -- (2,284,546)
--------- ------ ---------- ------- ----------- -------- ----------- --------- -----------
Balance,
September 30,
1999........... 1,085,573 1,086 9,536,623 9,537 7,211,449 -- (2,284,546) (594,475) 4,343,051
Sales of
preferred
stock, net of
issuance
costs.......... 302,500 302 -- -- 2,392,679 -- -- -- 2,392,679
Issuance of
common stock
pursuant to
exercise of
options and
warrants....... -- -- 48,960 49 472 -- -- -- 521
Compensation
expense on
option and
warrant
grants......... -- -- -- -- 76,390 -- -- 43,400 119,790
Net loss........ -- -- -- -- -- -- (1,978,788) -- (1,978,788)
--------- ------ ---------- ------- ----------- -------- ----------- --------- -----------
Balance,
December 31,
1999
(Unaudited).... 1,388,073 $1,388 9,585,583 $ 9,586 $ 9,680,990 $ -- $(4,263,334) $(551,075) $ 4,877,555
========= ====== ========== ======= =========== ======== =========== ========= ===========
The accompanying notes are an integral part of these statements.
F-5
MindArrow Systems, Inc. and Subsidiary
(a development stage company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
[Download Table]
For the
period from For the
inception three Cumulative From
(March 26, months Inception
1999) to ended (March 26, 1999)
September 30, December to December 31,
1999 31, 1999 1999
------------- ----------- ----------------
(unaudited) (unaudited)
Cash flows from operating
activities:
Net loss.......................... $(2,284,546) $(1,978,788) $(4,263,334)
Adjustments to reconcile net loss
to net cash used in operations:
Depreciation and amortization.... 107,892 122,069 229,961
Non-cash charges due to stock
issuances....................... 294,068 -- 294,068
Non-cash charges due to stock
option and warrant grants....... 167,923 119,790 287,713
Increase in accounts receivable.. (24,500) (27,049) (51,549)
Increase in prepaid expenses..... (98,743) (75,783) (174,526)
Increase in other current
assets.......................... (14,941) (423) (15,364)
Decrease (Increase) in deposits.. (76,975) 27,637 (49,338)
Increase (Decrease) in accounts
payable and accrued
liabilities..................... (113,866) 107,690 (6,176)
Decrease in accounts payable from
acquired companies.............. -- (81,603) (81,603)
Increase in customer deposits.... 30,500 25,000 55,500
----------- ----------- -----------
Net cash used in operations..... (2,013,188) (1,761,460) (3,774,648)
----------- ----------- -----------
Cash flows from investing
activities:
Increase in cash--pledged......... (233,890) (29,930) (263,820)
Cash acquired in acquisition...... 2,898 -- 2,898
Purchases of fixed assets......... (987,915) (653,025) (1,640,940)
Purchases of patents and
trademarks....................... (44,226) (32,609) (76,835)
----------- ----------- -----------
Net cash used in investing
activities..................... (1,263,133) (715,564) (1,978,697)
----------- ----------- -----------
Cash flows from financing
activities:
Principal payments on notes
payable.......................... (756,786) -- (756,786)
Payment received on subscriptions
receivable....................... 47,000 -- 47,000
Proceeds from issuance of
preferred stock.................. 7,760,492 2,392,981 10,153,473
Proceeds from issuance of common
stock............................ 970,356 -- 970,356
Proceeds from warrant exercises... -- 521 521
----------- ----------- -----------
Net cash provided by financing
activities..................... 8,021,062 2,393,502 10,414,564
----------- ----------- -----------
Net Increase (Decrease) in cash.... 4,744,741 (83,522) 4,661,219
Cash, beginning of period.......... -- 4,744,741 --
----------- ----------- -----------
Cash, end of period................ $ 4,744,741 $ 4,661,219 $ 4,661,219
=========== =========== ===========
Cash paid for income taxes......... $ -- $ -- $ --
=========== =========== ===========
Cash paid for interest............. $ -- $ -- $ --
=========== =========== ===========
Supplemental disclosure of noncash
investing and financing
activities:
The Company acquired its
subsidiary (Zap International,
Inc.) for 2,640,000 shares of
common stock..................... $ 2,640 $ -- $ 2,640
=========== =========== ===========
Assumption of liabilities in
connection with
recapitalization................. $(2,570,000) $ -- $(2,570,000)
=========== =========== ===========
The accompanying notes are an integral part of these statements.
F-6
MindArrow Systems, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 (data relating to December 31, 1999 is unaudited)
Note A--The Company and Summary of Significant Accounting Policies
MindArrow Systems, Inc., a Delaware corporation ("MindArrow" or the
"Company"), develops and markets proprietary interactive sales and marketing
automation ("SMA") systems, the goal of which is to enhance profitability of
the Company's customers and improve their customer relationships.
The Company's proprietary technology enables companies to deliver highly
compressed, rich content, multimedia files as email attachments that combine
high quality audio and video, graphics, animation, chat, hypertext links, and
telecommunication links (an "eCommercial"). This asynchronous delivery and
compression technology embedded in an eCommercial provides very high response
rates without requiring online connectivity.
The Company was founded on March 26, 1999 and incorporated as
eCommercial.com, Inc., a California corporation, on April 9, 1999.
On April 16, 1999, the Company acquired all of the outstanding common stock
of Zap International, ("Zap"), in exchange for 2,640,000 shares of Common
Stock. The transaction was recorded using the purchase method of accounting
(see Note F). Pro forma disclosures are not meaningful as Zap did not have
significant operations.
On April 19, 1999, Wireless Netcom, Inc. (a non-operating Nevada
corporation) acquired all of the outstanding shares of the Company. For
accounting purposes, the acquisition is treated as a recapitalization with the
Company as the acquirer (a reverse acquisition). Pro forma information is not
presented since the transaction is not a business combination (see Note F).
Effective March 31, 2000, the Company changed its name from eCommercial.com,
Inc. to MindArrow Systems, Inc. and its state of incorporation from Nevada to
Delaware. There was no impact to the Company's financial condition or results
of operations as a result of the reincorporation and name change.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany balances and
transactions have been eliminated.
2. Interim Financial Statements
The financial statements for the three months ended December 31, 1999 are
unaudited; however, in the opinion of management, all adjustments, consisting
of normal recurring adjustments necessary for a fair presentation of the
Company's financial position and results of operations for such period have
been included. The results for the three months ended December 31, 1999 are not
necessarily indicative of the results that may be expected for the year ending
September 30, 2000.
3. Revenue Recognition
The Company's revenues are derived from the production and delivery of
eCommercials as a part of comprehensive direct-response advertising campaigns
developed for each of its customers. eCommercials are delivered to targeted
email subscribers through email subscriber programs utilizing the Company's
unique personalization technology. The Company's eCommercial production
services include theme development, eCommercial design and layout, video
production, special effects, link recommendations, hyperlink page design
F-7
MindArrow Systems, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and creation, reporting and sales cycle consultation. Revenue for consultation
and production services is recognized when the services are rendered. Revenue
for delivery services is recognized when the eCommercials are delivered.
Revenues from sponsorship arrangements will be recognized at the time of
delivery. Revenues from revenue-sharing arrangements will be recognized as
transactions are completed.
Customers are generally billed in advance of production and delivery of
eCommercials. Accordingly, customer deposits include the customer prepayments
less the portion of service that has been completed.
4. Product Development
The company expenses costs associated with software developed or obtained
for internal use in the preliminary project stage and, thereafter, capitalizes
costs incurred in the developing or obtaining of internal use software.
Capitalized costs are amortized over their useful life. Periodically,
management evaluates the estimated useful life of intangible assets based upon
projected future undiscounted cash flows. Other costs incurred in the research
and development of new products and enhancements to existing products are
charged to expense as incurred.
5. Depreciation and Amortization
Property and equipment, including leasehold improvements, are stated at cost
and depreciated using the straight-line method over the estimated useful lives
of the assets, generally two to five years. Goodwill, patents, and trademarks
are included in intangible assets and carried at cost less accumulated
amortization, which is being provided on a straight-line basis over the
economic lives of the respective assets, generally seven years. The Company
periodically evaluates the recoverability of its long-lived assets based on
expected undiscounted cash flows and recognizes impairments, if any, based on
expected discounted future cash flows.
6. Income Taxes
Income taxes are computed using the asset and liability method. Under the
asset and liability method, deferred income tax assets and liabilities are
determined based on the differences between the financial reporting and tax
bases of assets and liabilities and are measured using the currently enacted
tax rates and laws. A valuation allowance is provided for the amount of
deferred tax assets that, based on available evidence, are not expected to be
realized.
At September 30, 1999, the Company has a deferred tax asset of approximately
$342,000 resulting from net operating loss for the period March 26, 1999
through September 30, 1999. The Company has provided for a valuation allowance
of $342,000 at September 30, 1999. The Provision for Income taxes on the
accompanying Consolidated Statement of Operations represents the minimum
California franchise tax.
7. Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation." Under APB 25, compensation
expense is recognized over the vesting period based on the difference, if any,
on the date of grant between the fair value of the Company's stock and the
amount an employee must pay to acquire the stock.
F-8
MindArrow Systems, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted average
number of common shares outstanding during the period. Diluted net income
(loss) per share is computed using the weighted average number of common and
common equivalent shares outstanding during the period. Common equivalent
shares consist of the incremental common shares issuable upon conversion of
convertible preferred stock (using the if-converted method) and shares issuable
upon the exercise of stock options and warrants (using the treasury stock
method). Common equivalent shares were excluded from the computation as their
effect was anti-dilutive (see Note H).
9. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those estimates.
10. Cash and Cash Equivalents
All highly liquid instruments with an original maturity of three months or
less are considered cash equivalents, those with original maturities greater
than three months and current maturities less than twelve months from the
balance sheet date are considered short-term investments, and those with
maturities greater than twelve months from the balance sheet date are
considered long-term investments.
As of September 30, 1999, the Company had a Certificate of Deposit account
that was pledged to collateralize an irrevocable letter of credit related to
the lease for the Company's headquarters. The letter of credit amount will
decrease by 50% in December 2000 and expire in December 2001. Additionally in
December 1999 a second Certificate of Deposit was pledged related to the New
York office space. The pledged cash is carried as a long-term asset on the
accompanying consolidated balance sheet.
11. Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash, cash equivalents, and
accounts receivable. Substantially all of the Company's cash and cash
equivalents are held in one financial institution. As of September 30, 1999 and
December 31, 1999, the carrying amount of cash in bank was $4,978,631 and
$4,925,039, and the bank balance was $5,239,321 and $5,009,458, of which
$100,000 was FDIC insured. Accounts receivable are typically unsecured and are
derived from revenues earned from customers primarily located in the United
States. The Company performs ongoing credit evaluations of its customers and
will maintain reserves for potential credit losses as the need arises.
12. Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
130, "Reporting Comprehensive Income," which has been adopted by the Company.
SFAS 130 establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined includes
all changes in equity (net assets) during a period from non-owner sources.
Examples of items to be included in comprehensive income, which are excluded
from net income, include foreign currency translation
F-9
MindArrow Systems, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
adjustments and unrealized gains and losses on available-for-sale securities.
As none of these components have impacted the Company, adjustments for
comprehensive income have not been made to the accompanying consolidated
financial statements.
13. Segments
In June 1997, the FASB issued SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information," which establishes standards for the way
companies report information about operating segments in annual financial
statements. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The Company
believes that it does not operate in more than one segment.
14. Fair Value of Financial Instruments
The fair value of financial instruments approximates their carrying amounts.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133), and in July 1999 issued Financial
Accounting Standard No. 137,"Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133, an
Amendment of FASB Statement No. 133" (SFAS 137). SFAS 137 delayed the effective
date for SFAS 133 to fiscal years beginning after June 15, 2000. The Company
does not believe that this statement will have a material effect on its
financial position or results of operations.
Note B--Development Stage
From inception (March 26, 1999) to December 31, 1999, the Company was a
development-stage company. In January 2000, significant principal operations
commenced. As shown in the accompanying financial statements, the Company
incurred a net loss of $2,284,546 for the period ended September 30, 1999 and
$1,978,788 for the three months ended December 31, 1999 and did not have
significant revenues. The future of the Company is dependent upon its ability
to generate sufficient cash flows from revenues to cover operating costs. Until
such time, however, the Company expects to seek financing through a combination
of private placements and/or public offerings. There is no assurance, however,
that such plans will be completed or, if completed, will generate sufficient
funds to enable the Company to meet its obligations as they come due. As of
March 24, 2000, the Company had issued 409,025 shares of Series C Preferred
Stock for $25 per share. Net proceeds were $10,225,625 (see Note H-1).
F-10
MindArrow Systems, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note C--Fixed Assets
Fixed assets, at cost, consist of the following:
[Download Table]
September 30, December 31,
1999 1999
------------- ------------
(Unaudited)
Computer equipment................................... $668,361 $ 944,734
Office equipment..................................... 10,723 18,975
Furniture and fixtures............................... 118,246 147,522
Leasehold improvements............................... -- 362,036
Production equipment................................. -- 140,630
Software............................................. 21,451 33,927
-------- ----------
818,781 1,647,824
Less accumulated depreciation........................ (58,463) (153,586)
-------- ----------
760,318 1,494,238
Construction in progress............................. 176,018 --
-------- ----------
$936,336 $1,494,238
======== ==========
Note D--Intangible Assets
Intangible assets consist of the following:
[Download Table]
September 30, December 31,
1999 1999
------------- ------------
(Unaudited)
Patents and trademarks............................... $ 44,226 $ 76,835
Goodwill............................................. 750,000 750,000
-------- --------
794,226 826,835
Less accumulated amortization........................ (49,429) (76,375)
-------- --------
$744,797 $750,460
======== ========
Note E--Commitments and Contingencies
1. Operating Leases
In June 1999, the Company entered into a non-cancelable five-year operating
lease for its primary facilities in Aliso Viejo, California and took occupancy
in December 1999. Rent expense increased to $29,642 per month through May 2002
and $30,878 per month through the remaining term of the lease, which expires in
November 2004. The lease contains a five-year renewal option from the date of
expiration.
F-11
MindArrow Systems, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In September 1999, the Company entered into a non-cancelable five-year
sublease for a satellite office in Cupertino, California. The lease calls for
minimum monthly rental payments ranging from $10,091 per month at the start of
the lease and gradually increasing to $13,358 per month by the end of the
lease. The sublessor is a company related to two significant stockholders, one
of whom is an officer and director of the Company. The sublease terms are
identical to the terms of the sublessor's lease with the landlord, and are
favorable to the terms the Company would have been able to acquire on its own.
The minimum lease payments for operating leases for the years ending
September 30 are as follows:
[Download Table]
Year ending September 30,
-------------------------
2000............................................................. $ 459,896
2001............................................................. 506,972
2002............................................................. 518,305
2003............................................................. 529,629
2004............................................................. 519,668
Thereafter....................................................... 61,755
----------
$2,596,225
==========
Rent expense for the period from inception (March 26, 1999) to September 30,
1999 amounted to $43,148.
Rent expense for the three months ended December 31, 1999 amounted to $108,761.
2. Legal Proceedings
From time to time the Company is subject to legal proceedings and claims in
the ordinary course of business, including claims of alleged infringement of
trademarks, copyrights and other intellectual property rights. Except as
described below, the Company is not currently aware of any legal proceedings or
claims that the Company believes will have, individually or in the aggregate, a
material adverse effect on the Company's consolidated financial position or
results of operations.
The Company has been named as a defendant in an action seeking damages, (the
"Voxel Claim") in connection with an Asset Purchase Agreement, dated as of
November 25, 1998, pursuant to which Wireless Netcom, Inc. had proposed to
acquire the assets of Voxel, Inc. The Company has accrued $1.8 million in
estimated damages as a portion of the liabilities assumed during the
recapitalization. Pursuant to an indemnity agreement, a significant
shareholder, who is also an officer and director, has agreed to reimburse the
Company in common stock or cash, at his option, any amounts paid to the
plaintiffs. Any reduction in the amount due or any amounts received in
reimbursement will be recorded as additional paid-in capital at the time such
amounts are received.
In October 1999, the court ruled in favor of the plaintiffs and awarded them
$1.8 million in damages. In January 2000 the Company appealed the judgement and
pledged a $2 million Certificate of Deposit with the court.
Note F--Acquisition
1. Acquisition of Zap International, Inc.
On April 16, 1999, the Company completed the acquisition of all outstanding
shares of Zap International, Inc. ("Zap"), for 2,640,000 shares of Common
Stock. Zap was a software company which had developed technology that enabled
generation of highly compressed multimedia files that combine audio, video,
graphics and hypertext links, and form the foundation of eCommercials. The
acquisition was accounted for as a
F-12
MindArrow Systems, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
purchase. Under the purchase method of accounting, the purchase price is
allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the date of the acquisition. Zap is now a wholly owned
subsidiary of the Company.
The total purchase price of the acquisition was $2,640, which is 2,640,000
shares at a value of $.001. The purchase price was allocated to the assets
acquired and liabilities assumed based on their estimated fair values. Goodwill
has resulted from the excess costs over fair value of net assets acquired.
[Download Table]
Goodwill.......................................................... $ 750,000
Tangible assets acquired.......................................... 1,000
Liabilities assumed............................................... (748,360)
---------
$ 2,640
=========
Goodwill is being amortized on a straight-line basis over seven years.
Amortization expense of goodwill was $49,107 for the period from inception
(March 26, 1999) to September 30, 1999 and $26,786 for the three months ended
December 31, 1999.
2. Recapitalization
On April 19, 1999, Wireless Netcom, Inc. (a Nevada corporation) acquired all
of the outstanding common stock of the Company. For accounting purposes, the
acquisition is treated as a recapitalization with the Company as the acquirer
(a reverse acquisition). Pro forma information is not presented since the
transaction is not a business combination. The founding stockholders of
eCommercial.com., Inc. exchanged their common stock for 6,640,000 shares of
common stock (approximately 76% of the outstanding common stock) of Wireless
Netcom, Inc. In connection with the recapitalization, Wireless Netcom, Inc.
changed its name to eCommercial.com, Inc., and the Company assumed liabilities
of $2,570,000.
At the time of the recapitalization described above, Wireless Netcom had
178,502 common stock warrants outstanding. The exercise price of the warrants
was $0.10 per share, and they generally expire on May 15, 2000.
Note G--Strategic Alliances
In July 1999, the Company entered into a strategic alliance with Lockheed
Martin ("Lockheed"), whereby, Lockheed and the Company will work together to
serve mutual customers. Lockheed was issued 30,000 shares of common stock as
part of the agreement, for which the Company recognized a non-cash charge of
$240,000.
Note H--Stockholders' Equity
1. Series B and C Convertible Preferred Stock
As of December 31, 1999, the Company had issued 1,388,073 shares of Series B
Preferred Stock for $8 per share in a private placement which closed in
December 1999. Net proceeds were $10,153,473.
In October 1999, the Company entered into a strategic investment agreement
with @ONEX LLC, ("Onex"). Under the terms of the agreement, Onex made a
$1,000,000 investment into the private placement of Series B Convertible
Preferred Stock, and has the option to invest another $1,000,000 under the same
terms. The option expires on March 31, 2000. Further, Onex received warrants to
purchase 250,000 shares of common stock at the price of $7 per share.
F-13
MindArrow Systems, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of March 24, 2000, the Company had issued 409,025 shares of Series C
preferred stock for $25 per share. Net proceeds were $10,225,625. Dividends are
payable to holders of Series B and C Preferred Stock when and if declared by
the Company and will be non-cumulative. No dividends (other than those payable
solely in Common Stock) will be declared or paid with respect to shares of
Common Stock until dividends in the aggregate amount of at least $0.90 and
$2.25 per share, have been paid or declared on the Series B and C Preferred,
respectively.
Holders of shares of Series B and C Preferred are entitled to vote on all
matters submitted to a vote of the stockholders. Each share of Series B and C
Preferred entitles the holder to the number of votes equal to the number of
shares of Common Stock into which the Series B and C Preferred is convertible
as of the record date established for the vote of the stockholders.
Each share of Series B and C Preferred may be converted into one share of
common stock at any time upon the stockholder's election. The shares of Series
B and C Preferred will be automatically converted into shares of common stock
upon (i) the effective date of a firm commitment, underwritten public offering
of common stock pursuant to an effective registration statement under the
Securities Act, other than a registration relating solely to a transaction
under Rule 145 of the Securities Act or to any employee benefit plan of the
Company, generating aggregate proceeds to the Company of not less than
$15,000,000 (after deducting underwriters' discounts and all expenses relating
to the offering) and with a per share offering price (prior to underwriters'
discounts and expenses) of not less than $15.00 per share, as such per share
price may be adjusted to reflect stock subdivisions, combinations or dividends
with respect to such shares, or (ii) the date specified by affirmative vote or
written consent or agreement of the holders of not less than two-thirds ( 2/3)
of the then outstanding shares of Series B and C Preferred.
In the event of liquidation, the holders of the Series B and C Preferred
shall be entitled to receive, prior to and in preference to any distributions
to the holders of common stock, $8.00 per share of Series B and C Preferred
plus any accrued but unpaid dividends if and when declared by the Board of
Directors.
In connection with the private placement of Series B Preferred stock,
warrants to purchase 385,091 shares of common stock at $8 per share were
granted to investors and the placement agent. These warrants expire in August
to December 2001.
In connection with the private placement of Series C Preferred stock,
warrants to purchase 40,903 shares of common stock at $25 per share were
granted to investors. These warrants expire in March 2002.
2. Common Stock
Upon initial incorporation, the Company issued 4,000,000 shares of common
stock with a par value of $0.001 to its founders at par. It subsequently issued
475,118 shares in a private placement. Net proceeds from both transactions were
$946,999.
During the period from inception (March 26, 1999) to September 30, 1999, a
total of 233,613 shares of common stock were issued upon warrant exercises.
Total proceeds amounted to $23,357. During the three months ended December 31,
1999 48,960 shares were issued upon warrant and option exercises. Total
proceeds amounted to $521.
During the period from inception (March 26, 1999) to September 30, 1999, a
total of 69,859 shares were issued as compensation for services. The Company
recorded compensation expense in the amount of $294,068. Such amounts are
inclusive of the shares issued to Lockheed (see Note G).
F-14
MindArrow Systems, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Warrants
At the time of its acquisition of Zap, warrants to purchase 5,200 shares of
common stock at $5 per share were granted to a former Zap creditor. These
warrants expire in April 2004. In connection with the issuance of the warrants,
the Company recognized an expense of $1,508, which was the fair value of the
warrants at the time of issuance.
In connection with the private placement of common stock, warrants to
purchase 183,500 shares were granted at exercise prices ranging from $0.10 per
share to $0.50 per share, and expire in May 2000.
Warrants to purchase 15,000 shares of common stock at $11.25 per share have
been granted to a customer. They expire in May 2001. In connection with the
issuance of the warrants, the Company recognized an expense of $25,950, which
was the fair value of the warrants at the time of issuance.
Warrants to purchase 635,091 shares of common stock were issued in
connection with the placement of the Series B preferred stock.
As of September 30, 1999 and December 31, 1999, a total of 476,340 and
764,970 warrants were outstanding, with exercise prices ranging from $0.10 to
$11.25 and expiring at various times through April 2004.
4. Options
In April 1999, the Company adopted the 1999 Stock Option Plan (the "Plan").
As amended, the Plan reserves 3,000,000 shares of common stock for grants to
employees.
Pursuant to the consummation of the reverse merger of Wireless Netcom, the
Company assumed and discontinued the Wireless Netcom 1997 Stock Option Plan
(the "Wireless Plan"). There were no outstanding options under the Wireless
Plan.
Under the Plan, incentive stock options may be granted to employees,
directors, and officers of the Company and non-qualified stock options and
stock purchase rights may be granted to consultants, employees, directors, and
officers of the Company. Options granted under the Plan are for periods not to
exceed ten years and must be issued at prices not less than 100% and 85%, for
incentive and nonqualified stock options, respectively, of the fair market
value of the stock on the date of grant, as determined by the Board of
Directors. Options granted to shareholders who own greater than 10% of the
outstanding stock are for periods not to exceed five years and must be issued
at prices not less than 110% of the fair market value of the stock on the date
of grant, as determined by the Board of Directors. Options granted under the
Stock Plan generally vest 33% after the first year of service and ratably each
quarter over the remaining twenty-four month period.
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, but applies Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for its plans.
If the Company had elected to recognize compensation cost on the fair market
value at the grant dates for awards under the stock option plan, consistent
with the method prescribed by SFAS No. 123, net income and income per share
would have been changed to the pro forma amounts indicated below:
[Download Table]
Period ended Three months ended
September 30, 1999 December 31, 1999
------------------ ------------------
(Unaudited)
Net loss--
As reported......................... $(2,284,546) $(1,978,788)
Pro forma........................... (2,434,063) (2,167,627)
Basic and diluted loss per share--
As reported......................... $ (0.26) $ (0.21)
Pro forma........................... (0.28) (0.23)
F-15
MindArrow Systems, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of the Company's stock options was estimated as of the grant
date using the Black-Scholes option pricing model with the following weighted
average assumptions for the period ended September 30, 1999 and December 31,
1999: dividend yield of 0.0%, expected volatility of 50%, risk free interest
rate of 6.5%, and an expected holding period from 1 to 3 years. The following
table summarizes activity under the Company's stock option plan:
[Download Table]
Three months ended
Period ended December 31, 1999
September 30, 1999 (Unaudited)
--------------------------- ---------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
--------- ---------------- --------- ----------------
Outstanding at beginning
of period.............. -- -- 2,070,500 3.13
Granted................. 2,131,500 $3.08 828,000 9.86
Exercised............... -- -- (43,750) 1.00
Forfeited/expired....... (61,000) 1.11 (178,250) 6.11
--------- ---------
Outstanding at end of
period................. 2,070,500 $3.13 2,676,500 $5.02
========= =========
Weighted average fair
value of options
granted during period.. $1.03 $2.71
========= =========
[Enlarge/Download Table]
Stock Options
Stock Options Outstanding at Exercisable at September
September 30, 1999 30, 1999
--------------------------------- ------------------------
Range of Weighted Average Weighted Average Weighted Average
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
--------------- --------- ---------------- ---------------- ------- ----------------
$1.00
to
$4.00 1,503,000 5.0 $1.20 359,666 $1.33
$7.00
to
$10.00 567,500 5.6 8.26 31,000 8.65
--------- -------
2,070,500 5.1 $3.08 390,666 $1.91
========= =======
Stock Options
Stock Options Outstanding at Exercisable at December
December 31, 1999 31, 1999
--------------------------------- ------------------------
Range of Weighted Average Weighted Average Weighted Average
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
--------------- --------- ---------------- ---------------- ------- ----------------
$1.00
to
$4.00 1,421,000 4.7 $1.21 419,332 $1.29
$7.00
to
$10.00 976,000 5.6 8.35 51,000 8.78
$12.00
to
$15.00 279,500 6.0 12.79 -- --
--------- -------
2,676,500 5.2 $5.02 470,332 $2.10
========= =======
Through September 30, 1999, the Company recorded compensation expense in the
amount of $167,923 related to certain stock options and warrants. As of
December 31, 1999 approximately $551,000 remains to be amortized over the
remaining vesting periods of the options. For the three months ended December
31, 1999 the Company recorded compensation expense in the amount of $119,790
related to certain stock options and warrants.
Note I--Employment Contracts
The Company has employment agreements and arrangements with certain
executive officers. The agreements generally continue until terminated by the
executive or the Company, and provide for severance payments under certain
circumstances. As of September 30, 1999 and December 31, 1999, if all of the
employees under these contracts were to be terminated by the Company, the
Company's liability would be approximately $1.3 million.
F-16
MindArrow Systems, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note J--Profit Sharing Plan
Effective October 1, 1999, the Company implemented a 401(k) Profit Sharing
Plan (the "Plan") for its full-time employees. Each participant in the Plan may
elect to contribute from 1% to 17% of his or her annual compensation to the
Plan. The Company does not yet make matching contributions. However, at its
option, the Company may match employee contributions at a rate of 25%, up to 6%
of the Employee's salary. Employee contributions are fully vested, whereas
vesting in matching Company contributions occurs at a rate of 33.3% per year of
employment.
F-17
PART II:
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13: Other Expenses of Issuance and Distribution
The estimated expenses payable in connection with the issuance and
distribution of the securities being registered are as follows:
[Download Table]
SEC registration fee............................................... $ 26,158
Legal fees and expenses............................................ 50,000
Accounting fees and expenses....................................... 30,000
Printing and engraving expense..................................... 30,000
Transfer agent fees and expenses................................... 2,500
Miscellaneous...................................................... 2,500
--------
TOTAL............................................................ $141,158
========
Except for the SEC registration fee, the above amounts are estimated.
Item 15: Recent Sales of Unregistered Securities
Transactions prior to April 1999 were initiated by Wireless Netcom and its
predecessor company, Rubicon Sports. As described in the following paragraphs,
all preferred shares and convertible debt balances were converted into common
stock upon the merger of Wireless Netcom and eCommercial California in April
1999. As of February 29, 2000, we had only Series B preferred stock and common
stock outstanding.
On May 23, 1997, we undertook a private debt offering of $130,000 (the
"Bridge Financing"), pursuant to the exemption from registration provided by
Rule 506 of the Act. The Bridge Notes had a term of six (6) months, and bore
simple interest at the rate of 8.5% per annum, payable at maturity. Investors
in the Bridge Financing were issued warrants to purchase an aggregate of 5,000
shares of our common stock ("Bridge Financing Investor Warrants"). Bridge
Financing Investor Warrants are exercisable for a term of three (3) years at an
exercise price of the lesser of $.10 per share, or 50% of the initial public
offering price of the common stock. The Bridge Notes were secured by our assets
as evidenced by the filing of a Financing Statement pursuant to the Uniform
Commercial Code. In addition, the Placement Agent received warrants to purchase
5,000 shares of common stock, exercisable on terms equivalent to the Bridge
Financing Investor Warrants. The Bridge Notes have been paid in full.
In June 1997, we undertook a private offering of 9% Series A Cumulative
Convertible preferred stock ("Series A preferred") at the price of $2.50 per
share. The June 1997 Offering was made pursuant to the exemptions from
registration provided by Rule 506 of Regulation D and Section 4(2) of the Act
and applicable Blue Sky laws. We sold 892,400 shares of Series A preferred to
67 accredited investors and received gross proceeds of $2,231,000. We issued
warrants to purchase 7,428 shares of common stock at a price of $0.10 in
connection with this Offering. Concurrent with the merger of Wireless Netcom
and eCommercial California, all Series A preferred shares were converted into
743,658 shares of our common stock.
In June 1998, we undertook a private offering of non-interest bearing
Promissory Notes (the "Notes") maturing twelve (12) months from the date of
issuance. Originally, the Notes were convertible into common stock by each
investor no earlier than thirty (30) days following commencement of trading of
our common stock on the OTC Bulletin Board. We received subscriptions totaling
$500,000 from 16 accredited investors. Concurrent with the merger of Wireless
Netcom and eCommercial California, these Notes were converted into 166,667
shares of our common stock.
II-1
In July 1998, we undertook a $500,000 private offering of 6% Convertible
Promissory Notes to six accredited investors. Originally, the Notes matured
twelve (12) months from the date of issuance and were convertible into common
stock thirty (30) days following commencement of trading of our common stock on
the OTC Bulletin Board. The number of shares into which the Notes were
convertible was determined by dividing the dollar amount of such amount by the
preceding five (5) day average closing bid price of the Shares, discounted by
twenty percent (20%), as quoted on the OTC Bulletin Board. Concurrent with the
merger of Wireless Netcom and eCommercial California, these Notes were
converted into 166,667 shares of our common stock.
In April 1999, we undertook a private placement of our common stock, at a
price of from $1 to $4 per share ("April 1999 Offering"). The April 1999
Offering was made pursuant to the exemptions from registration provided by
Section 4(2) of the Act, and Rule 505 promulgated thereunder, and the
applicable blue sky laws. We received proceeds of $942,404 and issued 475,118
shares of common stock thereunder. The April 1999 Offering closed in May 1999.
In July 1999, we undertook a private placement of our Series B preferred
stock, at a price of $8 per share ("July 1999 Offering"). The July 1999
Offering was made pursuant to the exemptions from registration provided by
Section 4(2) of the Act, and Rule 505 promulgated thereunder, and the
applicable Blue Sky laws. We received proceeds of $10,153,473 and issued
1,388,073 shares of Series B preferred stock and 635,091 warrants thereunder.
We also issued an option to purchase an additional 125,000 shares of Series B
preferred at $8.00 per share and receive an additional 12,500 warrants,
expiring March 31, 2000. The July 1999 Offering closed in December 1999.
In March 2000, we undertook a private placement of our Series C preferred
stock, at a price of $25 per share ("March 2000 Offering"). The March 2000
Offering was made pursuant to the exemptions from registration provided by
Section 4(2) of the Act, and Rule 505 promulgated thereunder, and the
applicable Blue Sky laws. Through March 24, 2000, we received proceeds of
$10,225,625 and issued 409,025 shares of Series C preferred stock and
40,903 warrants thereunder.
Item 16: Index To Exhibits and Financial Statement Schedules
[Download Table]
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger between MindArrow Systems, Inc. (DE)
and eCommercial.com, Inc. (NV)
3.1 Certificate of Incorporation of the Registrant
3.2 Bylaws of the Registrant
4.1 Investor Rights Agreement
4.2 Form of Registrant's Specimen Common Stock Certificate
4.3 Form of Registrant's Series B Preferred Stock Certificate
4.4* Form of Common Stock Warrants
4.5 Certificate of Designation--Series B Preferred
4.6 Certificate of Designation-Series C
5.1** Opinion on Legality
10.1* Stock Purchase Agreement, dated as of April 16, 1999 between the
Company and Shareholders of Zap International
10.2* Merger Agreement, dated as of April 19, 1999, between Wireless
Netcom, Inc. and the shareholders of eCommercial.com, Inc.
10.3* Employment Agreement--Thomas Blakeley
10.4* Employment Agreement--Mark Grundy
10.5* Employment Agreement--Eric A. McAfee
10.6* Form of Change in Control Executive Retention Agreement
10.7* Registrant's 1999 Stock Option Plan
10.8* Agreement between Registrant and Eric McAfee regarding Voxel
10.9* Form of Indemnification Agreement between Registrant and each of
its directors
10.10* Lease Agreement--Aliso Viejo, CA
10.11 Sublease Agreement--Cupertino, CA
10.12* Strategic Relationship Agreement between Registrant and ONEX
Ventures LLC
10.13* Strategic Relationship Agreement between Registrant and Lockheed
Martin Corporation
23.1 Consent of experts
23.2** Consent of Counsel (see Exhibit 5.1)
24.1* Power of Attorney (included on signature page)
27.1* Financial Data Schedule
-------
*Previously filed
**To be filed by amendment
II-2
Item 17: Undertakings
We hereby undertake to:
1. File, during any period in which we offer or sell securities, a post-
effective amendment to this Registration Statement to:
(a) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(b) 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; and
(c) Include any additional or changed material information on the plan
of distribution;
2. For determining liability under the Act, treat each post-effective
amendment as a new registration of the securities offered, and the
offering of such securities at that time to be the initial bona fide
offering;
3. File a post effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering; and
4. Provide certificates in such denominations and registered in such names
to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the company
pursuant to the foregoing provisions, or otherwise, the company 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 company of expenses incurred or paid by a
director, officer or controlling person of the company 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 company 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.
For the purpose of determining any liability under the Securities Act, the
company will 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 Company 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.
For the purpose of determining any liability under the Securities Act, we
will treat such post-effective amendment that contains a form of prospectus as
a new Registration Statement for the securities offered 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 S-1 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Aliso Viejo, State of California, on April 3, 2000.
eCommercial.com, Inc.
*
By___________________________________
Thomas J. Blakeley
Chief Executive Officer
IN WITNESS WHEREOF, each of the undersigned has exercised this power of
attorney as of the date indicated.
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 stated.
[Download Table]
Signature Title Date
--------- ----- ----
* Chairman of the Board Chief April 3, 2000
____________________________________ Executive Officer President
Thomas J. Blakeley (Principal
Executive Officer)
* Chief Operating Officer April 3, 2000
____________________________________ Executive Vice President
Mark Grundy Director
* Executive Vice President April 3, 2000
____________________________________ Secretary, Director
Eric A. McAfee
/s/ Michael R. Friedl Chief Financial Officer April 3, 2000
____________________________________ Treasurer (Principal
Michael R. Friedl Finance and Accounting
Officer)
* Director April 3, 2000
____________________________________
John Troiano
*
-------------------------------
Michael R. Friedl
Power of Attorney
II-4
[Download Table]
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Merger between MindArrow Systems, Inc. (DE)
and eCommercial.com, Inc. (NV)
3.1 Certificate of Incorporation of the Registrant
3.2 Bylaws of the Registrant
4.1 Investor Rights Agreement
4.2 Form of Registrant's Specimen Common Stock Certificate
4.3 Form of Registrant's Specimen Series B Preferred Stock Certificate
4.4* Form of Common Stock Warrants
4.5 Certificate of Designation--Series B Preferred
4.6 Certificate of Designation--Series C Preferred
5.1** Opinion on Legality
10.1* Stock Purchase Agreement, dated as of April 16, 1999 between the
Company and Shareholders of Zap International
10.2* Merger Agreement, dated as of April 19, 1999, between Wireless
Netcom, Inc. and the shareholders of eCommercial.com, Inc.
10.3* Employment Agreement--Thomas Blakeley
10.4* Employment Agreement--Mark Grundy
10.5* Employment Agreement--Eric A. McAfee
10.6* Form of Change in Control Executive Retention Agreement
10.7* Registrant's 1999 Stock Option Plan
10.8* Agreement between Registrant and Eric McAfee regarding Voxel
Form of Indemnification Agreement between Registrant and each of
10.9* its directors
10.10* Lease Agreement--Aliso Viejo, CA
10.11 Sublease Agreement--Cupertino, CA
Strategic Relationship Agreement between Registrant and ONEX
10.12* Ventures LLC
Strategic Relationship Agreement between Registrant and Lockheed
10.13* Martin Corporation
23.1 Consent of experts
23.2** Consent of Counsel (see Exhibit 5.1)
24.1* Power of Attorney (included on signature page)
27.1* Financial Data Schedule
--------
*Previously filed
**To be filed by amendment
Dates Referenced Herein and Documents Incorporated by Reference
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